Process of Merger & Acquisition

Top Management’s commitments:

The commitment of top management is of prime importance in mergers and acquisition process.
Top management defines the organisation goals and \outline the policy framework to achieve
these goals. Mergers and Acquisition can remove deficiencies in the organisation and can
contribute in the required direction to accomplish the goal of business expansion through
enhanced commercial activity, i.e. supply of inputs and market for output product diversification,
adding up new products, improved technological process, new distribution channels, new market
segments…etc if the top management is not committed then the merger or acquisition will fail.

Search for a merger or acquisition:

In the second step, the top management may use their own contact with competitors in the same
line of economic activity or in the other diversified field which could be identified as better
merger partners or for acquisition. Such identification should be based on the detailed
information of the organisation which would like merger or want to be acquired. Such
information should reveal the following aspects,

 Organisational study of the business, promoters and capital structure

 Organisational goals

 Product, market and competitors

 Organisational set-up and management pattern

 Detailed particulars of management employees

Negotiations:

This stage speaks about the monitory settlements. Once the organisation finds the partner whom
it wants to acquire or merge with will send its panel committee for the negotiation purposes.
Negotiation plays an important role, it clarifies about how much is the cost of the process as it
negotiates in terms of all aspects like finance, process, technology, market, goodwill…etc it
helps to figure out the intentions of the company which ant to get acquired, thus helps the
organisation to negotiate and to take further steps to acquire the company.

Post negotiation Steps in acquiring: After negotiation the following are the further steps which
an organisation need to follow to complete the acquiring process of any company.

 Scheme of Acquisition or merger

 Approval of board of directors for the scheme

 Approval of the scheme by specialized financial institutions

 Intimation of stock

 Application to court

 Approval of registrar of high court for calling the meeting of members/Creditors

 Dispatch of notice to members/Shareholders

 Advertisement of notice of members’ meeting

 Holding the shareholders’ general meeting and passing the resolutions

 Submission of Chairman’ report to court

 Submission of joint petition

 Hearing of petition and confirmation of scheme

 Transfer of assets and liabilities

 Allotment of shares

 Listing of the shares at stock exchange

 Court order to be annexed to memorandum of transferee company

 Preservation of books and papers of acquired company

 Post merger/Acquisition Obligations

This is how an exact acquisition or merger will take place in the corporate scenario, where following
all these steps is very necessary for an organisation.

Anti takeover Amendments

Some companies use formal methods that are put into place prior to an actual takeover attempt.
Known as anti takeover or “shark-repellent” devices, they are designed to make a takeover more
difficult. Before describing them, it is useful to consider their motivation. The managerial
entrenchment hypothesis suggests that the barriers erected are to protect management jobs and that
such actions work to the detriment of stock-holders. On the other hand, the stockholders interest
hypothesis implies that corporate control contests are dysfunctional and take management time away
from profit-making activities. Therefore, anti takeover devices ensure more attention being paid to
these activities and are in the interest of stockholders. Moreover, the barriers erected are set to cause
individual stockholders not to accept a low offer price but to join other stockholders in a cartel
response to any offer. Therefore, and to takeover devices would enhance shareholder wealth,
according to this hypothesis.

Voting devices

A handful of devices exist to make it more difficult for another party to take you over. As we know,
some companies stagger the terms of their board of directors so that fewer stand for election each
year, and, accordingly, more votes are needed to elect a director. Sometimes, it is desirable to change
the state of incorporation. Charter rules differ state by state, and many companies like to incorporate
in a state with few limitations, such as Delaware. By so doing it is easier for the corporation to install
anti takeover amendments as well as to defend itself legally if a takeover battle ensues. Some
companies put into place a super-majority merger approval provision. Instead of an ordinary
majority being needed for approval of a merger, a higher percentage is required, often two-thirds. The
percentage may be even higher; 80 percent is used in a number of instances. The ability to install the
provision depends on the state of incorporation.
The Poison Pill

The Poison Pill or distribution of rights to stockholders as it is known as formally- is the “biggie”
when it comes to putting defenses in place. Many contented it is only effective deterrent. The
distribution of rights to existing shareholders allows them to purchase a new security, often a
convertible preferred stock, on favorable terms. By favorable, the subscription price might be only
40n percent of the total market value. However, the security offering is triggered only if an outside
party acquires some percentage, frequently 20 percent, of the company’s stock. This trigger is known
as the flip-in feature. The idea is to have available a security offering that is unpalatable to the
acquirer. This can be with respect to voting rights or with respect to precluding a change in control
unless a substantial premium is paid.

The rights typically have an expiration date, frequently 10 years. Upon expiration, the pill no
longer is in place. To be continued a new distribution of rights must occur. Example: on October 5,
1997, Pfizer, the pharmaceutical company, issued new rights to stockholders to replace those that
expired on that date issued 10 years earlier. The board of directors reserves the ability to redeem the
rights at any time for a token amount. The poison pill is meant to force the potential acquirer into
negotiating directly with the board as opposed to a tender offer to the shareholders. Only the board
can authorize the pill being redeemed. Most companies state something to the effect that the rights are
not intended to prevent an acquisition of company that is in the best interest of stockholders. Whether
the board acts in the best interests of the shareholders in negotiating with a potential acquirer deterred
by the pill varies from situation to situation.

