6. Takeover Tactics

What are the three main takeover tactics for hostile bidders

Bear hug tender offer and proxy fight

How common are hostile takeovers compared to friendly ones

Hostile bids represent a small minority of total M&A deals typically under 10 percent

Define a casual pass

An informal initial approach by a bidder to gauge the target’s interest before making a formal offer

Why can a casual pass backfire

It gives advance warning to the target and allows management to prepare defenses

Define a toehold

An initial minority ownership position in a target firm acquired before launching a takeover bid

What are the advantages of a toehold

Lowers average acquisition cost provides voting rights and potential profit if another bidder wins

What are the main costs of establishing a toehold

Disclosure requirements potential price drops if the bid fails and adverse managerial reaction

When must a Schedule 13D be filed

Within 10 days of acquiring 5 percent or more of a company’s shares

How common are toeholds in takeovers

Approximately 13 percent overall with 50 percent of hostile bidders having toeholds

Define information asymmetry in hostile takeovers

Bidders must value targets with limited access to inside information compared to friendly deals

Define a takeover contest

Process in which a target receives one or more competing bids following an initial offer

What is the fiduciary out clause

Provision allowing a target board to consider superior bids even after signing a merger agreement

How successful are initial bidders in takeover contests

Initial bidders win roughly two thirds of the time but lose more often when rivals enter

Define a bid jump

The percentage increase in price offered by a subsequent bidder compared to the initial bid

Typical size of bid jumps

About 10 to 14 percent over the prior offer representing a 30 to 65 percent increase in premium

Define a bear hug

A public letter to the target’s board expressing intent to acquire the company often with a stated price

What is the purpose of a bear hug

To pressure the board into negotiations and signal seriousness to shareholders

Differentiate between teddy bear hug and standard bear hug

Teddy bear hug lacks price details and is private; standard bear hug includes price and is public

Why might a bear hug be used before a tender offer

It is less costly and may achieve acquisition without full hostile process

Define stock price runup

Increase in a target’s stock price before a formal takeover announcement

What is the relationship between runup and markup

Premium equals runup plus markup; runup raises total premium but reduces markup portion

Define a bypass offer

An unsolicited bid made directly to shareholders without prior negotiation with target management

Which targets are more likely to receive bypass offers

Firms with entrenched management or combined CEO-chair roles

What are the main acquisition structures available to bidders

Long-form merger short-form merger and tender offer

What is the difference between long-form and short-form mergers

Long-form requires shareholder vote; short-form can close once ownership exceeds 80–90 percent

How did Delaware Section 251h change two-step mergers

It allowed short-form completion after majority tender without requiring 90 percent ownership

What are the time differences between tender offers and long-form mergers

Tender offers close in 20–40 business days while long-form mergers take 2–4 months

Define a creeping tender offer

Gradual accumulation of shares in the open market to gain control without formal tender

When are creeping purchases considered tender offers

If accompanied by public announcements or rapid accumulation of stock

Why might a bidder choose a tender offer over negotiations

To bypass an uncooperative board and appeal directly to shareholders

What is the average success rate of contested tender offers

Approximately 55 percent for public company targets

Why are tender offers faster than mergers

They avoid shareholder votes and can achieve control through direct share purchases

When might tender offers face long delays

In regulated industries requiring lengthy antitrust or government approvals

Define an exchange offer

Tender offer using bidder’s securities instead of cash as consideration

What is a double barreled offer

Offer allowing shareholders to choose between cash or securities as payment

What is the 10 day window in the Williams Act

Period during which a bidder acquiring 5 percent of shares must file a Schedule 13D

What are the four target response options under Rule 14e-2(a)

Recommend acceptance recommend rejection state neutrality or take no position

Why might a target resist a tender offer

To negotiate a higher price or attract rival bids through an auction

Define a tender offer team

Group of advisors including investment bankers lawyers proxy solicitors and depository banks managing the bid

