AFM491 Chapter Notes - Chapter 03: Tender Offer, Shareholder Rights Plan, Issued Shares

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emeraldherring911

3 Nov 2016

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM491

Professor

Robert Ducharme

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AFM491

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Some of the reasons for business combinations are to

• defend a competitive position within a market segment or with a particular customer;

• diversify into a new market and/or geographic region;

• gain access to new customers and/or partners;

• acquire new and/or complementary products or services;

• acquire new expertise or capabilities;

• accelerate time to market (for a product and/or service);

• improve the company¡¯s rate of innovation either by acquiring new technology and/or intellectual property;

• gain control over a supplier; and

• position the company to benefit from industry consolidation.

Business combinations

➢ friendly or

◼ The top management and BOD of the companies involved negotiate the terms of the combo and

then sumbmit the proposal to the shareholders of both companies along with a recommendation for

approval

➢ hostile.

◼ BOD of the target company recommends that its shareholders reject the tender offer

◼ The management of the target company will often employ defences to resist the takeover

◆ Poison pill

⚫ When company issues rights to its existing s/h, exercisable only in the event of a

potential take over, to purchase addition shares at prices below market

◆ PAC-MAN defence

⚫ Target company making an unfriendly countervailing takeover offer to the shareholders

of the company attempting to acquire it

◆ WHITE KNIGHT

⚫ The target company searches out another company that will come to its rescue with a

more appealing offer for its shares

◆ Selling the crown jewels

⚫ Certain desirable assets to other companies so that the would be acquirer loses interest

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

➢ 

◼ 

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◆ an investor controls an investee when it is exposed or has rights to variable

returns from its involvement with the investee, and it has the ability to affect

those return through its power over the investee.

◆ All 3 elements have to be met for to have control

⚫ Returns

◼ Investor is exposed or has rights to variable returns from its involvement

with the investee when those returns from its involvement could vary as

a result of the investee’s performance

◼ Investor’s returns can be only pos, only neg, or both + and –

◼ Investment in common shares → exposed to variable returns because

the common shareholders receive the residual returns in the company

◼ If the company is very profitable, the div to the shareholder or

appreciation in the price of the common shares will be positive and can

be substantial

◼ If the company is incurring losses, the prospects for div or appreciation in

the share price is minimal or nonexistent

➢ Link between power and returns.

◼ An investor controls an investee if the investor not only has power over the investee and

exposure or rights to variable returns from its involvement with the investee, but the

investor also has the ability to use its power to affect his or her returns from its

involvement. A common shareholder usually has the power through voting rights and

exposure to variable returns. A preferred shareholder may have exposure to a

variable return. However, the preferred shareholder typically does not have voting rights

and, therefore, does not have power over the relevant activities of the investee.

➢ Elements of control to some practical situations

◼ If means of paying for the business = cash/promise to pay cash in the future

◆ Company making the payment = one gaining control

◼ If shares were issued as a means of payment

◆ Relative holdings of voting shares of the combined company by shareholder of the

combining company is key

◼ In a combination involving 2 companies

◆ If one shareholder group holds >50% of the voting shares of the combined

company

⚫ The party with control

◆ If more than 2 companies involved, the shareholder group holding the largest # of

voting shares would usually be identified as the company with control

◼ Owning more than 50% of the voting shares usually but not always = control

◆ More than 50% of the voting shares are required to elect the majority of the board

➢ First element of control

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◼ The ability to elect a majority of the members of the board

◆ First element of control is presumed to exist if the parent owns, directly or indirectly,

enough voting shares to elect the majority of the BOD of a sub

◼ In most situations, more than 50% of the voting shares are required to elect the majority

of the board

◼ The first element of control is presumed to exist with > 50% ownership

◼ If A owns 60% of voting shares of B and C owns the other 40%

◆ Presume A has power over the activities of B

◼ If C owns convertible bonds of B or options or warrants to purchase B shares, which , if

converted or exercised, would give C company 62% of the outstanding shares of B, the

C would have power over the activities of B

➢ General presumption that a holding of < 50% of the voting shares =/= no control

