Merger & Acquisition Assignment QUESTION 1) EXPLAIN THE FOLLOWING IN DETAILS a)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. The name "bear hug" reflects the persuasiveness of the offering company's overly generous offer to the target company. By offering a price far in excess of the target company's current value, the offering party can usually obtain an agreement. The target company's management is essentially forced to accept such a generous offer because it is legally obligated to look out for the best interests of its shareholders. With a bear hug, the acquirer mails a letter that includes an acquisition proposal to the target company’s CEO and board of directors. The letter arrives with no warning and demands a rapid decision. The bear hug usually involves a public announcement as well. The aim is to move the board to a negotiated settlement. Directors who vote against the proposal may be subject to lawsuits from target stockholders, especially if the offer is at a substantial premium to the target’s current stock price. Tanya chaudhary 11614803912 Page 1
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Merger & Acquisition Assignment
QUESTION 1) EXPLAIN THE FOLLOWING IN DETAILS
a) 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.
The name "bear hug" reflects the persuasiveness of the offering company's overly
generous offer to the target company. By offering a price far in excess of the target
company's current value, the offering party can usually obtain an agreement. The target
company's management is essentially forced to accept such a generous offer because it is
legally obligated to look out for the best interests of its shareholders.
With a bear hug, the acquirer mails a letter that includes an acquisition proposal to the
target company’s CEO and board of directors. The letter arrives with no warning and
demands a rapid decision. The bear hug usually involves a public announcement as well.
The aim is to move the board to a negotiated settlement. Directors who vote against the
proposal may be subject to lawsuits from target stockholders, especially if the offer is at a
substantial premium to the target’s current stock price.
Once the bid is made public, the company is effectively “put into play” (i.e., likely to
attract additional bidders). Institutional investors and arbitrageurs add to the pressure by
lobbying the board to accept the offer. Arbitrageurs (“arbs”) are likely to acquire the
target’s stock and to sell the bidder’s stock short in an effort to profit from the anticipated
rise in the target’s share price and the fall in the acquirer’s share price. The accumulation
of stock by arbs makes purchases of blocks of stock by the bidder easier, as they often are
quite willing to sell their shares.
Tanya chaudhary11614803912 Page 1
Merger & Acquisition Assignment
b) POISON PILL One of the ways a company can protect itself from a hostile takeover bid is by adopting a
poison pill defense. Generally, this term is used to describe several approaches the target
company can employ to make the potential acquisition less desirable.
Poison Pills
The term poison pill is defined as any corporate provision, or strategy, that is used by a company
to protect itself from a hostile takeover bid. The term originated from the world of espionage,
where spies were instructed to swallow a poisonous pill rather than risk capture.
The phrase was first used in a business setting by Martin Lipton, of Wachtell, Lipton, Rosen, and
Katz. Lipton invented the poison pill defense during a takeover battle in Texas back in 1982. At
the time, T. Boone Pickens was trying to acquire General American Oil. Lipton advised the
company's Board of Directors to flood the market with new shares of stock. By diluting the
stock purchased by Pickens, the company could regain control of its destiny.
The strategy was eventually ruled as a legal defense mechanism by the Delaware Supreme Court
in 1985, and was legally recognized for the first time in the case of Moran v. Household
International.
Poison Pill Provisions
These defensive techniques have evolved over time, and while this strategy may take several
forms, the most common structures include:
Preferred Stock Plans: this is the typical preferred stock, which is registered with the SEC, and
is paid as a dividend to common shareholders. This preferred stock has an important feature: it is
convertible to common stock only after the takeover is completed. This strategy both dilutes the
ownership of the acquiring company (which is highly undesirable for the acquirer) as well as
increases the cost of the merger.
Tanya chaudhary11614803912 Page 2
Merger & Acquisition Assignment
Flip-Over Plans: this allows shareholders to purchase shares of common stock in the new
company at a substantial discount after the merger. While this approach is simpler to implement
than a preferred stock plan, it does not prevent a company from purchasing a controlling share of
the target.
Flip-In Plans: this strategy provides shareholders of the target company with the right to
purchase additional stock in the target company at substantial discounts. The right to purchase
stock occurs before the merger is finalized, and the provision is usually triggered when the
acquirer owns greater than a 20% share of the target's stock.
