Title: P'V' Viswanath
1Introduction
Class Notes for EDHEC course on Mergers and
Acquisitions
2Mergers 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.
3Hostile 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.
4Economic 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.
5Regulatory 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.
6Securities 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
7Tender 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).
8Tender 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.
9Why 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.
10Insider 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.
11Antitrust 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.
12Antitakeover 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.
13Hostile 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.
14Hostile 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.
15Takeover 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
16Poison 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.