Mergers and Acquisitions Tactics

1. 5. MERGER & ACQUISITION TACTICS Mergers and Acquisitions Tactics A. Faisal Sultan

2. Depending a Hostile Bid Mergers and acquisitions is a way for companies to grow, establish and gain entry to new markets. They can be categorized as either friendly or hostile Hostile takeovers Friendly Takeovers • A hostile takeover allows a suitor to bypass a target company's management unwilling to agree to a merger or takeover, • A takeover is considered "hostile" if the target company's board rejects the offer, but the bidder continues to pursue it, • Before a bidder makes an offer for another company, • It usually first informs that company's board of directors

3. Depending a Hostile Bid Friendly Takeovers Hostile takeovers • If the board feels that accepting the offer serves shareholders better than rejecting it, it recommends the offer be accepted by the shareholders. • It is characterized by bargaining until agreement is signed, • or the bidder makes the offer without informing the target company's board beforehand, • A hostile takeover can be conducted in following ways, • A tender offer, Bear Hug, Proxy Contest.

4. Bear Hug • Bear Hug is also known as Lip Lock or Body Lock, • This is a method used under hostile takeover, • When target company management refuses acquirer's friendly offer, • Then acquirer firm mount a pressure on target by threaten management to go directly to shareholders in market and, • Will offer a price much more than its market value, • Now in this case acquirer gives a bear hug and target has no option except accepting the proposal, • Because the management has its fiduciary responsibility to the shareholders to take any decision in their favor, • If management is not doing so then it may face litigation from shareholders.

5. Proxy Contest • Proxy Contest is based on proxy voting, • Proxy Vote : votes by one individual or institution as the authorized representative of another (Shareholder), • This is again a method used under hostile takeover, • When target company is defending itself by various means, • Then acquirer try to replace the existing member in board of target company with its own choice member so that takeover may easy, • For this acquirer company try to have the proxy voting right form shareholders, • But as a matter of fact 80% of such effort failed in USA, • The use of proxies is highly regulated in India

6. Tender Offer • The tender offer is a public, open offer or invitation by a prospective acquirer to all shareholders of target company directly , • To sell their stocks at a specified price during a specified time, • The acquirer usually offer price which includes a premium over the current market price of the target company's shares, • Acquirer company may offer Cash or other securities to the target company's shareholders,

7. Reason behind M & A There are several reasons why a company would put a bid or acquire another company. The main reasons for acquiring another firm is naturally the possibility in improving productivity, gaining market shares as well as improving the stability of positive results. Improvement in productivity is generally achieved by reorganization and restructuring of the management as well as the company structure, while at the same time looking to utilize the company's resources in a more efficient and effective way. Furthermore, the acquiring company is seeking to take advantage of the potential economic of scale an acquirement often means, as well as seeking to reduce and cut expenses related to information and intelligence logistics.

8. Reason behind Hostile Take over the most effective way of replacing an ineffective board of directors or management of a targeted firm, is through a hostile takeover The acquiring company then wishes and aims to replace the old management, in order for the company to achieve its full revenue and growth potential, thus increasing its stock value A hostile takeover could therefore sometimes also be seen as an effective market transaction, which simply replaces a bad management, in order togain increased company value for the acquiring company as well as for the shareholders of the targeted firm

9. Depending a Hostile Bid When facing a hostile takeover trough a hostile bid the board of directors will act accordingly to protect their independence and current management or to ensure that the hostile bidder is pressured to sweeten their bid further. Often, the main purpose of the chosen defense strategy is to make the acquisition more costly or time consuming and in such way making the targeted company less attractive due to the rise in cost which follows. This can be done through several different ways and theses measures are commonly called defense strategies,

10. Depending a Hostile Bid every publicly listed company faces the risk of being a target for a hostile takeover, many companies protect themselves by implementing various defense measurements and strategies : These strategies could be either pro-active, such as the poison pill and staggered board defense strategy or re-active, such as the crown jewel and white knight defense strategy.

