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Chapter 1

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The Takeover Process

2001 Prentice Hall

Introduction
Goals of course
Practical guidelines for M&A analysis
To evaluate policies toward M&As

M&As refer to
Traditional mergers and acquisitions
Takeovers
Corporate restructuring
Corporate control
Changes in the ownership structure of firms
2001 Prentice Hall

Forces Affecting Mergers

Technology
Globalization
Deregulation
Efficiency of operations
Changes in industry organization
Entrepreneurship
Economic and financial environment
2001 Prentice Hall

Terminology
Merger
Negotiated deals
Mutuality of negotiations
Mostly friendly

Tender offers
Offer made directly to the shareholders
Hostile when offer made without approval of
the board

Restructuring changes to improve

operations, policies, and strategies
2001 Prentice Hall

Types of Mergers
Horizontal mergers
Combination between firms in same business activity
Rationale
Economies of scale and scope
Synergies such as combining of best practices

Government regulation due to potential

anticompetitive effects

Vertical mergers
Combinations between firms at different stages
Rationale is information and transaction efficiency

2001 Prentice Hall

 Conglomerate mergers
Combination of firms in unrelated types of
business activity

Distinctions between conglomerate and

nonconglomerate firms
Investment companies diversify to reduce
portfolio risk
Financial diversified provide funds and
expertise on generic management functions of
planning and control
Concentric diversified combine with firms in
less related activities to broaden market potentials
2001 Prentice Hall

Mergers in a Legal Framework

Statutory merger formal legal
procedures
Short-form merger streamlined legal
procedures when ownership is 90%
Holding company parent company
has a controlling interest

2001 Prentice Hall

Tender Offers
Bidder seeks target's shareholders
approval
Minority shareholders
Terms may be "crammed down"
May be subject to "freeze-in"
Minority has the right to bring legal actions

2001 Prentice Hall

 Kinds of tender offers and provisions

Conditional vs. unconditional
Restricted vs. unrestricted
"Any-or-all" tender offer
Contested offers
Two-tier offers
Three-piece suitor

2001 Prentice Hall

Risk Arbitrage in M&A Activity

Usually, long in the target stock and
short in the bidder stock
Nature of the arbitrage industry
Information gathering and analysis is the
principal raw material
Arbitragers attempt to anticipate takeover
bids
2001 Prentice Hall

 Arbitrage funds
Intensive research
No investment on rumors
Invest in 10-20 transactions at a given time
Main risk is whether deals are completed

2001 Prentice Hall

 Numerical example
An arbitrage firm (A) notes that a bidder (B)
whose stock is selling at $50 makes an offer
for a target (T) selling at $40.
Exchange offer is 1 share of B for 1 T share.
T rises to $48; B stays at $50.
A sells 1 share of B short for $50 and goes
long on T at $48.
One month later the deal is completed with B
at $50 and T at $50.
What is A's dollar and percentage annualized
gain assuming a required 50% margin on both
transactions?
2001 Prentice Hall

 Solution
A sells 1 B for $50 and buys T at $48.
Assuming 50% margin, the investment is .
5($50 + $48) = $47.5.
In one month, A uses 1 T to cover 1 B. The
gain is $2.
The percentage gain is [($2/$47.5)] * 12 =
50.21% less the interest on the $47.5
borrowed on margin.
If A invested the full $98, the gain would be
($2/$98) * 12 = 24.49%.
2001 Prentice Hall