5. Mergers and Acquisitions Flashcards
Explain ‘statutory merger’.
In a statutory merger, the acquiring company acquires all of the target’s assets and liabilities. As a result, the target company ceases to exist as a separate entity.
Explain ‘subsidiary merger’.
The target company becomes a subsidiary of the puerchaser. Most subsidiary mergers typically occur when the target has a well-known brand that the acquirer wants to retain.
Explain ‘consolidation’.
Both companies cease to exist in their prior form, and they come together to form a completely new company. Consolidations are common in mergers when both companies are of a similar size.
Explain a ‘forward integration’ and ‘backward integration’.
Forward integration: where the acquirer moving up the supply chgain toward the ultimate consumer. An ice cream manufacturer decides to acquire a restaurant chain.
Backward Integration: the acquirer moves down the supply chain toward the raw material inputs. The same ice cream manufacturer decides acquire a farm.
Explain ‘bootstrapping’.
Bootsrapping is a way of packaging the combined earnings from two companies after a merger so that the merger generates an increase in the EPS of the acquirer, even when no real economic gains have been achieved.
Explain ‘poison pill’ in the context of pre-offer defense mechanisms.
Poison pills are extremely effective anti-takeover devices and were the subject of many legal battles in their infancy. In its most basic form, a poison pill gives current shareholders the right to purchase additional shares of stock at extremely attractive prices (i.e. at a discount to current market value), which causes dilution and effectively increases the cost to the potential acquirer. The pills are usually triggered when a shareholder’s equity stake exceeds some threeshold level (e.g. 10%).
Specific forms of a poison pill are a flip-in pill, where the target company’s shareholders have the right to buy the target’s shares at a discountm, and a flip-over pill, where the tarhet’s shareholders have the right to buy the acquirer’s shares at a discount. In case of a friendly merger offer, most poison pill plans give the board of directors the right to redeem the pill prior to a triggering event.
Explain ‘poison put’ in the context of pre-offer defense mechanisms.
This anti-takeover device is different from the others, as it focuses on bondholders. These puts give bondholders the option to demand immediate repayment of their bonds if there is a hostile takeover. This additional cash burden may fend off a would-be acquirer.
Explain ‘restrictive takeover laws’ in the context of pre-offer defense mechanisms.
Companies in the US are incorporated in specific states, and the rules of that state apply to the corporation. Some states are more target friendly than others when it comes to having rules to protect against hostile takeover attempts. Companies that want to avoid a potential hostile merger offer may seek to reincorporate in a stete that has enacted strict anti-takeover laws.
Explain ‘staggered board’ in the context of pre-offer defense mechanisms.
In this strategy, the board of directors is split into roughky three equal-sized groups. Each group is elected for a 3-year term in a staggered system: in the first year the first group is elected, the following year the next group is elected, and in the final year the third group is elected. The implications are straight-forward. In any particular year, a bidder can win at nost one-third of the board seats, It would take a potential acquirer at least two years yo gain majority control of the board since the terms are overlapping for the remaining board members. This usually longer than a bidder would want to wait and can deter a potential acquirer.
Explain ‘restricted voting rights’ in the context of pre-offer defense mechanisms.
Equity ownership above some threshold level (e.g., 15% or 20%) triggers a loss of voting rights unless approved by the board of directors. This greatly reduces the effectiveness of a tender offer and forces the bidder to negotiate with the board of directors directly.
Explain ‘supermajority voting provision for mergers’ in the context of pre-offer defense mechanisms.
A supermajority provision in the corporate charter requires shareholder support in excess of a simple majority. For example, a supermajority provision may require 66,7%, 75% or 80% of votes in favor of a merger. Therefore, a simple majority shareholder vote of 51% would still fail under these supermajority limits.
Explain ‘fair price amendment’ in the context of pre-offer defense mechanisms.
A fair price amendment restricts a merger offer unless a fair price is offered to current shareholders. This fair price is usually determined by some formula or independent appraisal.
Explain ‘golden parachutes’ in the context of pre-offer defense mechanisms.
Golden parachutes are compensation agreements between the target and its senior management that give the managers lucrative cash payouts if they leave the target company after a merger. In practice, payouts to managers are generally not big enough to stop a large merger deal, but they do ease the target management’s concern about losing their jobs.
Explain ‘just say no defense’ in the context of post-offer defense mechanisms.
The first step in avoiding a hostile takeover offer is to simply say no. If the potential acquirer goes directly to shareholders with a tender offer or a proxy fight, the target can make a public case to the shareholders concerning why the acquirer’s offer is not in the shareholder’s best interests.
Explain ‘litigation’ in the context of post-offer defense mechanisms.
The basic idea is to file a lawsuit against the acquirer that will require expensive and time-consuming legal efforts to fight. The typical process is to attack the merger on anti-trust grounds or for some violation of securities law. The courts may disallow the merger or provide a temporary injunction delaying the merger, giving managers more time to load up their defense or seek a friendly offer from a white knight.