11. Defense Tactics Proactive Defense Measures Staggered Board Poison Pills Super-Majority Amendment Golden Parachutes Reactive Defense Measures Attack the Logic of The Bid White Knight & White Squire Greenmail Crown Jewel Litigation .

12. Proactive Defense Measures Staggered Board (also known as a classified board ) is a board that is made up of different classes of directors. Usually, there are three classes, with each class serving for a different term length than the other. Elections for the directors of staggered boards usually happen on an annual basis. This shows that the staggered board tactic provides an effective protection against a hostile takeover when it comes to preventing the acquirer to gain control of the whole board instantly. .

13. Proactive Defense Measures Poison Pills A strategy used by corporations to discourage hostile takeovers. With a poison pill, the target company attempts to make its stock less attractive to the acquirer. There are two types of poison pills: . • A "flip-in" allows existing shareholders (except the acquirer) to buy more shares at a discount. • provision that makes the firm's all debts immediately payable if the board of directors is changed; • Distribution of warrants or purchase rights for buying the firm's stock (shares) at a heavy (usually 50 percent) discount when a triggering event (takeover attempt) occurs, thus immediately diluting the raider's ownership interest and voting rights; and/or • issuance of a new series of preferred stock (preference shares) that gives stockholders/shareholders (not including the raider) right to redeem them at a hefty premium after a takeover. • A "flip-over" allows stockholders to buy the acquirer's shares at a discounted price after the merger. • An example of a flip-over is when shareholders gain the right to purchase the stock of the acquirer on a two-for-one basis in any subsequent merger (These rights are only triggered and set in motion when 100 per cent of the firms’ shares have been bought)

14. Proactive Defense Measures A "flip-over" allows stockholders to buy the acquirer's shares at a discounted price after the merger. A type of poison pill strategy in which shareholders have the option to purchase shares in the acquiring company at a deeply-discounted price. A flip-over pill is a shareholder rights plan used as a defense against hostile takeovers, and is one of the more commonly-used poison pill strategies. The rights plan can be included in the bylaws of the company, meaning that it must be permitted by an acquiring company. An example of a flip-over is when shareholders gain the right to purchase the stock of the acquirer on a two-for-one basis in any subsequent merger (These rights are only triggered and set in motion when 100 per cent of the firms’ shares have been bought)

15. Proactive Defense Measures Super-Majority Amendment A corporate amendment in a company's charter requiring a large majority (anywhere from 67-90%) of shareholders to approve important changes, such as a merger. This is sometimes called a "supermajority amendment". Often a company's charter will simply call for a majority (more than 50%) to make these types of decisions. For example, let's say the TSJ Sports Conglomerate is faced with a merger proposal from ABC Sports Inc. If the company has a supermajority amendment in it's charter, then before it is able to merge (even if management fully endorses the move) the company will need to hold a shareholder vote on the issue and gain a majority equal to, or greater than, the amendment specifies (anywhere from 67-90%).

16. Reactive Defense Measures Attack the Logic of The Bid By attacking the logic of the bid, the board is trying to persuade the shareholders that a fusion will have a harmful outcome on both the company andthe stock price. This is considered to be an effortless and cost beneficial tactic when facing a hostile bid. The board can also try to discourage their shareholders’ beliefs about the acquiring company through accusing them of being incompetent and only trying to acquire the firm’s assets. Management could also raise doubt the merger and encourage shareholders to hold their shares for additional bids

17. Reactive Defense Measures White Knight & White Squire These two defense measures require and involve a third party. In the first, the targeted firm seeks for a friendly firm which can acquire a majority stake in the company and is therefore called a white knight. white knight can be chosen for several reasons such as; friendly intentions, belief of better fit, belief of better synergies, belief of not dismissing employees or historical good relationships The intention of the white knight strategy is to make sure that the company remains independent but could also be used to play the other two parties against each other to further sweeten the bid. However, the most common outcome of a white knight strategy would be that targeted firm eventually gets overtaken by the white knight.

