the take over process

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston

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The Takeover Process


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Introduction• Goals of course

– Practical guidelines for M&A analysis– To evaluate policies toward M&As

• M&As refer to– Traditional mergers and acquisitions– Takeovers– Corporate restructuring– Corporate control– Changes in the ownership structure of firms


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Forces Affecting Mergers• Technology

• Globalization

• Deregulation

• Efficiency of operations

• Changes in industry organization

• Entrepreneurship

• Economic and financial environment


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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


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Types of Mergers• Horizontal mergers

– Combination between firms in same business activity

– Rationale• Economies of scale and scope• Synergies such as combining of best practices

– Government regulation due to potential anticompetitive effects

• Vertical mergers– Combinations between firms at different stages

– Rationale is information and transaction efficiency


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• Conglomerate mergers– Combination of firms in unrelated types of

business activity

• 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 market potentials


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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


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Tender Offers

• Bidder seeks target's shareholders approval

• Minority shareholders– Terms may be "crammed down"– May be subject to "freeze-in"– Minority has the right to bring legal actions


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• 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


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Risk Arbitrage in M&A Activity

• Usually, long in the target stock and short in the bidder stock

• Nature of the arbitrage industry– Information gathering and analysis is the

principal raw material– Arbitragers attempt to anticipate takeover

bids


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• Arbitrage funds– Intensive research– No investment on rumors– Invest in 10-20 transactions at a given time– Main risk is whether deals are completed


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• Numerical example– An arbitrage firm (A) notes that a bidder (B)

whose stock is selling at $50 makes an offer for a target (T) selling at $40.

– Exchange offer is 1 share of B for 1 T share. – T rises to $48; B stays at $50. – A sells 1 share of B short for $50 and goes

long on T at $48. – One month later the deal is completed with B

at $50 and T at $50. – What is A's dollar and percentage annualized

gain assuming a required 50% margin on both transactions?


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• Solution– A sells 1 B for $50 and buys T at $48.– Assuming 50% margin, the investment

is .5($50 + $48) = $47.5. – In one month, A uses 1 T to cover 1 B.

The gain is $2. – The percentage gain is [($2/$47.5)] * 12 =

50.21% less the interest on the $47.5 borrowed on margin.

– If A invested the full $98, the gain would be ($2/$98) * 12 = 24.49%.

the take over process

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