P'V' Viswanath

1
Introduction

• P.V. Viswanath

Class Notes for EDHEC course on Mergers and
Acquisitions
2
Mergers and Other Combinations

• A merger is a combination of two corporations in
  which only one corporation survives.
• The surviving firm assumes all the assets and
  liabilities of the merged company.
• In an acquisition, the buyer purchases some or
  all of the assets or the stock of the selling
  firm.
• If the stock of the selling firm is acquired,
  typically a controlling interest is obtained.
• Notwithstanding the above definitions, the terms
  merger and acquisition are often used loosely to
  refer to any combination.

3
Hostile and Friendly Combinations

• The active firm is usually called the acquirer,
  and the passive one, the target. Usually the
  acquirer is larger than the target and, usually,
  the acquirer survives, while the target ceases to
  exist upon completion of the merger.
• Often, one company tries to acquire another
  against the will of the target companys
  management and board. This is usually referred
  to as a takeover.
• Often this is done through a tender offer. A
  tender offer is where an acquirer makes a direct
  offer to the shareholders of the target firm to
  buy up their shares for a given price.

4
Economic Classification

• Horizontal mergers are combinations between two
  competitors. For example, Pfizers acquisition
  of Warner Lambert in 2000.
• Vertical mergers are deals between companies that
  have a buyer and seller relationship with each
  other. For example, Mercks acquisition of Medco
  Containment Services in 1993.
• A conglomerate deal is a combination of two
  companies that do not have a business
  relationship with each other. For example,
  General Electrics acquisition of Kidder Peabody
  in 1986.

5
Regulatory Framework

• When there is a significant event, such as a MA
  above a certain size, companies must file a Form
  8K.
• Hirsch International Corp. 8K dated July 20, 2005
• On July 20, 2005, we entered into a definitive
  merger agreement concerning the previously
  announced merger with Sheridan Square
  Entertainment, Inc., a privately-held producer
  and distributor of recorded music, and SSE
  Acquisition Corp., our wholly owned subsidiary.
  Upon the terms and conditions set forth in the
  merger agreement, SSE Acquisition Corp. will be
  merged with and into Sheridan Square, and
  Sheridan Square will survive the merger as our
  wholly-owned subsidiary. Post-merger, the
  embroidery equipment distribution business and
  music business will operate as separate
  independent divisions.

6
Securities Acts

• Securities Act of 1933 required the registration
  of securities to be offered to the public.
• Securities Exchange Act of 1934 established the
  Securities and Exchange Commission that was
  charged with enforcing federal securities law.
• There have been many amendments to the Securities
  Acts
• The Williams Act, passed in 1968 regulates tender
  offers

7
Tender Offer Regulation

• Section 13(d) requires that if an entity acquires
  5 or more of a companys shares, it must file a
  Schedule 13D within 10 days of reaching the 5
  threshold.
• The Schedule 13D includes information regarding
  the identity of the acquirer, its intentions and
  the purpose of the transaction e.g. if it
  intends to launch a hostile takeover, or if the
  securities are being acquired for investment
  purposes.
• This is important for shareholders who may not
  want to sell their shares if there is a bidder
  who is about to make an acquisition bid that
  would usually mean a higher stock price
  (including a takeover premium).

8
Tender Offer Regulation

• Section 14(d) gives information to target company
  shareholders that they can use to evaluate a
  tender offer.
• It requires that the bidder wait 20 days before
  completing purchase of the shares.
• During that period other bidders may come forward
  with competing bids.
• This might lead to an extension of the original
  waiting period.
• From the viewpoint of a potential acquirer, this
  could lead to a higher price having to be paid
  for a target it could effectively lead to an
  auction situation.

9
Why a takeover premium?

• When there is a takeover, there is often a
  transfer of control, or, at least, a major change
  in the way that the firm is being run.
• The acquirers believe that such changes will
  increase the value of the firm substantially.
• Given the Williams Act and the natural operation
  of the market, the acquirers are forced to share
  their gains with target shareholders.
• Another reason is that existing management will
  probably lose out, in terms of their human
  capital. Consequently, they are likely to
  resist. A higher takeover price is required to
  forestall or counter such resistance, as well.

10
Insider Trading Laws

• The possibility of large takeover premiums in
  takeovers makes advance information valuable.
  While an acquirer might be less able to obtain
  enough shares in the target to complete the
  acquisition by stealth, a single individual might
  very well be able to trade with uninformed target
  shareholders.
• This is, nevertheless, unfair to the shareholders
  who sell out too early.
• One might argue that an acquirer who has a better
  plan to use target company assets should be able
  to benefit from foresight. However, there is no
  economic rationale why acquiring firm officers
  (or other insiders) should be able to benefit
  from trading on insider information.

11
Antitrust Laws

• The Sherman Antitrust Act was passed in 1890 to
  prevent anticompetitive activities.
• Section One addresses monopolies and tries to
  limit a firms ability to monopolize an industry.
• Section Two seeks to prevent combinations from
  engaging in business activities that limit
  competition.
• The Clayton Act of 1914 regulated anticompetitive
  mergers.
• The Federal Trade Commission Act created the
  Federal Trade Commission, which, inter alia,
  enforces competition laws along with the Justice
  Department.
• The Hart-Scott-Rodino Antitrust Improvements Act
  of 1976 requires that firms engaged in mergers
  provide sales and shipments data to the Justice
  Dept and the FTC. Such information can
  prospectively prevent anti-competitive mergers.

12
Antitakeover Laws

• Fair Price Laws all shareholders in tender
  offers must receive a fair price (prevents
  two-tier tender offers).
• Business Combination Statutes prevent unwanted
  bidders from taking control of the target
  companys assets unless it acquires a minimum
  number of shares, e.g. 85.
• Control share provisions target company
  shareholders must approve before the bidder can
  acquire shares.
• Cash-out statutes a bidder must purchase shares
  of the shareholders whose stock may not have been
  purchased by a bidder, if such purchase provides
  bidder with control in the target. This prevents
  target shareholders from being unfairly treated
  by a controlling shareholder.

13
Hostile Takeovers

• Refers to the taking control of a corporation
  against the will of its management and/or
  directors.
• Sometimes this opposition is bad for
  shareholders, sometimes its good.
• The target might object to the acquisition, so as
  to attract other bidders and raise the premium.
• Management might object, because they are likely
  to lose their jobs.

14
Hostile Takeover

• In a friendly takeover, the bidder would contact
  target company management
• If this contact is rejected, the bidder can
• Go to the Board of Directors
• Go to shareholders directly through a tender
  offer
• Engage in a proxy fight bidder tries to get
  enough votes to throw out the current board of
  directors and their managers. The insurgent then
  presents its own proposals.

15
Takeover Defenses

• File a suit alleging antitrust violations.
• Get white knights friendly bidders.
• Preventive Takeover defenses
• Poison pill/ Shareholder rights plans
• Greenmail
• Supermajority Provisions
• Dual Capitalizations

16
Poison Pill Example

• As reported in the Wall Street Journal of Feb.
  11, 2000
• American Homestar Corp. said its board approved a
  poison-pill anti-takeover measure that gives
  shareholders the right to purchase shares at a
  discount in the event of an attempt to acquire
  the company. The manufactured-housing company
  said the plan is triggered when a person or group
  acquires 15 or more of its common stock.