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Terminology and how the best divest v2


It is a good collection of Terminology and examples..

It is a good collection of Terminology and examples..

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  • 1. MERGERS & ACQUISITIONS Terminology & How the Best Divest
  • 2.
    • Terms like "dawn raid", "poison pill", and "shark repellent" might seem like they belong in James Bond movies, but there's nothing fictional about them - they are part of the world of mergers and acquisitions (M&A).
    • While mergers and Alliances are based on the mutual consent/agreement, the acquisitions have chances of unfriendly takeovers and this kind of takeovers give us the colourful vocabulary of M&A
  • 3.
    • BEAR HUG
    • An offer made by one company to buy the shares of another for a much higher per-share price than what that company is worth. A bear hug offer is usually made when there is doubt that the target company's management will be willing to sell.
    • Acquirer mails letter to directors of target firm announcing intentions and requiring a quick decision on bid.
    • If this strategy fails, it is usually followed by Saturday Night Special
    TERMINOLOGY OF M&A Slide Procter & Gamble Takeover of Gillette (2005) On 1 February 2008, Microsoft offered Yahoo shareholders $31 for each of their shares, which represented a 62% premium on the closing price on the prior day
  • 4.
    • O ffer made to stockholders just before the market’s close on Friday.
    • Takes maximum advantage of stockholder greed
    TERMINOLOGY OF M&A Slide Colt Industries (Fire Arms)Takeover of Garlock Industries (Packing & Sealing) during 1975
  • 5.
    • When the target firm's management does not want to be taken over and fights the tender offer.
    • Acquiring firm must carry offer to stockholders of target firm.
    • This strategy is generally nasty and expensive - an effort frequently carried out to a questionable conclusion.
      • Good deal for stockholders of target firm.
      • Bad deal for stockholders of acquiring firm.
    TERMINOLOGY OF M&A Slide HP Takeover of Compaq(2001) Oracle Offer on Peoplesoft(2004) Microsoft Vs Yahoo (2008)
  • 6.
    • When target firm cannot defend itself against the hostile acquirer, it will seek another firm to acquire it (one more acceptable to management).
    • A white knight is a company (the “good guy”) that gallops in to make a friendly takeover offer to a target company that is facing a hostile takeover from another party (a “black knight”). The white knight offers the target firm a way out with a friendly takeover.
    • This was a favorite strategy early in the M&A game.
    TERMINOLOGY OF M&A Slide Chevron Corp acquired Gulf Oil when Gulf Oil was having a threat of acquisition by Pickens (1984) Severstal Almost acted as White Knight to Arcelor during hostile takeover strategy by Mittal Steel in 2006
  • 7.
    • A spin-off of the term "blackmail", greenmail occurs when a large block of stock is held by an unfriendly company or raider, who then forces the target company to repurchase the stock at a substantial premium to destroy any takeover attempt. This is also known as a "bon voyage bonus" or a "goodbye kiss".
    TERMINOLOGY OF M&A Slide Investor Goldsmith used Greenmail option with Good Year Tire & Rubber Co in 1980
  • 8.
    • PAC-MAN
    • A form of defense in which the target tenders for shares of acquirer:
        • e.g., Martin-Marietta - Bendix.
    • The standoff is usually resolved when one of the parties finds a "white knight" to help.
        • In the case of Martin-Marietta, it was Allied Corp
    • Bendix Hostile takeover of Martin-Marietta and Martin-Marietta strategy to buyout Bendix (1982)
    • Citgo Counter tender offer to buy Mesa Oil of Pickens, when Pickens offered to buy Citgo
    • Finally the stand off resolved when Allied Corp Acquired Bendix
    • Gulf Oil came as White Knight for Citgo and then Chevron as White knight to Gulf Oil against Hostile takeover bid by Pickens
  • 9.
    • With this strategy, the target company aims at making its own stock less attractive to the acquirer. There are two types of poison pills.
    • The 'flip-in' poison pill allows existing shareholders (except the bidding company) to buy more shares at a discount. This type of poison pill is usually written into the company’s shareholder-rights plan. The goal of the flip-in poison pill is to dilute the shares held by the bidder and make the takeover bid more difficult and expensive.
    • The 'flip-over' poison pill allows stockholders to buy the acquirer's shares at a discounted price in the event of a merger.
    TERMINOLOGY OF M&A Slide Yahoo Vs Microsoft in 2008 (it was a perceived threat and did not happen) Peoplesoft Vs Oracle (2004)
  • 10.
    • Dawn Raid
    • During a dawn raid, a firm or investor aims to buy a substantial holding in the takeover-target company’s equity by instructing brokers to buy the shares as soon as the stock markets open. By getting the brokers to conduct the buying of shares in the target company (the “victim”), the acquirer (the “predator”) masks its identity and thus its intent.
    • The acquirer then builds up a substantial stake in its target at the current stock market price. Because this is done early in the morning, the target firm usually doesn't get informed about the purchases until it is too late, and the acquirer now has controlling interest.
  • 11.
    • Golden Parachute
    • A golden parachute measure discourages an unwanted takeover by offering lucrative benefits to the current top executives, who may lose their job if their company is taken over by another firm.
    • Benefits written into the executives’ contracts include items such as stock options, bonuses, liberal severance pay and so on. Golden parachutes can be worth millions of dollars and can cost the acquiring firm a lot of money and therefore act as a strong deterrent to proceeding with their takeover bid.
  • 12.
    • Macaroni Defense
    • This is a tactic by which the target company issues a large number of bonds that come with the guarantee that they will be redeemed at a higher price if the company is taken over. Why is it called Macaroni Defense? Because if a company is in danger, the redemption price of the bonds expands, kind of like macaroni in a pot! This is a highly useful tactic, but the target company must be careful it doesn't issue so much debt that it cannot make the interest payments.
    • Takeover-target companies can also use leveraged recapitalization to make themselves less attractive to the bidding firm.
  • 13.
    • People Pill
