The Takeoer Process
Points to remember
M&As refer to
- Traditional mergers and acquisitions
- Takeovers
- Corporate restructuring
- Change in corporate control
- Changes in the ownership structure of firms
The 10 Change Forces
-Technological change
-Economies of scale, economies of scope, complementarity, and the need to catch up technologically
-Globalization and freer trade
-Changes in industry organization
-New industries
-Deregulation and regulation
-Favourable economic and financial conditions for much of the past two decades
-Negative trends in certain individual economies and industries
-Widening inequalities in income and wealth
-Relatively high valuations for equities during the 1990s
Terminology
Merger
Negotiated deals
Mutuality of negotiations
Mostly friendly
Tender offers
Offer made directly to the shareholders
Hostile - when offer is made without approval of the board
Restructuring — changes in organization structure or policies to alter the firm’s approach to achieving its long-term objectives.
Types of Mergers
Horizontal mergers
Mergers - Legal Framework of USA
Statutory merger — formal legal procedures
Short-form merger — streamlined legal procedures when ownership is 90%
Holding company — parent company has a controlling interest
Tender Offers
Bidder seeks target's shareholders approval
Minority shareholders
Terms may be "crammed down"
May be subject to "freeze-in"
Minority has the right to bring legal actions
Kinds of tender offers and provisions
Conditional vs. unconditional
Restricted vs. unrestricted
"Any-or-all" tender offer
Contested offers
Two-tier offers
Three-piece suitor
Risk Arbitrage in M&A Activity
In mergers and acquisitions, risk arbitrage is the practice of being long in the target stock and short in the bidder stock.
The position implies that arbitrageurs are betting that the merger will be successful.
Nature of the arbitrage industry
Information gathering and analysis is the principal raw material
Some arbitragers attempt to anticipate takeover bids and acquire stock before public announcement also.
Combination between firms in same business activity
Rationale
Economies of scale and scope
Synergies such as combining of best practices
Government regulation due to potential anticompetitive effects
Vertical mergers
Combinations between firms at different stages
Rationale is information and transaction efficiency
Conglomerate mergers
Combination of firms in unrelated types of business activity
Distinctions between conglomerate and nonconglomerate firms
- Investment companies — diversify to reduce portfolio risk
- Financial diversified — provide funds and expertise on generic management functions of planning and control
- Concentric diversified — combine with firms in less related activities to broaden market potentials
Risk Arbitrage in M&A Activity
Usually, long in the target stock and short in the bidder stock
Nature of the arbitrage industry
Information gathering and analysis is the principal raw material
Arbitragers attempt to anticipate takeover bids
Arbitrage funds
Abritrage funds invest in multiple merger parties to diversify the risk.
To minimise risk, funds undertke intensive research and do not investment on rumours.
They invest in 10-20 transactions at a given time.
They aim to give annual returns of 10% or greater and also to provide returns uncorrelated with overall stock market returns.
Summary
This chapter has summarized some basic terminology and concepts, providing a foundation of further knowledge and understanding of M&As.
Main risk is whether deals are completed
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