MERGERS AND ACQUISITIONS/ACQUISITION PROCESS
Mergers, acquisitions and takeovers have become a modern trend in the concentration of production activities and capital. The process of mergers and acquisitions is very closely related to the dynamics of the capital market.
To carry out these operations, first of all, it is necessary to determine the state of the fictitious capital of the corporation – swollen, compressed or efficient (corresponding to market needs), because the financial market situation has a direct impact on the mode of operation of the company. If the size of the real assets of the enterprise exceeds the size of its fictitious capital, the corporation becomes an object for a profitable acquisition (usually by buying up its shares on the stock exchange).
In the opposite situation, the company’s securities (actually not backed by real assets) turn into an object of speculation due to their increased vulnerability, which leads to the depreciation of the corporation’s financial instruments and its takeover.
Depending on the goals and methods (repurchase, buyout of a controlling stake), the acquisition can be:
• Friendly – a formal offer to acquire is supported by the management of the company being acquired, such as a strategic takeover (strategic buyout). The merger takes place on the basis of an analysis of the benefits of the merger: the companies fit together. As a result of the acquisition, synergy gains are realized.
• Hostile (aggressive) – unfriendly repurchase (hostile takeover) – the absorbing company (raider) makes a tender offer to the shareholders of the acquired company to buy up for cash, usually 95-100% of the shares. The management and the board of directors of the company do not agree with this proposal, but shareholders can welcome it. The main varieties of hostile acquisition are:
o Gradual share buyback aimed at changing the board of directors;
o A share swap, in which shareholders of the target company are invited to exchange their shares for shares in the acquiring company.
In world practice, the following acquisition tactics are distinguished:
• A sudden takeover (blitzkreig tender offer) – a quick purchase of shares (bust-up takeover), buyout of a controlling stake with the involvement of collateral (leveraged buyout). The assets of the acquired company are sold to pay off the debt incurred as a result of financing the takeover. In such a situation, the raider orders the broker to buy up all the shares of another company in the market as quickly and discreetly as possible so that the company being acquired does not understand. This practice (called dawn-raid) is prohibited in developed countries.
• A bear hug is a very lucrative takeover bid made to the company’s directors, to which shareholders do not object.
• An imposed deal (cram-down deal) – purchase of a company through borrowed funds, when the shareholder has no other alternative but to accept unfavorable conditions for himself. For example, exchanging your shares for “junk” bonds, not for cash. Varieties of such acquisition tactics are:
o a very generous takeover offer, if not accepted, the shareholders will sue the company’s management (godfather offer);
o a very lucrative contract offered to a company executive and providing him with large compensation when his company is taken over by another and when he is fired (golden parachute). Includes cash payment, stock option or premium.
• “Strategy of Lady Macbeth” (Lady Macbeth Strategy) – acquisition tactics when the company first acts as a “white knight”, and then unites with a hostile absorber.
Also, the raider can act as a “gray knight”. “Gray knight” (gray knight) – an absorber who tries to reduce the price offered by the white knight, but for the company to be acquired, he is more preferable than a hostile absorber.
REFLECTION OF ABSORPTIONS
Acquired companies develop their own strategy to repel a hostile takeover, aimed at preventing and resisting the acquisition. Often the company – the object of the takeover – fights against the attempts of the raiders “shark repellent techniques”. If the acquired company does not take any action, it is called “sleeping beauty” (sleeping beauty).
The main acquisition prevention tactics are:
• close monitoring by the company’s management of trading operations with shares, characteristic of the acquisition;
• appeal to companies specializing in the early detection of takeover attempts (they are called shark watchers);
• inviting specialists, investment banks (they are called killer bees), who develop strategies to counter the raiders;
• formation of “military treasury” (war chest) – the allocation of funds (liquid assets, cash) stored outside the company in case of acquisition.
The strategy for countering a hostile takeover is:
• from official events preventing takeovers;
• from the tactics of countering takeovers;
• from the instruments of confrontation.
Formal arrangements to help a company avoid a takeover:
• tax incentives;
• provision for exemption from liability;
• “safe haven” – the acquired company is subject to very strict regulation and becomes unattractive for the takeover.
The main tactics for repelling a hostile takeover are:
• Green blackmail (greenmail) – a company (acquisition object) buys back from a potential absorber the shares acquired by it at a premium for a promise not to buy out a controlling stake within a certain period of time. Its main varieties are the good-bye kiss and the bon voyage bonus.
• Poison pill – a takeover strategy aimed at exposing its shares in an unattractive light. For example, the issuance of new series of preferred shares with the right to redeem them at a premium after the takeover, which causes a dilution of the share capital and can prevent a takeover attempt by increasing the costs of the absorber. Main varieties:
• internal poison pill (flip-in poison pill) – an additional issue of shares, allowing all shareholders of the company (except for the absorber) to buy additional shares at reduced prices;
• external poison pill (flip-over poison pill) – gives the holders of ordinary shares the right to buy (and preferred ones – to convert) the buyer’s shares at a reduced price in case of an undesirable merger of companies, etc.;
• suicide pill (suicide pill) – an action with potentially catastrophic consequences for the absorber, for example, the exchange of shares of the acquired company for its loan obligations, but this can not only scare off the raider, but also lead to the bankruptcy of the absorbed company.
• “Macaroni defense” (macaroni defense) – the tactic of issuing a large number of bonds with the possibility of early redemption at a higher price during absorption.
• Reverse leveraged buyout with the use of borrowed funds by the company’s management.
• Scorched earth policy (scorched-earth policy) – the acquired company agrees to sell the most attractive part of the business (so that it does not go to the raider) or appoints the payment of all debts immediately after the merger.
• Strategy “Pac-Man” (Pac-Man Stra-tegy) – the acquired company begins buying shares of the raider, threatening to swallow him up.
The main tools to repel a hostile takeover are:
• Human pill (pilpeople) – an agreement on the dismissal of management and leading specialists. In this case, absorption becomes impractical.
• Pension parachute – a pension agreement under which, in the event of a hostile takeover attempt, excess company assets will be paid out to participants in the program in the form of increased pensions. Therefore, the raider will not be able to finance the takeover from the company’s assets.
• Prevention of “financial leverage” (leveraged recapitalization) – the acquired company takes a large loan and pays large sums to shareholders, in fact, acting as a “white knight” in relation to itself.
• Management buyout – buyout with a premium by the management of the company of all outstanding shares (the company becomes private).
Shark repellent methods, also called porcupine provision, are the most successful in world practice:
• the requirement to set a fair price, the same for all shareholders (any-at-all-bid), which prevents a conditional tender offer (two-tired bid);
• golden parachute – a contract with top management that makes replacement expensive;
• defensive merger with another company;
• introduction of a clause in the corporation’s charter for re-election every year of a part of the board of directors;
• Qualified majority procedure (eg 90%) for takeover voting.
And finally, the company being acquired may turn to the “white knight”. “White Knight” (white knight) – a friendly company, attracted to protect against takeovers. The privilege of the “white knight” is a closed option – the ability to purchase an additional share of the capital of the company being absorbed at a price below par.
International speculators (third parties in the takeover – arbitrageurs) cannot miss such a favorable moment as the takeover. They carry out risky arbitrage – the simultaneous acquisition of shares in the acquired company and the sale of shares in the absorber. In fact, this is an arbitrage on the takeover of a company. If the takeover fails, the arbitrageur will suffer huge losses.
Empirical studies of mergers and acquisitions show that the main motive for these transactions is synergy. Companies form profile groups (merging or simply absorbing other companies).