9. Mergers, acquisitions and the market for corporate control
The increasingly hostile mergers and acquisitions market.
Nothing wets the appetite of the financial press more than a hostile takeover bid. In 2010 alone, there was more than 260$ billion in hostile takeovers launched, with the trend expected to strengthen in 2011. (1) With nearly 57 thousand bankruptcy fillings last year, (2) large companies are aggressively pursuing takeover bids in an effort to profit off good value acquisitions given the current economic climate. These bids however are not always welcomed. The merger and acquisition market for publicly traded companies has become increasingly hostile over the past two years, according to a recent report by The Conference Board (3). According to the report, hostile offers accounted for 47% of total mergers and acquisitions in the first two months of 2009, compared with 24% for the whole of 2008, and only 7% in 2004. (4) Companies with undervalued stock, have a low debt ratio or have a large cash flow are prone to takeovers.
As companies are experiencing short-term liquidity issues, increased pressure to achieve cost savings, investment fatigue from investors, many have done away with structural takeover protections, which have contributed to the increasingly hostile buyout market. One such firm who have recently thrown in the towel after a long battle is Cadburys. In early 2010, they accepted defeat in their battle to resist the 12£ billion takeover from US rival Kraft. (5) The hostile takeover bid, which was greeted with huge opposition across England and Ireland, was described as a merger by Kraft and they claimed it would deliver more value than Cadbury could achieve on its own. (6)
As was the case with Cadburys, target companies have every reason to fight off bids. Employees of the target companies often find themselves without a job, as the trusted employees from the acquiring company are retained as the firm views the target company’s employees as new and unknown. Kraft has since shut down Cadbury’s Keynsham plant, despite its pledge to keep it open, resulting in the loss of 400 jobs. (7) There are fears of further job losses as the company is moving its production to more tax-efficient countries such as Poland. Furthermore, ownership of Cadbury is likely to move to a holding company in Zurich, a move which will cost Britain 60£ million in tax receipts, enraging worker and government officials alike.
Although Cadburys attempted to stave off any attempts of a takeover by Kraft, they eventually conceded and are now feeling the effects. Given the increasingly hostile mergers and acquisitions market, many methods of resisting both potential takeovers and an actual hostile takeover bid have been developed and certain companies have succeeded in their attempts to fight off these takeovers.
Pre-emptive anti-takeover measures include:
1)
Poison Pills
With a poison pill, the target company attempts to make its stock less attractive to the acquirer, either by a ‘flip in’ or a ‘flip over’. A ‘flip in’ allows existing shareholders- except the acquirer to buy more shares at a discount, diluting the shares held by the acquirer, thus making them less valuable. This makes the takeover attempt more difficult and expensive. A ‘flip over’ allows stockholders to buy the acquirers shares at a discount price after the merger, thus making the acquisition less attractive. Poison pills are very effective as a defence tactic and are favoured by the board for the leverage they bring to the bargaining table. In 2003, enterprise giant Oracle attempted to acquire rival PeopleSoft through a 5.1$ billion hostile takeover bid. PeopleSoft employed a poison pill which was set to trigger if Oracle bought more than 20% of the company. Finally, after an 18-month battle, PeopleSoft finally voided its poison pill and was acquired by Oracle, but for 10.3$ billion – double Oracle’s initial offer. (8)
2) Poison Puts
A poison put is a right, distributed to common stockholders which make some or all of their stock puttable to an acquirer at a very high price. This, like poison pills, increases the cost of a potential takeover and discourages it.
3) Shark Repellents
This involves a firm amending their corporate charter or bylaws. The amendments will only become active when a takeover attempt is announced or presented to shareholders. It reduces the profitability of the acquisition.
Active anti-takeover measures include:
1)
Golden Parachutes
These are lucrative benefits given to employees of the target firm in the event they lose their jobs after a takeover. Benefits include stock options, bonuses, severance pay etc.
2) Stand-still agreements
A contract that stalls or stops the process of a hostile takeover by reaching a contractual agreement with a potential acquirer whereby the acquirer agrees not to increase its holdings in the target during a particular time period.
3) White knight
This occurs when friendly companies bid for a takeover against a hostile acquirer. The Chrysler takeover by Fiat, which saved them from liquidation, is an example of this method.
4) White Squire
Strategy in which a takeover target places a block of stock in the hands of an investor deemed friendly by the management. This decreases the possibility of a takeover as the suitor must acquire a significantly greater proportion of the remaining shares in order to complete the takeover.
5) Change in Capital Structure
This involves changing the capital structure of the target company. This can be done in a number of ways; by recapitalization, assuming more debt, issuing more shares or buying back shares. This makes it more difficult and expensive to take over the target company.
The danger of an unwanted takeover bid can force firms to self-inflict harm in a bid to fend off potential acquirers. As was the case with Cadburys, they are not always successful and eventually give up their control of the firm; however a number of methods are used in an effort to make the acquisition less attractive. The value of worldwide mergers and acquisitions totalled 1.75$ trillion in the first 3 quarters of 2010, an increase of 21% from the same period the previous year. (9) 8% of these bids were reported to be hostile, with firms reluctant to sell as the economy starts to improve. Therefore fewer and fewer takeovers are friendly, and with companies looking to expand and profit on good value investments expect there to be further hostile reports in the future.
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