Define a two tiered tender offer

A front end loaded offer where early tendering shareholders receive superior compensation

Why are two tiered bids considered coercive

They pressure shareholders to tender early to avoid inferior back end terms

How did fair price provisions address two tiered bids

They require equal treatment and pricing for all shareholders

What does empirical research show about two tiered bids

They are now rare and yield similar total premiums to uniform any and all offers

Define a glamour firm in M&A context

A firm with a low book to market ratio that may overpay due to overconfidence

What did Rau and Vermaelen find about glamour acquirers

They underperform post acquisition compared to value acquirers

Define risk arbitrage

Investment strategy betting on completion of announced M&A transactions by buying targets and shorting acquirers

What are the main risks in merger arbitrage

Deal failure regulatory delays and financing risk

Define a street sweep

Rapid open market purchase of target shares to gain control without tender offer

Why are open market purchases less effective than tender offers

They risk partial control positions and price runups from market awareness

Define an arbitrager in M&A

Investor who buys target shares to profit from the takeover spread

How do arbitragers influence takeover outcomes

Their buying increases deal likelihood and compresses bid spreads

Define proxy fight

A contest in which shareholders vote to replace directors or change control using proxy solicitation

How do proxy fights differ from tender offers

They seek control through voting rather than share purchase

Why are proxy fights considered political processes

They involve campaigning mailings advertisements and direct solicitation of shareholder votes

What filing must accompany any proxy solicitation?

Schedule 14A, which must include all required disclosure and be filed with the SEC at least 10 calendar days before distribution.

What does Rule 14a-7 require regarding shareholder communication?

It requires corporations to provide their shareholder lists to dissidents so they can contact shareholders directly.

What information must be included in a proxy statement for a merger vote?

Terms and reasons for the transaction, accounting and tax treatment, financial statements, fairness opinions, and regulatory compliance disclosures.

Can preliminary merger proxy statements be filed confidentially?

Yes, if marked “Confidential – For Use of the Commission Only.”

What is a “no-action letter” in proxy regulation?

A letter from the SEC allowing exclusion of a shareholder proposal if it serves only personal interests or is not in the interests of other shareholders.

How can shareholders gain access to nominate board members?

Through a two-year, two-step process under Rule 14a-8 known as customized proxy access.

What are the two main types of proxy contests?

(1) Contests for board seats and (2) Contests over management proposals such as mergers or antitakeover amendments.

When are insurgents most likely to win a proxy fight?

When management lacks strong voting support, firm performance is poor, and insurgents offer a credible turnaround plan.

What is the “dead shares” problem in proxy fights?

Undelivered proxies effectively count as votes against insurgents, making apathetic shareholders a key obstacle.

How does share-ownership concentration affect proxy outcomes?

Activist hedge-fund blocks increase insurgent success, while concentrated employee or loyal institutional ownership favors management.

Why are proxy fights generally cheaper than tender offers?

They avoid paying acquisition premiums but still require spending on proxy solicitors, bankers, lawyers, and litigation.

Why are proxy-advisory firms sometimes criticized?

They have potential conflicts of interest, limited research resources, and disproportionate influence on institutional voting.

When is “proxy season” and what threshold allows proposals?

Annual meetings are usually in April; shareholders with at least $2,000 invested may submit proposals.

Who typically leads dissident campaigns in proxy contests?

Former managers or industry insiders; about half had experience in the target’s business and one-third were ex-employees.

Why are proxy contests often followed by takeovers or restructurings?

They expose poor management and trigger disciplinary actions such as sales or reorganizations that raise shareholder value.

What factors influence whether a bidder uses a tender offer or proxy fight?

Poor performance and managerial inefficiency favor proxy fights, while less leveraged firms tend to be targets for tender offers.

How can a proxy fight and tender offer be combined?

A bidder can use a proxy fight to remove antitakeover defenses or replace the board, then launch a tender offer to acquire the company.