mergers & acquisitions business finance 335 supplemental material
TRANSCRIPT
MERGERS & ACQUISITIONSMERGERS & ACQUISITIONS
Business Finance 335Supplemental Material
Dr. David P. Echevarria
All Rights Reserved Slide 2
MERGERS & ACQUISITIONSMERGERS & ACQUISITIONS
Why do firms merge or acquire other firms?Several possibilities. Increase market powerIncrease market power Acquire financial strengthAcquire financial strength, Tax loss carry forwardsTax loss carry forwards Acquire specific product linesAcquire specific product lines Achieve synergiesAchieve synergies Gain economies of scaleGain economies of scale
Strategies subject to debate: Prevalent belief is that M&A result in increased profits, competitiveness, & increased stockholder wealth. Evidence reveals this is not necessarily so…
Dr. David P. Echevarria
All Rights Reserved Slide 3
I. I. BASIC DEFINITIONSBASIC DEFINITIONS
A. Merger; combination of two firms into one.
B. Acquisition; one business buys another.1. Cash.2. Securities.3. Combination of cash and securities.
Dr. David P. Echevarria
All Rights Reserved Slide 4
I. I. BASIC DEFINITIONSBASIC DEFINITIONS
C. General Process; Acquisitions1. Initial contacts between management teams.2. Tender offer by acquireracquirer to targettarget company
stockholders.3. Stockholders required to vote approval.4. Acquirer purchases majority or complete
interest.
Dr. David P. Echevarria
All Rights Reserved Slide 5
I. I. BASIC DEFINITIONSBASIC DEFINITIONS
D. General Process; Merger1. Initial contacts between management teams.2. Negotiations as to new name, management
team.3. Stock exchange details negotiated.4. Merger proposal goes to stockholders for vote.5. If stockholders approve, deal consummated
when stock changes hands.
Dr. David P. Echevarria
All Rights Reserved Slide 6
II. II. TERMINOLOGY OF M&ATERMINOLOGY OF M&A
A. "BEAR HUG" Acquirer mails letter to directors of target firm
announcing intentions and requiring a quick decision on bid.
B. "SATURDAY NIGHT SPECIAL" Offer made to stockholders just before the
market’s close on Friday. Takes maximum advantage of stockholder greed
Dr. David P. Echevarria
All Rights Reserved Slide 7
II. II. TERMINOLOGY OF M&ATERMINOLOGY OF M&A
C. “HOSTILE TAKEOVER”1. When the target firm's management fights the
tender offer. 2. Acquiring firm must carry offer to stockholders
of target firm. 3. This strategy is generally nasty and expensive -
an effort frequently carried out to a questionable conclusion.
Good deal for stockholders of target firm. Bad deal for stockholders of acquiring firm.
Dr. David P. Echevarria
All Rights Reserved Slide 8
II.II.TERMINOLOGY OF M&ATERMINOLOGY OF M&A
D. “WHITE NIGHT” When target firm cannot defend itself against
the hostile acquirer, it will seek another firm to firm to acquire it (one more acceptable to management).
E. “Shark Repellant” Slang term for any one of a number of
measures taken by a company to fend off an unwanted or hostile takeover attempt
Examples: poison pills, scorched earth policies, leveraged recapitalization
Dr. David P. Echevarria
All Rights Reserved Slide 9
II.II.TERMINOLOGY OF M&ATERMINOLOGY OF M&A
F. "PAC-MAN";1. A form of defense in which the target tenders for
shares of acquirer: e.g., Martin-Marietta - Bendix.
2. The standoff is usually resolved when one of the parties finds a "white knight" to help.
In the case of Martin-Marietta, it was Allied Corp
Dr. David P. Echevarria
All Rights Reserved Slide 10
II.II.TERMINOLOGY OF M&ATERMINOLOGY OF M&A
G. "POISON PILL";1. Another anti-takeover defense;
a. target company threatens to load the balance sheet with debt
b. the acquirer effectively gets more debt than the business can handle.
2. Effectiveness is not always guaranteed.
Dr. David P. Echevarria
All Rights Reserved Slide 11
IIIIII. . RESTRUCTURING FIRMS.RESTRUCTURING FIRMS.
After the M&A activity in the 1980's, many companies were left with large amounts of debt. Many deals went “south”.
A. The most prevalent response was to restructure the resulting reorganizations. 1. Spinoff: create new independent company via
sale or distribution of new shares2. Carve-outs: selling minority interest in a
subsidiary:3. Tracking stock: stock issued by parent to track
fortunes of a particular division or group.