Chapter 6 - Takeover Tactics

Merger Tactics 

Typical tactics for mergers:

  • Toehold 

  • Bear hugs / bypass offers

  • Tender offers

  • Proxy fights

  • Streetsweep

  • Creeping tender offer

Preliminary steps may include a toehold or casual pass

NB: Only ” hostile takeover” if target directors vote against it


Choice of Tactic

The choice of tactic is influenced by at least four considerations:

  • Attitude of target management and board

  • Distribution of voting power

  • Strength of target’s defenses in place

  • Presence of competing offers and or a white knight


The Casual Pass

  • Where a bidder may attempt a friendly overture prior to initiating a hostile bid.

  • Sometimes it is done when the bidder is unsure of the target’s response.

  • May backfire as it gives advance warning to the target.

  • Management of the target is often advised not to discuss such deals with the bidder so that the bidder may not misinterpret the target's intentions.


Toehold

  • Establishing a toehold:

May lower the average cost of the takeover

  • May also give the bidder leverage with target management (bidder now a shareholder; may help in litigation; also more credible threat of a proxy fight)

  • Discourages white knights and may circumvent supermajority provisions


Why don't bidders max out toeholds

  • Danger of being caught holding shares if the bid is unsuccessful - this is especially worrisome if management appears to be entrenched

  • Can alert target management (and/or market) of a forthcoming bid

  • May appear unfriendly from the start


Bear Hugs

  • Bidder brings offer directly to the target’s directors and/or management (though often bypass management)

  • Typically carries threat that a hostile bid will be forthcoming

  • May be publicly announced (strong bear hug) or threaten to reduce offer price in the event of opposition or delay (super strong bear hug)

  • If the target rejects a friendly bid and does not bring it to the shareholders for a decision then the target directors may face lawsuits from target shareholders; however, directors do not have a legal duty to sell the corporation

  • Less expensive and less time-consuming than a tender offer, but ultimately requires target board acceptance


Tender Offers

  • Two-Tiered Tender Offers (also called Front End Loaded Offers):

  • Courts have found them to be illegal

  • Best price rule renders them ineffective

  • Fair price provisions in state laws and corporate charters also make them ineffective

  • Tender offers are more expensive than negotiated deals due to legal costs, publication costs, information costs, etc

  • * Note the eight factors relevant in deciding whether an offer is a tender offer, as previously discussed


Creeping Tender Offer

  • Open market purchases which may eventually lead to a tender offer

  • It refers to the repeated purchases of shares by a party which may (or may not) do a full takeover

  • It usually requires a 13D filing, and updates with each new 1% addition, but courts have typically ruled this is not a tender offer so it does not require a Schedule TO

  • Generally, the purchase of stock from sophisticated institutional investors is not a primary concern of the Williams Act.


Open Market Purchases and Street Sweeps

  • Open market purchases may be a precursor or an alternative to a tender offer Street Sweeps:

Sweeping up large block holdings of target firm stock which remain after a cancelled tender offer.

  • The idea is even if a tender offer doesn’t appear to be working, arbitrageurs will have purchased large holdings of stock. Ending the tender offer still keeps the target “in play”, because arbs will need to sell and easier now to accumulate large holdings.

  • After crossing the 5% threshold, have to do a 13D filing.


Main Types of Proxy Fights

  1. Contests for Seats on the Board of Directors

  • Insurgent group may be trying to replace management

  1. Contests about management proposals

  • Mergers or acquisitions

  • Anti-takeover amendments


Characteristics that Increase Likelihood of Proxy Fight Success

  1. Management has insufficient voting support

  • Management does not hold many votes

  1. Poor operating performance

  • The worse it is, the more likely shareholders are unhappy with management

  1. Sound alternative operating plan

  • Insurgents has good plan to improve shareholder returns


Proxy Fight Costs

Generally less expensive than a tender offer or a revised bid, but still expensive:

  • Professional Fees: Proxy solicitors, attorneys and public relations professionals

  • Printing, Mailing and Communications Costs

  • Litigation Costs: Proxy fights tend to be actively litigated.

  • Other Fees: Miscellaneous fees (i.e., for tabulators)



Trends in Proxy Contests

  • Management and boards are starting to give in to insurgents more and are more willing to make concessions

  • Example: March 2008 The New York Times gave two seats to hedge fund Harbinger Capital Partners and Firebrand Partners

  • Wanted publisher to sell assets and invest in new media properties


Proxy Fights and Hedge Funds

  • Hedge funds sometimes threaten to start proxy fights to bring able changes in the company

  • Companies have been more willing to acquiesce to such pressures

  • Examples of such activist hedge fund managers:

    • Carl Icahn

    • Nelson Peltz


Arbitrage and M&A

  • Riskless Arbitrage: Buying and selling the same asset in different markets and different prices

  • Risk Arbitrage: Buying shares in potential or actual targets and possibly selling shares in acquirers

    • There are hedge funds they just do M&A arbitrage

    • Arbitragers causes more shares to be concentrated in large blocks

    • This may make buying large blocks easier


Roles of Arbitragers

  • They acquire shares in the hope that the deal will close and they will get the difference between their purchase price of the target’s shares and the closing price with its premium

  • They may also sell the acquirer’s shares short knowing that the bidder’s stock price often declines after M&A announcements AND if the consideration of the offer includes stock

  • E.G. If bidder offers .5 bidder share for every target share, than by purchasing one target share (for risk arbitrage purposes), the arb exposes himself to bidder firm performance -> If the bidder share price declines, so does the target share (by incorporating the .5 bidder share)

  • By shorting the bidder in proportion to target shares bought, the arb effectively neutralizes the consideration aspect of the deal.


Risk Arbitrage Return

A simple equation of a risk arbitrager’s annualized return (RAR) is shown:

   RAR = GSS/I x (365/IP)

Where:

  RAR = risk arbitrage return

   GSS = gross stock spread

  I = investment by arbitrager

  IP = investment period (days between investment and closing date)

See example pg 276 (sixth edition)


Sources of Risk in Risk Arbitrage

  • That the Deal May be Cancelled:

    • Financing Environment May Change

      • Sub-prime crisis of 2007

        • May cause rates to rise so much bidder may find the deal uneconomical

        • Example: Cerberus Capital backed out of buyout of United Rentals

          • Banks were still willing to provide the debt capital but at a higher rate

  • Regulatory / Anti-trust Approval May Not be Secured

  • Material Adverse Change Clause May be Activated

    • Bidder may contend that something important changed at the target which enabled the bidder to back out