Other anti takeover devices

A number of other shark repellents are employed, but most feel that they are far less effective
deterrents than the poison pill. With a fair merger price provision, the bidder must pay
noncontrolling stockholders a price at least equal to a earnings per share through a price/earnings
ratio, but it may simply be a stated market price. Often the fair price provision is coupled with a
supermajority provision. If the stated minimum price is not satisfied, the combination can only be
approved if a supermajority of stockholders are in favor. It also is frequently accompanied with a
freeze-out provision, which allows the transactions to proceed, at a “fair price”, only after a delay of
between 2 and 5 years.

Lock-up provision

It is used in conjunction with other provisions. This provision requires supermajority stockholder
approval to modify the corporate character and any previously passed anti takeover provisions. In
addition to these charter amendments, many companies enter into management contracts with their
top management. Typically, high compensation is triggered if the company is taken over. Known as a
“golden parachute”, these contracts effectively increase the price the acquiring company must pay in
an unfriendly takeover.

Sometimes the company will negotiate a standstill agreement with the outside party. Such an
agreement is a voluntary contract where, for a period of several years, the substantial stockholder
group agrees not to increase its stock holdings. Often this limitation is expressed as a maximum
percentage of stock the group may own. The agreement also specifies that the group will not
participate in a control contest against management and that it gives the right of first refusal to the
company if it should decide to sell its stock. The standstill agreement, together with the other
provisions discussed, serves to reduce competition for corporate control.

As a last resort, some companies make a premium buy-back offer to the threatening party. As
the name implies, the repurchase of stock is at a premium over its market price and usually is in
excess of what the accumulator paid. Moreover, the offer is not extended to other stockholders.
Known as greenmail, the idea is to get the threatening party off management’s back by making it
attractive for the party to leave. Of course the premium paid to one party may work to the
disadvantage of stockholders left “holding the bag”.

WHITE KNIGHT

A white knight is a potential acquirer who is sought out by a target company's management to take
over the company to avoid a hostile takeover by an undesirable black knight.
The white knight refers to the friendly acquirer of a target firm in a hostile takeover attempt by
another firm. The intention of the acquisition is to circumvent the takeover of the object of interest by
a third, unfriendly entity, which is perceived to be less favorable. The knight might defeat the
undesirable entity by offering a higher and more enticing bid, or strike a favorable deal with the
management of the object of acquisition.

The white knight strategy involves the target firm finding a more suitable acquirer(the “white
knight”) and prompting it to compete with the initial hostile acquire to take over the firm. The basic
premise of this strategy is that if being taken over is nearly certain; the target firm ought to attempt to
be taken over by the firm that is deemed most acceptable to its management.

In business, a white knight may be a corporation, a private company, or a person that intends to help
another firm. There are many types of white knights. Alternatively, a gray knight is an acquiring
company that enters a bid for a hostile takeover to the target firm and first bidder, perceived as more
favourable than the black knight (unfriendly bidder), but less favorable than the white knight (friendly
bidder).

In short, if company T (target) is going to be acquired by company H (hostile firm), but company A
(acquirer) can acquire ownership of company T, then company A would be acting as the white knight.
The second type refers to the acquirer of a struggling firm that may not necessarily be under threat by
a hostile firm. The financial standing of the struggling firm could prevent any other entity being
interested in an acquisition. The firm may already have huge debts to pay to its creditors, or worse,
may already be bankrupt. In such a case, the knight, under huge risk, acquires the firm that is in crisis.
After acquisition, the knights then rebuild the firm, or integrate it into itself.

Example: Tyco as white knight for AMP-

In 1998, Allied Signal Corp. launched a $10 billion hostile takeover bid for AMP Inc. AMP Inc- was
an electronic connector maker with just under $6billion in revenues & $500 million in net income.
APM Inc. tried to remain independent, but when it not possible, it decided to seek a White Knight.
The company agreed to sell to Tyco, the industrial conglomerate. Generally Shareholder’s wealth has
negative effect of white knight bids as such bids are not of a planned strategic acquisition and do not
yield net benefits for the acquiring firms’ shareholders.

WHITE MAIL
White mail, coined as an opposite to blackmail is an anti-takeover arrangement in which the target
company will sell significantly discounted stock to a friendly third party in return, the target company
helps thwart takeover attempts, by

a. Raising the acquisition price of the raider,

b. Diluting the hostile bidder’s number of shares, &

c. Increasing the aggregate stock holdings of the company

It is a strategy that a takeover target uses to try and thwart an undesired takeover attempt. The target
firm issues a large amount of shares at below-market prices, which the acquiring company will then
have to purchase if it wishes to complete the takeover. It’s an Anti-Takeover device whereby a
vulnerable company sells a large amount of stock to a friendly party at below-market prices. This puts
a potential raider in a position where it must buy a sizable amount of stock at inflated prices to get
control and thus helps perpetuate existing management. If the white mail strategy is successful in
discouraging the takeover, then the company can either buy back the issued shares or leave them
outstanding.