18. Reactive Defense Measures instead of acquiring a majority stake in the targeted company the white squire acquires a smaller portion, but enough to hinder the hostile bidder from acquiring a majority stake and thereby fending off an attack. A white squire is not always needed to be found but can also be created by raising an investment fund with the help of financial advisors. Here are hedge funds and banks suitable white squires due to their ability to move large amount of capital on short notice .

19. Reactive Defense Measures Greenmail If the bidders’ interests are short-termed profit rather than long-termed corporate control then an effective and simple defense measure could be touse a so called greenmail, also known as targeted repurchase or a goodbye kiss. Greenmail involves repurchasing a block of shares which is held by a single shareholder or other shareholders at a premium over the stock price in return for an agreement called a standstill agreement.

20. Reactive Defense Measures Crown Jewel The target company has the right to sell of the entire or some of the company’s most valuable assets (Crown Jewels) when facing ahostile bid, in hope to make the company less attractive in the eyes of the acquiring company and to force a drawback of the bid. Anotherway of implementing this type of defense strategy is for the target company to sell its Crown Jewels to another friendly company (White Knight) and later on, when and if the acquiring company withdraws its offer, buy back the assets sold to the White Knight at a fixed price agreed in advance The Crown Jewel strategy does not go without risks.By selling of the targeted company’s most valuable assets, one puts the whole operation of the company in danger and if the target company chooses to adopt a Crown Jewel strategy to sell of its most valuable assets to a White Knight, they need guarantee to able to buy the assets back

21. Reactive Defense Measures Litigation Litigations are ways for companies to stall a hostile attack, but are often not effective against long-term bidders. The litigations often involve pursuing legal injunction, filing antitrust litigations, restraining orders or filing a law suit against the bidding company. This pressures the bidder to gather information to prove its legitimacy of the takeover, often towards the institution in each country that handles these matters, in U.S it is the Security Exchange Committee (SEC). During the time the bidder is preparing and presenting its legal preferences, the targeted company receives a space to implement other defense measures or to pressure the bidder to sweeten the bid additionally in exchange drop the litigations

22. Depending a Hostile Bid One of the most effective defensive measures is to be well prepared in advance. The greater the preparation, the greater the likelihood of the target company remaining independent or being able to obtain greater value for shareholders. Categories of actions that can be taken by a potential target before the bid arrives include : Know your shareholder base: it is extremely important to have the support of major institutional shareholders and to open and utilise a channel for communications; take the opportunity to improve the shareholder base. 2. …

23. Depending a Hostile Bid Know your key advisers: the company should have appointed expert advisors who can give it assistance immediately. Time is of the essence in a hostile takeover and no time should be wasted in finding the right advisers. The company should keep in mind that professional advisers will often have conflicts. Know your legal options: a legal review of defensive options should be undertaken. This will range from change of control arrangements, the possibility of placing securities in friendly hands, regulatory challenges, trade union assistance, reverse takeovers, Know the PR world: takeover battles are often fought in the press, and the company should have a PR plan and arrangements in place with a PR firm experienced in corporate takeovers.

24. Defence manuals/pre-bid checklists A defence manual will include an analysis of: The company's own business and business strategy, how successful it has been, how it may be portrayed both by the company and by a predator. Valuations of different parts of the business and of the business as a whole on a trading basis and on an exit, including restructuring and demerger/spin off strategies. The identity and details of possible predators. The identity and details of possible supportive investors (white squires), acceptable bidders (white knights) or other supporters (for example, large customers or suppliers). Details of antitrust or any other regulatory issues.

25. Quick Quiz • What are the different methods for achieving a takeover? • How do we account for acquisitions? • What are some of the reasons cited for mergers? Which may be in stockholders’ best interest and which generally are not? • What are some of the defensive tactics that firms use to thwart takeovers? • How can a firm restructure itself? How do these methods differ in terms of ownership?