4. Strategic Aspect of M&A
• Management and board of company
must continuously reassess competitive
environment
• All forms of M&A activities may impact
firm both as threats and opportunities
– Main developments in industry
– Opportunities for adding critical capabilities
to participate in attractive growth areas
firdaus@icbm.ac.in
5. – Opportunities for rolling-up fragmented
industries into stronger firms
– Improving or deteriorating sales to capacity
relationships in industry
– Impact of consolidating mergers on capacity
and cost structure
– Enhanced capabilities of competitors as a
result of their merger activity
– Preemptive moves
– Responses to takeover bids
firdaus@icbm.ac.in
6. TAKEOVER
• Takeover, an inorganic corporate
growth device whereby one company
acquires control over another company,
usually by purchasing all or a majority
of its shares.
• Takeover implies acquisition of control
of a company, which is already
registered, through the purchase or
exchange of shares.
firdaus@icbm.ac.in
7. TYPES OF TO
• Friendly Takeover: Friendly takeover is with the consent of taken
over company. There is an agreement between the management of two
companies through negotiations and the takeover bid may be with the
consent of majority or all shareholders of the target company and hence
is also called Negotiated Takeover.
• Hostile Takeover: When an acquirer company does not offer the
target company the proposal to acquire its undertaking but silently and
unilaterally pursues efforts to gain control against the wishes of existing
management.
• Bail Out Takeover: Takeover of a financially sick company by a
profit earning company to bail out the former. There are several
advantages for a profit making company to takeover a sick company.
The price would be very attractive as creditors, mostly banks and
financial institutions having a charge on the industrial assets, would like
to recover to the extent possible.
firdaus@icbm.ac.in
8. SEBI GUIDELINES FOR TO BIDS
• SEBI (Substantial Acquisition of Shares & TO) Regulations
2011, require acquirers to make bids for acquisition of
certain level of holdings subject to certain conditions. A
takeover bid is required to be introduced through a public
announcement through newspapers in cases:
(a) for acquisition of 25% or more of the shares or voting rights;
(b) for acquiring additional shares or voting rights to the extent
of 5% of the voting rights in any financial year ending on 31st
March if such person already holds not less than 25% but
not more than 75% or 90% of the shares or voting rights in a
company as the case may be;
(c) for acquiring control over a company.
firdaus@icbm.ac.in
10. Offensive Strategy 1
• Street Sweep: An investment strategy
in which large amounts of a target
company's stock are quickly purchased.
Also called market sweep. After
amassing a large amount of shares, an
open bid is made.
• Usually the target firm has no choice
but to give in.
firdaus@icbm.ac.in
11. Offensive Strategy 2
• Bear Hug: An offer made by acquirer to
buy the shares of target for a much
higher per-share price than what that
company is worth. The target company's
management is essentially forced to
accept the generous premium as it is
legally obligated to look out for the best
interests of its shareholders.
firdaus@icbm.ac.in
12. Offensive Strategy 3
• Dawn Raid: Acquirer buys a substantial
amount of shares as soon as the stock
market opens for trading. It does this
through stock brokers in order to mask
its identity & intention. Usually prevalent
in UK.
firdaus@icbm.ac.in
13. Offensive Strategy 4
• Saturday Night Special: A sudden
attempt by one company to take over
another by making a public tender offer
over the weekends. Typical in US. (This
is controlled now as any purchase of
5% or more of equity must be disclosed
to the regulator)
firdaus@icbm.ac.in
14. Offensive Strategy 5
• Lady Macbeth: A corporate-takeover
strategy with which a third party poses as
a white knight to gain trust, but then turns
around and joins with the unfriendly
bidders.
firdaus@icbm.ac.in
15. SCOUTING FOR A TARGET FIRM
– low P/E ratio
– Low stock price in relation to replacement cost
of assets or potential earning power
– Highly liquid balance sheet with large amounts
of excess cash, unused debt capacity, etc.
– Good cash flows relative to current stock prices
– Subsidiaries or properties that could be sold off
without significantly impairing cash flows
– Relatively small stockholdings under control of
incumbent management
firdaus@icbm.ac.in
16. Combinations of these factors can
simultaneously make a target firm an
attractive investment & facilitate its
financing
• Firm's assets can be used as collateral
for acquirer's borrowing
• Target's cash flows from operations
and divestitures can be used to repay
loans
firdaus@icbm.ac.in
17. Reasons for Defensive Strategies
– Target is resisting to get a better price
– Management of target judges that
company will perform better on its own
– Management is seeking to entrench itself
firdaus@icbm.ac.in
18. HOW DOES A COMPANY
DEFEND ITSELF FROM A
HOSTILE TAKEOVER?
