P'V' Viswanath

About This Presentation
Title:

P'V' Viswanath

Description:

A merger is a combination of two corporations in which only one ... For example, General Electric's acquisition of Kidder Peabody in 1986. P.V. Viswanath ... – PowerPoint PPT presentation

Number of Views:53
Avg rating:3.0/5.0
Slides: 17
Provided by: aswathda
Learn more at: https://webpage.pace.edu

less

Transcript and Presenter's Notes

Title: 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.
Write a Comment
User Comments (0)