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Western University
Management and Organizational Studies
Management and Organizational Studies 1023A/B
Maria Ferraro

Pages 252-273 Mergers and Acquisitions 15.1 TYPES OF TAKEOVERS  Takeover – the transfer of control from one ownership group to another  Acquisition – the purchase of one firm (target firm) by another (acquiring firm or bidder) o The acquiring firm keeps its identity while the acquired firm disappears  Merger – the combination of two firms into a new legal entity o Some mergers run into issues over the merge equals (Suits) Financing Takeovers  Most acquisitions are made through a cash transaction – the receipt of cash for shares by shareholders in a target company  When one company acquires another, the approval of the target company’s shareholders is required since they have to agree to sell their shares  Alternative to a cash transaction is a share transaction – the acquiring company offers shares or some combination of cash and shares to the target company’s shareholders o Often requires the approval of the acquiring firm’s shareholders, depending on whether the firm has a limit on its authorized share capital Amalgamations  Amalgamation – a merger where both sets of shareholders are required to approve the transaction  Under Canada Business Corporations Act (CBCA), 21 days’ notice is given for a meeting where shareholders have to vote  Two-thirds of the shareholders have to approve  Going private transaction or issuer bud – a special form of acquisition where the purchaser already owns a majority stake in the target company  Fairness opinion – an opinion provided by an independent expert regarding the true value of a firm’s shares, based on external valuation 15.2 SECURITIES LEGISLATION  Authorities can reject takeovers for a variety of reasons including: o Concerns related to national security o Concerns about sensitive industries that are seen as critical to the nation – some restrictions on foreign ownership in Canada o Anti-trust concerns in situations where an amalgamation of two or more businesses would create an entity that would too narrowly restrict competition  Securities legislation is relevant for all potential takeovers because it governs the exchange of shares by the target company’s shareholders and protect their right to receive full value for their shares  Critical shareholder percentages that investors have to be aware of: o 10%: early warning – requires a report sent out to the OSC. Lets company know who owns its shares and whether a significant block has been bought by a potential acquirer o 20%: takeover bid – once a shareholder owns 20%, he cannot buy anymore shares in the open market without making a takeover bid o 50.1%: control – gives a company control so that it can call a special meeting of the shareholders and change the membership of the board of directors o 66.7%: amalgamation o 90%: minority squeeze out – can force the minority of the shareholders to sell their shares at the takeover price  A takeover circular describing the bid, financing, and all relevant information must be sent to all shareholders for review. Target has 15 days to circulate a letter indicating acceptance or rejection, 35 days from announcement for shareholders  Shareholders tender - to sign an authorization accepting a takeover bid made to target company shareholders  If another firm makes a competing offer, they can withdraw their acceptance  A competing bid increases the takeover window 10 days  The takeover bid does not have to be for 100 percent of the shares  A tender offer price cannot be for less than the average price of shares that the acquirer has bought in the last 90 days  All takeovers have to abide by these rules unless they are exempt from the Ontario Securities Act for one of these reasons: o Where there is limited involvement by shareholders in Ontario o Private firms o An acquirer can also buy shares from fewer than five shareholders as long as the premium over the market price is not more than 15% - allows the sale of blocks of shares o A normal tender offer can be made through a stock exchange as long as no more than 5% of the shares are purchased through the exchange over a one-year period. This 5% rule allows for creeping takeovers – a company acquires a target over a long period of time by slowly accumulating shares 15.3 FRIENDLY VERSUS HOSTILE TAKEOVERS Friendly Takeovers  Friendly acquisition – the acquisition of a target company that is willing to be taken over  Offering memorandum – a document describing a target company’s important features to potential buyers  Whether the company decides to sell itself or an acquirer approaches it, the company has to provide more information so that its fair value can be measured  Data room – a place where a target company keeps confidential information about itself for serious potential buyers to consult  Confidentiality agreement – a document signed by a potential buyer to guarantee the buyer will keep any confidential information about a target company that is available in the data room and will not use the data to harm the target company  Due diligence – the process of evaluating a target company by a potential buyer  Letter of intent – a letter signed by an acquiring company that sets out the terms of agreement of its acquisition, including legal terms  No-shop clause – a clause in a letter of intent stating that the target agrees not to find another buyer, showing its commitment to close the transaction  Break fee – a fee paid to an acquirer or target should the other party terminate the acquisition, often 2.5% of the value of the transaction  Once the final due diligence phase is complete, the final sale agreement is reached/ratified. For a private company, that is it; for a public, it goes to the shareholders for approval  When an acquirer uses cash to purchase a company, that cash is taxable o the target company shareholders  If the share price goes up a lot, the shareholders must pay capital gains tax on the appreciation in the value of their shares  A share swap is usually non-taxable  In many smaller acquisitions, target company’s shares are swapped for preferred shares in the acquiring company  Asset purchase – a purchase of the firm’s assets rather than the firm itself  In an asset purchase, the target firm has the option if reinventing itself or liquidating itself and paying out the proceeds to the firm’s shareholders  Sometimes the target firm has liabilities that the acquirer does not want to assume  Earn outs – the acquirer pays an upfront price and them makes future payments conditional on the performance of the target after it has been acquired Hostile Takeovers  Hostile takeovers – a takeover in which the target has no desire to be acquired, actively rebuffs the acquirer, and refuses to provide any confidential information  In hostile bids there is usually a tender offer – a public offer in which the acquiring firm offers to purchase shares of the target firm from its existing shareholders  If the market price stays close to the offer price, it indicates that the price is fair and the deal is likely to go through  Very little trading is usually a bad sign for the acquirer because it means shareholders are sitting on the shares and are reluctant to sell  Arbs/arbitrageurs – specialists who predict what will happen in takeovers and buy and sell shares in target companies with the possibility of earning a premium  Defensive tactic – a strategy used by a target company to stave off a takeover or to try to get the best deal for its shareholders o Shareholder rights plan/poison pill – a plan by a target company that allows its shareholders to buy 50% more shares at a discounted price in the event of a takeover, which makes the target company less attractive o Selling the crown jewels – the sale of a target company’s key assets, which the acquiring company is most interested in, to make the target company less attractive for takeover o White knight – an entity that rescues a target company from a hostile takeover by making a counter bid 15.4 MOTIVATIONS FOR MERGERS AND ACQUISITIONS Classifications of Mergers and Acquisitions Three broad classifications of mergers and acquisitions: 1. Horizontal merger – when two firms in the same industry combine. Removing a competitor 2. Vertical merger – a merger in which one firm acquires a company that is close
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