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
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
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
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
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)
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.
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.
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.
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.
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.
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.
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
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