◼ Can be overcome if other factors clear indicate control

◼ E.g. irrevocable agreement with other shareholders to convey voting rights to the parent

would constitute control, even if less than 50% of the voting shares if its holdings of

rights, warrants, convertible debt, or convertible preferred shares would give it enough

voting power to control the BOD of the sub

◆ Exercise or conversion would not be necessary, only the right to exercise or

convert is

◼ E.g. agreement in writing allowing it to dictate the operating policies of the sub, resulting

in it receiving fees, royalties and profits from interco sales

◼ the parent makes the key decisions, receives the majority of the benefits

and absorbs most of the risk, though the parent may own very few

shares in the controlled company

◆ E.g. if X owns 40% of Y, largest single block of Y’s o/s and the other 60% is widely

held and only a very small proportion of the holders appear at the annual meeting

of Y. X has no trouble electing the majority of the BOD. X deemed to have control

as long as the other shareholders do not actively cooperate when they exercise

their votes so as to have more voting power than X

➢ Temp control does not of itself change the fact that control exists

◼ During the time control is held and until such time as control ceases, the reporting

requirements for controlled entities should be applied

◆ Control ceased when

⚫ The seizure of the company’s assets by a trustee in a receivership or

bankruptcy situation

⚫ Imposition of governmental restrictions over a foreign company’s ability ot pay

div to its canadian investors

◆ When a receiver seizes a specific asset in satisfaction of a default under a loan

agreement but permits the company to continue in business under the direction of

the parent, not a lost control

➢ Normal business restrictions do not preclude control by the parent

◼ Reporting entity can control another entity, though other parties have protective rights

relating to the activities of that other entity

◼ Protective rights

◆ Designed to protect the interest of the party holding those rights, without giving that

party control of the entity to which they relate

◆

NORMAL BUSINESS RESTRICTIONS DO NOT PRECLUDE CONTROL BY THE PARENT

➢ Reporting entity can control another, though other parties have protective rights[IFRS 10,

designed to protect the interests of the party holding those rights, without giving that

party control of the entity to which they relate]relating to the activities of that other entity

◼ They include the following

◆ Approval or veto rights granted to other parties that do not affect the strategic

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Document Summary

Some of the reasons for business combinations are to. The top management and bod of the companies involved negotiate the terms of the combo and then sumbmit the proposal to the shareholders of both companies along with a recommendation for approval hostile. Bod of the target company recommends that its shareholders reject the tender offer. The management of the target company will often employ defences to resist the takeover. When company issues rights to its existing s/h, exercisable only in the event of a potential take over, to purchase addition shares at prices below market. Target company making an unfriendly countervailing takeover offer to the shareholders of the company attempting to acquire it. The target company searches out another company that will come to its rescue with a more appealing offer for its shares. Certain desirable assets to other companies so that the would be acquirer loses interest.

Related Questions

I have a essay written up already, the problem is that I submitted it and received a 62% return from turnitin, which is totally unacceptable. It must be below 20%. Is it possible for you to look over it, make any corrections or suggestions to re-submit it. The majority of the repetitiveness was from my intro paragraph and the definitions I used in the essay. Sent at 04:42 AM The essay is attach. I will need this by this evening if that's possible. thanks

Identify the type of corporate restricting that fits with common theories of what are assumed to be causes of mergers and acquisitions.

Corporate reconstructing is more often defined as re-designing organizationâs practice and structure; so to remain competitive and sustainable in the market (s). There may be several reasons for corporate restructuring. These includes, but not limited to, re-positioning in the market, discovery of a new market or becoming more profitable and/or economical. The corporate restructuring is generally classified into or two different categories: operational reconstructing and financial reconstructing. This entails changes in the alignment of firmâs asset structure by acquiring new business outright, by partial sale, by a spin-off of companies or via product lines. This can also include downsizing through closure of non-profitable units. Financial reconstructing deals with the changes in the capital structure of the firm. Share repurchase or adding debt in capital structure; just to name. Financial limiting hardly deals with mergers and acquisitions, hence we will discuss the cause of mergers and acquisitioning and how it is related to that the operational restructuring only.

Omit the chart in the question!

There are several types of Restructuring are given below:

A merger is a combination of two or more firms who combine all operations, officers, structure and other functions of business to form a new entity. Desired effect being not just the accumulation of assets and liabilities of the distinct entities, but also to achieve several other benefits such as: economics of scale, acquisition of new technologies and having access to new markets. Additionally, the merger allows for one company giving shareholders in the other stock in exchange for surrounding the stock of the first company. And it allow for the entities to retain its original identity.

