Merger Tactics and Considerations
Takeover Tactics Overview
- This chapter discusses various tactics used in mergers, acquisitions, and corporate restructurings.
Typical Merger Tactics
- Bear Hugs / Bypass Offers: Direct approaches to target’s management or board.
- Tender Offers: Formal offer to purchase shares at a specified price.
- Proxy Fights: Contests for board control or to influence management decisions.
- Street Sweep: Accumulating large stock holdings in the market.
- Creeping Tender Offer: Gradually acquiring shares leading to a potential full takeover.
- Toehold: Initial small acquisition to gain leverage.
- Note: A merger is considered a hostile takeover only if target directors oppose.
Factors Influencing Choice of Tactic
- Target Management Attitude: Positive or negative reception affects strategy.
- Voting Power Distribution: Where votes reside can change tactical approach.
- Target Defenses: Existing defenses like poison pills influence decision.
- Competing Bids: Presence of alternatives affects the approach taken.
Casual Pass
- A preliminary friendly attempt before a hostile bid.
- Risks: Can tip off target management and may create misunderstandings about intentions.
Toehold Strategy
- Establishing a position to lower costs and improve negotiating leverage.
- Risks: Potential exposure if the bid fails, which can alert the target and create opposition.
Bear Hugs in Depth
- Direct offers to directors, bypassing management, raising competitive stakes.
- Types:
- Strong Bear Hug: Public announcement to instill urgency.
- Super Strong Bear Hug: Threat to reduce offer price if the bid is resisted.
- Example: AIG's approach in 2001 illustrates tactical execution, showing competitive bidding dynamics.
Tender Offers
- Two-Tiered Offers: Often deemed illegal due to fairness provisions; more costly due to public and legal expenses.
- Legal Considerations: Various state laws impact the validity of such offers and the buyer's obligations.
Creeping Tender Offer
- Gradual share acquisition typically requiring legal filings, often classified as not being a tender offer under specific regulations.
Open Market Purchases & Street Sweeps
- Street Sweeps: Nesting large blocks of shares after interrupted tender offers, creating vulnerability for the target.
- Court cases illustrate legal standing involved in these tactics and the disclosure requirements under the Williams Act.
Proxy Fights Explained
- Types of Proxy Fights: Contests for board positions or management proposals (e.g., mergers).
- Success Factors for insurgents:
- Inadequate voting support for management.
- Poor performance by the current management.
- A viable alternative strategy from the insurgent.
- Costs: Generally lower than tender offers, but still substantial owing to professional fees and potential litigation.
Trends in Proxy Contests
- Increased willingness of management to accommodate insurgents; notable concessions made in recent years.
Arbitrage and M&A Understanding
- Riskless Arbitrage: Buying/selling same assets at different prices.
- Risk Arbitrage: Involving buying shares in acquisition targets.
- Institutional arbitragers affect stock concentrations and potential deal negotiations.
Role of Arbitragers in M&A
- Acquire shares anticipating the completion of a deal, with strategies to hedge against fluctuations in value.
- RAR = \frac{GSS}{I} \times \frac{365}{IP}
- Where:
- RAR = Risk arbitrage return
- GSS = Gross stock spread
- I = Investment by arbitrager
- IP = Investment period (in days)
Sources of Risk in Risk Arbitrage
- Risks stemming from potential deal cancellations or changes in financing conditions affecting valuations.
Merger Consideration Analysis
- Collar Mechanism: Hedges for stakeholders against buyer stock volatility, with four profiles for payment structures.
- Fixed Exchange Ratio
- Fixed Value Deal
- Floating Collar
- Fixed Collar
- Illustrations exhibit value impact due to share price fluctuations in merger contexts.