firdaus@icbm.ac.in
19. (I)Financial Defenses
– Increase debt — use borrowed funds to
• Repurchase equity
• Concentrate management's percentage holdings
– Increase dividends
– Loan covenants structured to force
acceleration of repayment in event of takeover
– Liquidate securities portfolio
– Decrease excess cash
• Invest in positive net present value projects
• Return to shareholders in dividends or share
repurchases
firdaus@icbm.ac.in
20. – Excess liquidity could be used to acquire
other firms
– Divest subsidiaries that can be eliminated
without impairing cash flows; or spin-offs to
avoid large cash inflows
– Divest low-profit operations
– Undervalued assets should be sold
firdaus@icbm.ac.in
21. (II) Corporate Restructuring and
Reorganization
• Reorganization of assets
– Asset acquisitions can be used to block
takeovers
• Dilute ownership position of bidder by using
equity in acquisitions
• Create antitrust problems for bidder
firdaus@icbm.ac.in
22. – Reorganizing financial claims
• Debt-for-equity exchanges — increase leverage
to levels unacceptable to bidder
• Dual-class recapitalizations — increase voting
powers of insider groups to levels that would
enable them to block tender offers
• Leveraged recapitalizations/ Leveraged cash-out
— outsiders (shareholders) receive a large one-time
cash dividend and insiders (mgt. &
employees) get new shares instead of dividend.
The cash dividend is financed through borrowed
funds – senior bank debt or subordinated
debentures.
• ESOPs can be used to decrease voting shares
available for tender
firdaus@icbm.ac.in
23. – Target firm may look for international partner
– Share repurchase can be used to defend
against takeovers
• Increase ownership of insiders
• Low reservation price shareholders can be
bought out — higher tender offer price needed
for bid to succeed
– Proxy contest — aim is to change control
group and make performance improvements
firdaus@icbm.ac.in
25. Defensive Strategy 1
• Golden Parachute: discourages an
unwanted takeover by offering lucrative
benefits (bonuses, stock options, liberal
severance pay) to the current top
executives, who may lose their job if
their company is taken over by another
firm. Golden parachutes can be worth
millions of dollars and can cost the
acquiring firm a lot of money.
firdaus@icbm.ac.in
26. Defensive Strategy 2
Greenmail
• Represents targeted repurchase of
large block of stock (that raider has
cornered) from specified shareholders
at premium to end hostile takeover
threat.
firdaus@icbm.ac.in
27. Defensive Strategy 3
• Standstill agreement
–Voluntary contract in which raider
agrees not to make further investments
in target company during specified
period of time
– If no targeted repurchase is made, large
block-holder agrees not to further
increase in ownership percentage of the
firm
firdaus@icbm.ac.in
28. Defensive Strategy 4
Pac Man defense
– Target firm makes a counteroffer for bidder firm
– Rarely used
– Effective if target much larger than bidder
– Implies target finds combination desirable but
seeks control of surviving entity
– Extremely costly
• Could involve devastating financial effects for both
firms, especially if large amount of debt used to
purchase shares
firdaus@icbm.ac.in
29. Defensive Strategy 5
White Knight
–Target company chooses another
company with which it prefers to be
combined
–Alternative company preferred by target
because of :
• Greater compatibility
• New bidder may promise not to break
up target or engage in massive
restructuring
firdaus@icbm.ac.in
30. Defensive Strategy 6
White Squire
– Modified form of white knight defense in
which the white squire does not acquire
control of target
– Target sells block of its stock to third party
(white squire) it considers to be friendly
– Often accompanied by standstill agreement
• Limits amount of additional target stock white
squire can purchase for specified period of time
• Restricts sale of its target stock, usually giving
right of first refusal to target
firdaus@icbm.ac.in
31. – White squire often receives in return
• Seat on target board
• Generous dividend and/or
• Discount on target shares
– Preferred stock usually used in white
squire transactions because it enables
Board to tailor characteristics of stock as
described
firdaus@icbm.ac.in
32. (IV) Antitakeover Amendments
• Anti-takeover amendments to firm's
corporate charter generally impose
new conditions on transfer of
managerial control of firm — "shark
repellents”
firdaus@icbm.ac.in
33. Anti-TO Amendment 1
• Supermajority amendments
– Require shareholder approval by at least
2/3rd vote (even as much as 90%) for all
transactions involving change in control
– Involve "board-out" clause that gives board
power to determine when and if
supermajority provisions will be in effect
firdaus@icbm.ac.in
34. Anti-TO Amendment 2
• Fair-price amendments
– Supermajority provisions with board-out
clause and additional clause waiving
supermajority requirement if fair price is
paid by bidder for all purchased shares
– Fair price — highest market price of target
during a past specified period
firdaus@icbm.ac.in
35. Anti-TO Amendment 3
• Staggered or Classified boards
– It delays effective transfer of control following TO
– Management's rationale is to assure continuity of
policy and experience
Eg: 1/3rd of board stands for election to 3-year term each year
• Reduce effectiveness of cumulative voting because
greater shareholder vote is required to elect single
Director
• Directors are removable only due to a cause
• Limited number of directors to prevent "packing"
firdaus@icbm.ac.in
36. Anti-TO Amendment 1
Poison Pills