    • Here, management threatens that in the event of a takeover, the management team will resign at the same time en masse. This is especially useful if they are a good management team; losing them could seriously harm the company and make the bidder think twice. On the other hand, hostile takeovers often result in the management being fired anyway, so the effectiveness of a people pill defense really depends on the situation. 
  • 14.
    • Just Say No Defense
    • A strategy used by corporations to discourage hostile takeovers in which board members reject a takeover bid outright. The legality of a just say no defense may depend on whether the target company has a long-term strategy that it is pursuing, which can include a merger with a firm other than the one making the takeover bid, or if the takeover bid simply undervalues the company.  
  • 15.
    • Bankmail
    • An agreement made between a company planning a takeover and a bank, which prevents the bank from financing any other potential acquirer's bid.
  • 16.
    • Sandbag
      • With the sandbag tactic the target company stalls with the hope that another, more favourable company (like “a white knight”) will make a takeover attempt. If management sandbags too long, however, they may be getting distracted from their responsibilities of running the company.
  • 17. Divestiture
    • Definition
    • The partial or full disposal of an investment or asset through sale, exchange, closure or bankruptcy.
    • For a business, divestiture is the removal of assets from the books. Businesses divest by the selling of ownership stakes, the closure of subsidiaries, the bankruptcy of divisions, and so on.
  • 18. Other forms of Restructuring
    • Equity Carveout:
    • Variation of divesture where there is a sale of equity interest in a subsidiary to an outsider.
    • Parent company may not control the carved out entity.
    • New equity gives investors shares of ownership in the portion of the selling company being divested.
    • Shareholder base different.
    • Different management team and run as an independent firm.
  • 19. Other forms of Restructuring
    • Spin Off:
    • Creation of a new entity and new shares are issued to existing share holders on a pro rata basis.
    • Shareholder base remains same as the parent firm.
    • Independent management
    • No cash inflow into the parent company.
  • 20. Other forms of Restructuring
    • Split Off:
    • Some shareholders of parent firm issued the shares of the spilt off in exchange of shares of parent company.
    • There may be an issue of variation in split off price.
    • Split Up:
    • Entire firm is broken into a series of spin offs.
    • The parent firm no longer exists leaving only the newly formed entities.
  • 21. Divestiture
    • Motives
    • A firm may divest (sell) businesses that are not part of its core operations so that it can focus on what it does best.
    • To obtain funds by selling part of its firm assets
    • a firm's "break-up" value is sometimes believed to be greater than the value of the firm as a whole
    • To get rid of under performing division
    • To bring in stability by divesting volatile business
  • 22. How the Best Divest
    • The Smart Way to Divest
    • Establish a dedicated team
    • Test for Fit and Value
    • Plan for De-Integration
    • Communicate the deal’s benefits for buyers and employees
  • 23. How the Best Divest
    • I. Establish a Dedicated Team
    • The team generally have members with unique skills in Accounting, HR & SLA
    • Constantly screens their company’s portfolio for divestiture candidates
    • Works on timing & implementation steps to maximize value
    • Develop divestiture pipeline by screening the company’s portfolio annually
    • Identify the businesses that may be worth more to others than they are to the company’s shareholders
    • Maintain a database of potential buyers
    Slide Approach the divestiture with the same level of planning & rigor that the acquirer does
  • 24. How the Best Divest Establish a dedicated team Slide Example
    • Ranked 233 rd of Fortune 500 list of largest US Companies and revenue @ >$10Bn.
    • Team with distinctive deal execution capabilities
    • Team maintains database of potential buyers
    • Keep data on other transactions in markets that Textron Competes.
    Since 2001, It has sold 41 businesses of > $4.4bn revenue & acquired 24 business of $1.4bn
  • 25. How the Best Divest
    • II. Test for Fit and value
    • Is keeping the business essential to positioning the company for long term growth & profitability
    • Whether the business is worth more held in the company’s portfolio than it is anywhere else
    • To be candidate for divestiture, a business must neither be core to the company’s strategy nor more valuable to the company than anyone else.
    • Normally companies don’t sell when the conditions are good and don’t wait when the conditions are not good. This is not best.
    Sell a business while potential acquirer can still extract value from the operations and take steps to reignite profitable growth Slide
  • 26. How the Best Divest Test for Fit and value Slide Some businesses may not be core, but can still be managed more profitably by company than any other entity Eg. Disney repurchase of its North American retail stores. Some businesses may be retained to build competitive advantage in the portfolio. Eg. Coca-Cola’s heritage fountain business creates distribution advantages for its soft drinks business
  • 27. How the Best Divest
    • III. Plan for De-Integration
    • Once the company has decided to divest a unit it must determine how best to separate it out.
    • Do we sell for Cash or Stock?
    • Do we sell the whole business or a piece of it?
    • Who will pay the highest price?
    • Which buyer is better from a strategic point of view?
    Slide Determine what type of separation will best meet the company’s needs and implementation steps required to generate the maximum value from the separation
  • 28. How the Best Divest Plan for De-Integration Slide
  • 29. How the Best Divest
    • IV. Communicate the Deal’s Benefits to Buyers & Employees
    • What actions should be taken to improve the profitability and growth
    • Expected time period it will take for the buyer to achieve the deal’s full potential value
    • How the value that is unlocked through divestiture be split between buyer and seller
    • How to motivate and inspire people in the business until the deal closes.
    Slide The best divestors clearly communicate what’s in the deal for all involved
  • 30. How the Best Divest Communicate the Deal’s Benefits Slide
  • 31. Deal Done Thank You Slide