Back-End Plans: this approach provides shareholders of the target company with the right
to cash or debt securities at a price established by the company's Board of Directors. By doing
so, the target company has essentially established an above-market selling price for the company.
Poison Puts: this is a bond that allows investors to cash in the security before it matures, if the
target company is engaged in a hostile takeover attempt. The poison put places pressure on the
acquiring company to raise substantial sums of money to pay off the owners of the puts.
c) GOLDEN PARACHUTE A golden parachute is an agreement between a company and an employee (usually
upper executive) specifying that the employee will receive certain significant benefits if
employment is terminated. Most definitions specify the employment termination is as a
result of a merger or takeover, also known as "Change-in-control benefits", but more
recently the term has been used to describe perceived excessive CEO (and other
executives) severance packages unrelated to change in ownership (also known as
a golden handshake).The benefits may include severance pay, cash bonuses, stock
options, or other benefits.
Golden parachute is designed for the corporation’s most senior management teams, say
the top 10 to 30 managers. Under this type of plan, a substantial lump sum payment (may
be multiples of the manager’s annual salary and bonus) is paid to a manager who is
terminated following an acquisition. This agreement is usually effective if termination
occurs within one year but is automatically extended for an additional year if there is no
change in control during a given year. Funds to back- up golden parachutes are
sometimes put aside in separate accounts referred to as rabbit trusts. Rabbit trusts offer
Tanya chaudhary11614803912 Page 3
Merger & Acquisition Assignment
assurance to the employees that the money will be there for the payment of the parachute.
Proponents of golden parachutes argue that they provide three main benefits:
1) Golden parachutes make it easier to hire and retain executives, especially in industries
more prone to mergers.
2) They help an executive to remain objective about the company during the takeover
process
3) They dissuade takeover attempts by increasing the cost of a takeover, often part of a
poison pill strategy.
Example
One of the most famous golden parachutes was received by Stan O’Neal, the
chairman and chief executive of Merrill Lynch at the time of the financial crisis of
late 2007. When he was ousted in October of that year, he received a severance
payment of approximately $160 million.
d) SILVER PARACHUTE
A form of severance paid to the employees of a company that is taken over by another company.
Silver parachutes include severance pay, stock options and bonuses. Silver parachutes are
generally extended to a large number of employees and often appear as clauses in hiring
contracts that call for lucrative severance packages if an employee leaves the company, or, in
particular, after a merger, acquisition or other change in corporate control
Silver parachutes are similar to golden parachutes, which are received by the top executives in
the corporation. A silver parachute is typically smaller, but more employees are eligible to
receive one. Golden and silver parachutes are named such because they are intended to provide a
"soft landing" for employees who lose their jobs either through corporate restructuring, mergers
or other reasons. In certain cases, a silver parachute clause specifies that the benefits go into
effect only if the company is taken over by another company, resulting in the employee losing
his or her job.
Tanya chaudhary11614803912 Page 4
Merger & Acquisition Assignment
e) GREEN MAIL Greenmail (introduced earlier) is the practice of paying a potential acquirer to leave you
alone. It consists of a payment to buy back shares at a premium price in exchange for the
acquirer’s agreement not to commence a hostile takeover. In exchange for the payment,
the potential acquirer is required to sign a standstill agreement, which typically specifies
the amount of stock, if any, the investor can own, the circumstances under which the
raider can sell stock currently owned, and the terms of the agreement. Courts view
greenmail as discriminatory because not all shareholders are offered the opportunity to
sell their stock back to the target firm at an above-market price. Nevertheless, courts in
some states (e.g., Delaware) have found it to be an appropriate response if done for valid
business reasons. Courts in other states (e.g., California) have favored shareholder
lawsuits, contending that greenmail breaches fiduciary responsibility.
f) WHITE KNIGHT
A white knight is a friendly savior in the business world who helps a company by purchasing it
when it is either in the midst of an attempted hostile takeover, or when the business is either
near bankruptcy or bankrupt due to unpaid debts. The term needs to be contrasted with black
knight: a person, group or corporation that initiates a hostile takeover. Another related term
isgray knight: a person, group or corporation that initiates a takeover, which is not what the
business in trouble wants, but is perceived as a better alternative than being taken over by a black
knight. The gray knight might take over the company with some concessions to retaining
employees or staff, while the black knight ruthlessly replaces staff and management with its own
people from its own corporation. A white knight, conversely, generally will try to maintain the
same employees but funnel money into the company to help restore it.
