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

1. Target Management Attitude: Positive or negative reception affects strategy.
2. Voting Power Distribution: Where votes reside can change tactical approach.
3. Target Defenses: Existing defenses like poison pills influence decision.
4. 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:
  1. Inadequate voting support for management.
  2. Poor performance by the current management.
  3. 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.

Risk Arbitrage Return Formula**

• 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.
  • Profiles:
  1. Fixed Exchange Ratio
  2. Fixed Value Deal
  3. Floating Collar
  4. Fixed Collar
• Illustrations exhibit value impact due to share price fluctuations in merger contexts.