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Chapter 1

The Takeover Process


The Pace of Merger Activity
Worldwide M&A Activity ($ Billions)

4,000
3,500
3,000
2,500 1,779
2,000 979
749 920
1,500
1,000 1,786
1,343 1,395 1,143
500
0
1998 1999 2000 2001

US Non-US
Chapter 1-2
Change Forces Driving Mergers
1. Technological change
2. Efficiency of operations
3. Globalization and freer trade
4. Changes in industry organization
5. New industries
6. Deregulation and regulation
7. Favorable economic and financial conditions
8. Negative trends in industries and economies
9. Widening inequalities in income and wealth
10. High valuation of equities (1990s)

Chapter 1-3
Issues Regarding M&A Activity
In Favor Opposed
 Critical to healthy  No improvements
expansion of business subsequent to the
firms acquisition
 Increase value and  Redistribution of
efficiency wealth from labor
 Move resources to and other
optimal uses stakeholders to
shareholders
 Speculative activity

Chapter 1-4
M&A Terminology
 Merger
• Negotiated deals
• Mutuality of negotiations
• Mostly friendly
 Tender offers
• Offer made directly to the shareholders
• Hostile when offer made without
approval of the board
 Restructuring — changes to improve
operations, policies, and strategies

Chapter 1-5
Types of Mergers
 Horizontal mergers
• Between firms in same business activity
• Rationale
– Economies of scale and scope
– Synergies (ex. combining of best practices)
• Government regulation due to potential
anticompetitive effects
 Vertical mergers
• Combinations between firms at different stages
• Goal is information and transaction efficiency
Chapter 1-6
Types of Mergers
 Conglomerate mergers
• Firms in unrelated business activities
 Distinctions between conglomerate and
nonconglomerate firms
• Investment companies – diversify to reduce
portfolio risk
• Financial diversified – provide funds and
expertise on generic management functions of
planning and control
• Concentric diversified – combine with firms in
less related activities to broaden potential
markets
Chapter 1-7
Mergers in a Legal Framework
 Statutory merger — formal legal
procedures
 Short-form merger — streamlined legal
procedures when ownership is 90%
 Holding company — parent company has
a controlling interest

Chapter 1-8
Tender Offers
 Bidder seeks target's shareholders
approval
 Minority shareholders
• Terms may be "crammed down"
• May be subject to "freeze-in"
• Minority may bring legal actions
• 2001-2002, many minority squeeze-outs
–Usually reversing equity carve-out
–Parents often make high bid to avoid
shareholder lawsuits
Chapter 1-9
Tender Offers
 Kinds of tender offers and provisions
• Conditional vs. unconditional
• Restricted vs. unrestricted
• "Any-or-all" tender offer
• Contested offers
• Two-tier offers
• Three-piece suitor

Chapter 1-10
Risk Arbitrage in M&A Activity
 In M&A, risk arbitragers take a position in a
merger for short-term profitable resale
 Arbitragers bet that a deal will be completed:
bear “deal risk” & try to minimize market risk
 Provide liquidity for target shareholders
seeking to sell to realize gains from premium
 Arbitrage funds
• Spread deal risk over portfolio of deals
• Performance of these funds is often high
• But, funds are highly exposed to market crashes

Chapter 1-11
Risk Arbitrage in M&A Activity
 Illustrative Example
• Sears announced a cash tender offer for Land’s
End
• Tender offer was for $62; at close on
announcement date, LE was at $61.72
• Investing at $61.72 would yield 3.7% annual
return if deal closed in the forecasted 45 days
36545
  62  61.72 
Annual return  3.7%  1    1
  61.72 
Chapter 1-12