Mergers can be classified into the following categories:

Horizontal Mergers

Two merged units were doing the same business i.e. TMobile and Sprint they were competitors with one another in the market. The basic motive in this type of merger is to consolidate in the market so as to gain advantage in negotiating with customers as well as having better position with respect to other competitors.

Vertical Mergers

This type of mergers is conducted between customer and suppliers of a value chain process and main motive in this type of merger is gain maximum efficiency in supply chain and minimization of transaction cost.

Congener Mergers

In this type of mergers, the two firms will be sharing similar kind of industry structure at least in one form of their operation and therefore try to combine operation in that one form and get efficiency benefit in supply chain and other operations.

Conglomerate

A conglomerate merger is a merger between two firms having unrelated business. The motive behind a conglomerate is a.) Better utilization of financial resources b.) Increase in debt capacity, c.) Increase in the share price by increased EPS with decreased cost capital d) Cross selling and e.) Synergy

Cash-out merger

In this type of merger the share of one unit involved in merger donât want to retain their share in the merged unit and therefore are compensated with cash in place of the share.

Acquisitions or take-over has said to have happened when the acquirer company buys out majority of the shares of the acquired company and the ownership of the assets and liabilities of the acquired company get transferred to the acquirer company. The process of acquisition or take-over may be conducted in both friendly and hostile manner depending upon the specific strategy of the acquirer.

Friendly takeover

In a friendly takeover, the targetâs board and management recommend shareholdersâ approval. To gain control, the acquiring company usually will offer a premium to the current stock price. The excess of the price over the targetâs premerger share price is called a purchase premium and can vary widely by country, which reflects the perceived value of obtaining a controlling interest in the target, the value of expected synergies resulting from combining the two entities and any overpayment of the target firm. Acquirers often prefer friendly takeovers because the post-merger integrations process in usually more expeditious when both parties are cooperating fully and customer, employee attrition is less.

Hostile takeover

A Hostile takeover occurs when the offer is unsolicited, the approach was contested by the targetâs management and control changed hands. The acquirer prefers hostile mode rove the friendly mode only when it becomes possible to acquire the shares in a friendly mode. The acquirer may attempt to circumvent management by offering to buy shares directly from the targets from the targetâs shareholders and buy shares in a public stock exchange. A hostile takeover can be accomplished through either a tender offer or a proxy fight.

The Pros to a merge and an acquisition is that both types of transactions include the potential increase in the competitiveness, cost-efficiency and stock value of the new enterprise. And with everything pro there has to be Cons. One disadvantage of these transactions; it could be very expensive. A significant amount of capital typically must be raided before entering negotiations. Another mergers drawback is that there is now a new owner, co-owners, in which they must now collaborate.

In conclusion any entity or entities that have chosen to merge or entering an acquisition should consider prior to move. Identify the goals of acquisition clearly, if the move is a good fit and what conditions must be met for the pursing the merge or the acquisition. An in-depth due diligence must occur; the financial records must be thoroughly examined, is the marketplace a profitable absolute, as well as the senior executives should also be conducted. There could be potential for disaster if all areas are not explored. Negotiation process is should have clear written rules and guidelines before following through with the merger or acquisition. Assembling an acquisition team can be very valuable to the success of the new owners. The team will be able to define the responsibilities of each company; considering all parties are in agreement with the new implementations such as computer systems, new HR policies and so forth. Lastly, be flexible and ready for unexpected surprises and have a supplemental plan in case of potential disasters.

sangriadeer475

Answer the questions that immediately follow the case study.

Lam Research Buys Novellus Systems to Consolidate Industry.

Highly complex electronic devices such as smartphones anddigital cameras have become ubiquitous in our everyday lives. Thesedevices are powered by sets of instructions encoded on wafers ofsilicon called semiconductor chips(semiconductors). Consumer and business demands forincreasingly sophisticated functionality for smartphones and cloudcomputing technologies require the ongoing improvement of both thespeed and the capability of semiconductors. This, in turn, placeshuge demands on the makers of equipment used in thechip-manufacturing process.

