1. ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 1 - - - - - - - - Chapter 1 - - - - - - - - The Takeover Process

2. ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 2 Introduction Goals of course –Practical guidelines for M&A analysis –To evaluate policies toward M&As M&As refer to –Traditional mergers and acquisitions –Takeovers –Corporate restructuring –Corporate control –Changes in the ownership structure of firms

3. ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 3 Forces Affecting Mergers Technology Globalization Deregulation Efficiency of operations Changes in industry organization Entrepreneurship Economic and financial environment

4. ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 4 Terminology Merger –Negotiated deals –Mutuality of negotiations –Mostly friendly Tender offers –Offer made directly to the shareholders –Hostile when offer made without approval of the board Restructuring — changes to improve operations, policies, and strategies

5. ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 5 Types of Mergers Horizontal mergers –Combination between firms in same business activity –Rationale Economies of scale and scope Synergies such as combining of best practices –Government regulation due to potential anticompetitive effects Vertical mergers –Combinations between firms at different stages –Rationale is information and transaction efficiency

6. ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 6 Conglomerate mergers –Combination of firms in unrelated types of business activity Distinctions between conglomerate and nonconglomerate firms –Investment companies — diversify to reduce portfolio risk –Financial diversified — provide funds and expertise on generic management functions of planning and control –Concentric diversified — combine with firms in less related activities to broaden market potentials

7. ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 7 Mergers in a Legal Framework Statutory merger — formal legal procedures Short-form merger — streamlined legal procedures when ownership is 90% Holding company — parent company has a controlling interest

8. ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 8 Tender Offers Bidder seeks target's shareholders approval Minority shareholders –Terms may be "crammed down" –May be subject to "freeze-in" –Minority has the right to bring legal actions

9. ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 9 Kinds of tender offers and provisions –Conditional vs. unconditional –Restricted vs. unrestricted –"Any-or-all" tender offer –Contested offers –Two-tier offers –Three-piece suitor

10. ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 10 Risk Arbitrage in M&A Activity Usually, long in the target stock and short in the bidder stock Nature of the arbitrage industry –Information gathering and analysis is the principal raw material –Arbitragers attempt to anticipate takeover bids

11. ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 11 Arbitrage funds –Intensive research –No investment on rumors –Invest in 10-20 transactions at a given time –Main risk is whether deals are completed

12. ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 12 Numerical example –An arbitrage firm (A) notes that a bidder (B) whose stock is selling at $50 makes an offer for a target (T) selling at $40. –Exchange offer is 1 share of B for 1 T share. –T rises to $48; B stays at $50. –A sells 1 share of B short for $50 and goes long on T at $48. –One month later the deal is completed with B at $50 and T at $50. –What is A's dollar and percentage annualized gain assuming a required 50% margin on both transactions?

13. ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 13 Solution –A sells 1 B for $50 and buys T at $48. –Assuming 50% margin, the investment is.5($50 + $48) = $47.5. –In one month, A uses 1 T to cover 1 B. The gain is $2. –The percentage gain is [($2/$47.5)] * 12 = 50.21% less the interest on the $47.5 borrowed on margin. –If A invested the full $98, the gain would be ($2/$98) * 12 = 24.49%.