MERGER TACTICS

Nov. 2006

Takeover Methods
Tools Used To Acquire Companies
Proxy Contest Tender Offer

Acquisition

Merger

Leveraged Buy-Out

Management Buy-Out

Friendly Mergers
• Merger Between Two Firms with Approval of Two Boards of Directors • One Firm May Merge with the Other • Two May Merge to Form Another Corporate Entity

Tender Offers
• Since Merger Regulations Became Widespread (Williamson Act, SEBI Regulations) Many Countries Encourage Tender Offers as a Way of Discovery of True Value of Firms

Tender Offers
– Active & Widespread Solicitation of Public Shareholders – Solicitation made for substantial percentage of issuer’s stock – Offer Made at Premium to Market Price – Terms of Offer are Firm (not negotiated) – Offer may be contingent on tender of fixed number of shares often subject to a fixed minimum number to be purchased

Tender Offers
• Offer open for a limited number of days. • Target Shareholder subject to pressure to sell his stock • Public announcement of a purchase programme concerning the target co. precedes or accompany rapid accumulation of large amount of target co. securities.

Tender Offers
• Under regulations, tender offers must provide for a window between offer and actual tendering of shares to allow other bidders to enter with counter offers. • Higher costs associated with tender offers due to legal filing, publication/mailing costs, etc • Tender offer puts a Company “into play”

Cash vs. Securities Tender Offer
• Can solicit shares in “all-cash” deal • Securities may offered in lieu of shares tendered (may be tax-free deal) • Option offered to target shareholders • Waiting period – 10 days to 4 weeks

Bear Hug
• Bidder sees realistic possibility of negotiated transaction, and Bear Hug is to pressurise management • Bidder may pressurise target management
– – – – Offer to merge in a friendly manner Threat to go directly to target shareholders Accompanied by press reports and public statements Offer a price that of rejected by incumbent management may result in shareholder lawsuits.

Target Management Response
• Typical response is to acquire a “fairness” opinion from a merchant banker and reject the offer. • Target Co. Shareholders often see tender offers positively due to premium associated. • Market Price does not include “Control Premium”

Target Management Response
• Target Firm Managers may be right in rejecting the offer if control premium is small • Defensive tactics may increase shareholder wealth

Open Market Purchases
• Open market purchases may not constitute a tender offer or may not trigger one if purchase below a certain percentage • “Creeping Acquisition” – where small amounts are bought by controlling group

Tender Offers Agency Problem
• Agency Problem
– Divorce between ownership & control – Managements own only a small %age of shares – May work to maximize their own wealth rather than shareholders

Takeover as a Solution
• Control Functions are delegated to the BOD by shareholders • Agency problem may be tackled by
– Appropriate compensation policies (internal) – Market for corporate control acts as an external disciplining devise

Proxy Contest
• Two Group of Managers Solicit Proxies without actually offering cash • Change in BOD if enough votes against incumbent management

Sell-Offs & Divestitures
• Under takeover threat incumbent managers may restructure operations and reduce value-destroying activities. • Sell-off or divestiture of unattractive business

Spin-Offs
• Co. offers shares it holds in a subsidiary to its shareholders on pro-rata basis • No money changes hands • Two companies exist where one existed before

Management Buy-Outs
• Managers raise resources to acquire shares from shareholders • Employees trusts • Demonstration of managers Faith in the value of the firm

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