To stay competitive, makers of equipment used to manufacturesemiconductor chips were compelled to increase R&D spendingsharply. Chip manufacturers resisted paying higher prices forequipment because their customers, such as PC and cellphone handsetmakers, were facing declining selling prices for their products.Chip equipment manufacturers were unable to recover the higherR&D spending through increased selling prices. The resultingerosion in profitability due to increasing R&D spending wascompounded by the onset of the 2008â2009 global recession.

The industry responded with increased consolidation in anattempt to cut costs, firm product pricing, and gain access to newtechnologies. Industry consolidation began among chip manufacturersand later spurred suppliers to combine. In February 2011, chipmakerTexas Instruments bought competitor National Semiconductor for $6.5billion. Three months later, Applied Materials, the largestsemiconductor chip equipment manufacturer, bought VarianSemiconductor Equipment Associates for $4.9 billion to gain accessto new technology. On December 21, 2011, Lam Research Corporation(Lam) agreed to buy rival Novellus Systems Inc. (Novellus) for $3.3billion. Lam anticipates annual cost savings of $100 million by theend of 2013 due to the elimination of overlapping overhead.

Under the terms of the deal, Lam agreed to acquire Novellus in ashare exchange in which Novellus shareholders would receive 1.125shares of Lam common stock for each Novellus share. The dealrepresented a 28% premium over the closing price of Novellusâsshares on the day prior to the dealâs public announcement. Atclosing, Lam shareholders owned about 51% of the combined firms,with Novellus shareholders controlling the rest.

In comparison to earlier industry buyouts, the purchase seemedlike a good deal for Lamâs shareholders. At 2.3 times Novellusâsannual revenue, the purchase price was almost one-half the 4.5multiple paid by industry leader Applied Materials for Variant inMay 2011. The purchase premium paid by Lam was one-half of thatpaid for comparable transactions between 2006 and 2010. Yet Lamshares closed down 4%, and Novellusâ shares closed up 28% on theannouncement date.

Lam and Novellus produce equipment that works at differentstages of the semiconductor-manufacturing process, making theirproducts complementary. After the merger, Lamâs product line wouldbe considerably broader, covering more of thesemiconductor-manufacturing process. Semiconductor-chipmanufacturers are inclined to buy equipment from the same supplierdue to the likelihood that the equipment will be compatible. Lamalso is seeking access to cutting-edge technology and improvedefficiency. Technology exchange between the two firms is expectedto help the combined firms to develop the equipment necessary tosupport the next generation of advanced semiconductors.

Customers of the two firms include such chip makers as Intel andSamsung. By selling complementary products, the firms havesignificant cross-selling opportunities as equipment suppliers toall 10 chip makers globally. Together, Lam and Novellus are able togain revenue faster than they could individually by packaging theirequipment and by developing their technologies in combination toensure they work together. Lam has greater penetration with Samsungand Novellus with Intel.

Lam also stated on the transaction announcement date that a $1.6billion share repurchase program would be implemented within 12months following closing. The buyback allows shareholders to sellsome of their shares for cash such that, following completion ofthe buyback, the deal could resemble a half-stock, half-cash deal,depending on how many shareholders tender their shares during thebuyback program. The share repurchase will be funded out of thefirmsâ combined cash balances and cash flow. Structuring the dealas an all-stock purchase at closing allows Novellus shareholders tohave a tax-free deal.^{^[1]}

Discussion Questions:

1. Why did Lamâs shares close down 4 percent on the news? Whydid Novellusâ shares close up 28 percent?

2. Speculate why Lam used stock rather than some other form ofpayment?

3. Describe how market pressures on semiconductor manufacturersâimpact chip equipment manufacturers and how this merger will helpLam and Novellus better serve their customers in the future.

4. How do the high fixed costs in the highly cyclical chipequipment manufacturing industry encourage consolidation?

5. Is this deal a merger or a consolidation from a legalstandpoint?

6. Is this deal a horizontal or vertical transaction? What isthe significance of this distinction?

7. What are the motives for the deal? Discuss the logicunderlying each motive you identify.

8. How are Lam and Novellus similar and how are they different?In what way will their similarities and differences help or hurtthe long-term success of the merger?

9. Speculate as to why Lam announced a $1.6 billion sharerepurchase program at the same time it announced the deal.

10. Do you believe this deal would help or hurt competitionamong semiconductor chip equipment manufacturers?

AFM491 Chapter Notes - Chapter 03: Tender Offer, Shareholder Rights Plan, Issued Shares

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