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
A target company seeking to avoid being taken over by a specific bidder may try to be acquired
by a white knight: another firm that is considered a more appropriate suitor. To complete such a
Tanya chaudhary11614803912 Page 5
Merger & Acquisition Assignment
transaction, the white knight must be willing to acquire the target on terms more favorable than
those of other bidders. Fearing that a bidding war might ensue, the white knight often demands
some protection in the form of a lockup. This may involve giving the white knight options to buy
stock in the target that has not yet been issued at a fixed price, or the option to acquire specific
target assets at a fair price. Such lockups usually make the target less attractive to other bidders.
If a bidding war does ensue, the knight may exercise the stock options and sell the shares at a
profit to the acquiring company. German drug and chemical firm Bayer AG’s white knight bid
for Schering AG in 2006 (which was recommended by the Schering board) was designed to
trump a hostile offer from a German rival, Merck KGaS—and it succeeded in repelling Merck.
G) WHITE SQUARE
This strategy entails the target company issuing a large block of shares or convertible preference
shares to a friendly party. This is done to dilute the stake of the hostile acquirer in the company
by increasing the number of shares. Typically the white squire is a portfolio investor and is not
interested in gaining control of the target company. The deal can be structured to ensure that the
white squire cannot tender his/her shares to a hostile raider. White squire differs from the white
knight in the sense that a white knight is bought in to make a counter-offer and ensure a friendly-
takeover of the firm. White squire on the other hand is not interested in acquiring control of the
target company.
Warren Buffett has been the most renowned white squire for the last two decades. He has
invested as white squire in companies such as coco-cola, US air, Champion international, etc. In
1987, he prevented Ronald Perelman from acquiring Salomon Bros, a leading investment bank.
In September 1987, he was approached by John Gutfreund, the CEO of Salomon to act as a
white squire. Minerals and Resources Corporation was a major shareholder in Salomon with a
stake of 14 percent. Minorca was unhappy with its investments and had approached Felix
Rohatyn to find a buyer. Rohatyn retrenched pressure on Gutfreund by negotiating a tentative
deal with Ronald Perelman. Gutfreund was concerned. Salomon could not afford to repurchase
Minorca shares at $38,the price offered by Perelman, which was at 20% premium to its
prevailing market price. Warren Buffett entered the scene and agreed Berkshire Hathaway would
invest $700 million in Salomon in the form of convertible preferred stock. The securities would
Tanya chaudhary11614803912 Page 6
Merger & Acquisition Assignment
carry 9 percent guaranteed yield at $38 per share. In structuring the deal, Buffett estimated that
the 9 % coupon along the estimated appreciation of the underlying stock would give Hathaway a
return of 15%. The capital infusion facilitated Salomon to buy out Minarco’s and obviated the
takeover threat by Perelman.
H) PACMAN DEFENCE
A defensive tactic used by a targeted firm in a hostile takeover situation. In a Pac-Man defense,
the target firm turns around and tries to acquire the other company that has made the hostile
takeover attempt. This term has been accredited to Bruce Wasserstein, chairman of Wasserstein
& Co.
This term comes from the Pac-Man video game. In the game, once Pac-Man eats a power pellet
he is able to turn around and eat the ghosts that are chasing after him in the maze.
When one company makes an unsolicited and aggressive bid on another publicly traded
company, the takeover attempt may not be welcomed by the targeted firm. In an attempt to scare
off the would-be acquirers, the takeover target may use any method in an attempt to acquire the
other company, including dipping into its war chest for cash to purchase the other company's
stock.
I. CROWN JEWEL
In business, when a company is threatened with takeover, the crown jewel defense is a strategy
in which the target company sells off its most attractive assets to a friendly third party or spin off
the valuable assets in a separate entity. Consequently, the unfriendly bidder is less attracted to
the company assets. Other effects include dilution of holdings of the acquirer, making the
takeover uneconomical to third parties, and adverse influence of current share prices.