– Creation of securities carrying special
rights exercisable by triggering event such
as accumulation of specified percentage of
target shares or announcement of tender
offer
– Make acquisition of control of target firm
more costly
firdaus@icbm.ac.in
37. – Can be adopted by board without
shareholders' approval
– Poison pill adoptions often submitted to
shareholders for ratification even though
not required to do so
– Use of poison pills requires justification to
be upheld by courts — adoption of poison
pills in the best interest of shareholders —
"business judgment rule"
firdaus@icbm.ac.in
38. • Types of Poison Pill plans
– Flip-over plans
• Bargain purchase of bidder's shares at some
trigger point
• Weakness: If rights are exercisable only when
bidder obtains 100% of company stock, bidder
may buy just over 50% to obtain control
firdaus@icbm.ac.in
39. – Flip-in plans
• Bargain purchase of target's shares at some
trigger point
• More widely used than flip-over plans
• Ownership flip-in provision allows rights holder
to purchase shares of target at a discount if
acquirer exceeds a shareholding limit — rights
of bidder who triggered pill become void
• Some plans waive flip-in provision if acquisition
is cash tender offer for all outstanding shares
(defend against two-tier offers)
firdaus@icbm.ac.in
54. DIVESTITURE/DEMERGER
• It is a form of Corporate Restructuring which
involves the sale of only some assets of the
firm – such as a plant, division, product line,
subsidiary, etc.
• For the seller, Divestiture causes contraction
in size, but not necessarily in profits. In fact,
Divestiture is undertaken to part with loss-making
or low revenue yielding business to
enhance overall Corporate value.
firdaus@icbm.ac.in
55. Strategic Rationale
• Unlocking hidden value – Establish a public market valuation for undervalued assets
and create a pure-play entity that is transparent and easier to value
• Un-diversification – Divest non-core businesses and sharpen strategic focus when direct
sale to a strategic or financial buyer is either not compelling or not possible
• Institutional sponsorship – Promote equity research coverage and ownership by
sophisticated institutional investors, either of which tend to validate Spin Co as a standalone
business
• Public currency – Create a public currency for acquisitions and stock-based
compensation programs
• Motivating management – Improve performance by better aligning management
incentives with SpinCo's performance (using SpinCo, rather than ParentCo, stock-based
awards), creating direct accountability to public shareholders, and increasing transparency
into management performance
• Eliminating dissynergies – Reduce bureaucracy and give SpinCo management
complete autonomy
• Anti-trust – Break up a business in response to anti-trust concerns
• Corporate defense – Divest "crown jewel" assets to make a hostile takeover of ParentCo
less attractive
firdaus@icbm.ac.in
56. DEMERGER
The demerged company sells and transfers one or more of its undertakings to
the resulting company for an agreed consideration.
The resulting company issues its shares at the agreed exchange ratio to the
shareholders of the demerged company.
Demerger might take place for various reasons –
• a conglomerate carrying out various activities might transfer one or more
of its existing activities to a new company to give effect to rationalization or
specialization in the manufacturing process;
• or such transfer might be of a less successful part of the undertaking to
the newly formed company,
• or demerger may be result of the family owned properties of the company
transferring to the new companies formed by the different family members
to carry on different activities etc.
firdaus@icbm.ac.in
57. Demerger of L&T
to concentrate
on infrastructure, engineering, energy & turnkey businesses
firdaus@icbm.ac.in
58. SLUMP SALE
A company sells or disposes of the whole or substantially the whole
of its undertaking for a predetermined lump sum consideration.
In a slump sale, an acquiring company may not be interested in
buying the whole company, but only one of its divisions or a
running undertaking which may be on a going concern basis.
The sale is made for a lump sum price, without values being
assigned to the
individual assets and liabilities transferred. The business to be hived-off
is transferred from the transferor company to an existing or a
new company. A "Business Transfer Agreement" (Agreement) is
drafted containing the terms and conditions of transfer.
The agreement provides for transfer by the seller company to the
buyer company, its business as a going concern with all
immovable and movable properties, at the agreed consideration.
firdaus@icbm.ac.in
59. Spin-Offs
• In a spin-off, the parent company (ParentCo) distributes to
its existing shareholders new shares in a subsidiary,
thereby creating a separate legal entity with its own
management team and board of directors.
• The distribution is conducted pro-rata, such that each
existing shareholder receives stock of the subsidiary in
proportion to the amount of parent company stock already
held. No cash changes hands, and the shareholders of the
original parent company become the shareholders of the
newly spun company.
firdaus@icbm.ac.in
62. Split-Up
• A method of demerger involving the
breakup of the entire company into a
series of newly created legal entities, so
that the parent firm no longer exists and
only the new off-spring survive.
• Smaller, hence logistically more
convenient to manage and hence liable
to enhance efficiency & performance.
firdaus@icbm.ac.in
