Ch 13 Flashcards
Defences against hostile takeover bids
directors of a company subject to a hostile bid should act in sh/h interests, in practice should also consider views of other st/h (employees, themselves)
range of pre-bid and post-bid options exist
Pre-Bid Defences against hostile takeovers
effective sh/h comms
PR officer specializing in financial matters keeping analysts informed, speaking to journalists
revalue NCAs
to current values to ensure sh/h aware of true asset value per share
poison pill
steps to make an org less attractive to potential bidder
most common = existing sh/h given rights to buy future bonds/preference shares - if a bid is made before date of exercise of rights, rights automatically converted into full ordinary shares
change Articles of Association to require “super majority” takeover approval
eg. 80% threshold in favor of vote
Post-Bid Defences against hostile takeovers
appeal to their own sh/h
e.g. by saying that value placed on shares is too low vs real value/earning power, or that market price of bidder’s shares is unjustifiably high/not sustainable
attack the bidder
concentrate on mgmt style, overall strategy, lack of capital investment, dubious A/C policies, how they grow EPS
White Knight
directors offer themselves up to more friendly outside interest - only as last resort as all independence goes
acceptable tactic provided that any information given to preferred bidden is also shared with hostile bidder
counterbid - “pacman” defence
where the target starts trying to take over the bidder
refer the bid to the Competition Authorities
to be effective, would need to prove that the takeover was against public interest
Characteristics of well-managed defence campaign against takeover
aggressive publicity - ideally before a bid received
investors made aware of strong research ideas and mgmt potential, or simply more aware of company achivements
direct comms with sh/h stressing financial and strategic reasons to remain independent
Two questions regarding form of consideration for a takeover
(1) WHAT FORM SHOULD BE OFFERED?
cash / share exchange / earn-out
(2) IF CASH, HOW IS IT RAISED?
debt finance / rights issue (if entity doesn’t already have the cash)
Advantages - Cash as consideration in a takeover
quick and low cost - provided bidder has the money
target company sh/h have certainty about bid’s value vs e.g. shares in bidding company
increased liquidity to sh/h of target company - accepting cash in a takeover = good way of realizing investment
less risk to target org sh/h => acceptable consideration likely less than with a share exch => reduced overall cost to bid for bidder
Disadvantages - Cash as consideration in a takeover
bidder must often borrow in cap mkts or issue new shares to raise cash => adverse gearing and increased COC due to increased risk
in some jurisdictions, target org sh/h are taxed if shares sold for cash; gain may not be immediately chargeable to tax under a share exchange
target sh/h perhaps unhappy to be “bought out” of participation in new group // to the bidding company’s advantage if they seek full control
Takeover Forms of Consideration - Cash vs Share Exchange
CASH
target sh/h are offered a fixed sum per share
likely only suitable for smaller acqns unless bidder has accumulation of cash
SHARE EXCHANGE
bidder issues new shares and exchanges them with target company sh/h
target sh/g thus own shares in bidder, and target shares all in bidder’s possession
large acqns almost always involve a full or partial exchange
Advantages - Share Exchange as consideration in takeover
bidder does not need to raise cash
bidder can boot strap EPS if it has higher P/E ratio than target
shareholder capital increased and gearing improved b/c target sh/g become sh/h in post-acq company
share exchange can be used to finance very large acquisitions
Disadvantages - Share Exchange as consideration in takeover
bidder’s existing sh/h need to share future gains with acquired entity, and existing sh/h will have lower proportion of control and profit share than previously
price risk - market price of bidder’s shares at risk of falling during bid process, may result in bid failure
e.g. if a 1-for-2 share exchange is offered b/c bidder’s shares worth approximately 2x target’s, fall in bidder price may result in target sh/h refusing to sell
Definition - Earn-Out Arrangement
a procedure whereby owners/mgrs selling an entity receive a portion of their consideration linked to the fin perf of the business during a specified point after the sale
the arrangement gives a measure of security to new owners who pass some fin risk associated with purchase to the sellers
possible structure = initial payment and deferred balance, some of which dependent on specified performance targets
Earn-Out Agreement in practice
often used when buyers/sellers disagree about expected growth/perf in the future
typical earn-out takes place over 3- to 5-year period after acqn and may involve 10-50% of purchase price being deferred, paid across the period
popular amont private equity investors - they don’t have expertise to run a target business, and so can keep the previous owners involved post-acq
Example - Earn-Out Agreement
entrepreneur selling a business seeking $2m based on projected earnings
buyer willing to pay $1m based on past performance
earn-out provision might be such that entrepreneur will receive more than 1m only if certain targets are met
e.g. 1m plus 10% of grosss sales over next three years
Earn-Out Targets
may include revenue, net income, EBITDA, EBIT targets
sellers prefer revenue as simplest measure, but revenue can be boosted through business activities which hurt bottom line
buyers prefer net income as best reflection of overall economic performance, but can be manipulated downward by capex and other opex frontloading
some earnouts may include non-fin targets e.g. development of product, execution of contract
Limitations of earn-outs
generally work best when the business is operated as envisioned at time of tx – rather than where business plan changes due to change in business environment
in some txs, buyer may have ability to block earn-out targets from being met
outside factors may also affect company’s ability to achieve earn-out targets
sellers need to negotiate the targets very carefully factoring in all of the above