Tanya chaudhary11614803912 Page 7
Merger & Acquisition Assignment
Crown jewels refer to the most valuable assets and parts of the company. According to this
strategy, the target company has the right to sell its best and most profitable assets and valuable
parts of the business to another party if a hostile takeover occurs. This discourages hostile
takeovers as it makes the target company less attractive
For example, a telecommunications company might have a highly-regarded research and
development (R&D) division. This division is the company's "crown jewels." It might respond to
a hostile bid by selling off the R&D division to another company, or spinning it off into a
separate corporation.
J) LEVERAGE BUYOUT
A leveraged buyout (LBO) is an acquisition of a company or a segment of a company funded
mostly with debt. A financial buyer (e.g. private equity fund) invests a small amount of equity
(relative to the total purchase price) and uses leverage (debt or other non-equity sources of
financing) to fund the remainder of the consideration paid to the seller. The LBO analysis
generally provides a "floor" valuation for the company, and is useful in determining what a
financial sponsor can afford to pay for the target and still realize an adequate return on its
investment.
Transaction Structure
Below is a simple diagram of an LBO structure. The new investors (e.g. and LBO firm or
management of the target) form a new corporation for the purpose of acquiring the target. The
target becomes a subsidiary of NewCo, or NewCo and the target can merge.
Tanya chaudhary11614803912 Page 8
Merger & Acquisition Assignment
Applications of the LBO Analysis
Determine the maximum purchase price for a business that can be paid based on certain leverage
(debt) levels and equity return parameters.
Develop a view of the leverage and equity characteristics of a leveraged transaction at a given
price.
Calculate the minimum valuation for a company since, in the absence of strategic buyers, an
LBO firm should be a willing buyer at a price that delivers an expected equity return that meets
the firm's hurdle rate.
Steps in the LBO Analysis
Develop operating assumptions and projections for the standalone company to arrive at EBITDA
and cash flow available for debt repayment over the investment horizon (typically 3 to 7 years).
Determine key leverage levels and capital structure (senior and subordinated debt, mezzanine
financing, etc.) that result in realistic financial coverage and credit statistics.
Estimate the multiple at which the sponsor is expected to exit the investment (should generally
be similar to the entry multiple).
Calculate equity returns (IRRs) to the financial sponsor and sensitize the results to a range of
leverage and exit multiples, as well as investment horizons.
Solve for the price that can be paid to meet the above parameters (alternatively, if the price is
fixed, solve for achievable returns).
Tanya chaudhary11614803912 Page 9
Merger & Acquisition Assignment
QUESTION2) EXPLAIN THE REASONS FOR FAILURE OF
MERGER
1. IGNORANCE -While the parties to a merger or acquisition cannot exchange
commercially sensitive information prior to being under common ownership, there is
enough crucially important and legally permissible preparation work to keep an integration
team busy for several months before day one. Most chief executives don’t know this and
they waste the time that could be put to good use while they await clearance from the
regulatory authorities. Good preparation means the integration can kick off on day one.
Speed matters.
2. NO COMMON VISION- In the absence of a clear statement of what the merged
company will stand for, how the organisation will operate, what it will feel like, and what
will be different compared to how things are today, there is no point of the convergence on
the horizon and the organisations will never blend.
3. NASTY SURPRISES RESULTING FROM POOR DUE DILIGENCE -This sounds basic, but happens so often.
4. TEAM RESOURCING - Resource requirements are very often underestimated. It can
take two or three months to release the best players from daily business to join the
integration team(s), find a backfill for them, sign up contractors to fill the gaps and set up
the team’s infrastructure. Most companies start too late and are not ready on once the deal is
completed.
5. POOR GOVERNANCE -Lack of clarity as to who decides what, and no clear issue
resolution process. Integrating organisations brings up a myriad of issues that need fast
resolution or else the project comes to a stand-still. Again: speed matters, but with a sound
decision-making process.
Tanya chaudhary11614803912 Page 10
Merger & Acquisition Assignment
6. POOR COMMUNICATION - Messages too frequently lack relevance to their
audience and often hover at the strategic level when what employees want to know is why
the organisation is merging, why a merger is the best course action it could take, in what
way the company will be better after the merger, how it will “feel”, how the merger will
affect their work and what support they will receive if they are adversely impacted.