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Chapter 1-2
Change Forces Driving Mergers
1. Technological change
2. Efficiency of operations
3. Globalization and freer trade
4. Changes in industry organization
5. New industries
6. Deregulation and regulation
7. Favorable economic and financial conditions
8. Negative trends in industries and economies
9. Widening inequalities in income and wealth
10. High valuation of equities (1990s)
Chapter 1-3
Issues Regarding M&A Activity
In Favor Opposed
Critical to healthy No improvements
expansion of business subsequent to the
firms acquisition
Increase value and Redistribution of
efficiency wealth from labor
Move resources to and other
optimal uses stakeholders to
shareholders
Speculative activity
Chapter 1-4
M&A 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
Chapter 1-5
Types of Mergers
Horizontal mergers
• Between firms in same business activity
• Rationale
– Economies of scale and scope
– Synergies (ex. combining of best practices)
• Government regulation due to potential
anticompetitive effects
Vertical mergers
• Combinations between firms at different stages
• Goal is information and transaction efficiency
Chapter 1-6
Types of Mergers
Conglomerate mergers
• Firms in unrelated business activities
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 potential
markets
Chapter 1-7
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
Chapter 1-8
Tender Offers
Bidder seeks target's shareholders
approval
Minority shareholders
• Terms may be "crammed down"
• May be subject to "freeze-in"
• Minority may bring legal actions
• 2001-2002, many minority squeeze-outs
–Usually reversing equity carve-out
–Parents often make high bid to avoid
shareholder lawsuits
Chapter 1-9
Tender Offers
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
Chapter 1-10
Risk Arbitrage in M&A Activity
In M&A, risk arbitragers take a position in a
merger for short-term profitable resale
Arbitragers bet that a deal will be completed:
bear “deal risk” & try to minimize market risk
Provide liquidity for target shareholders
seeking to sell to realize gains from premium
Arbitrage funds
• Spread deal risk over portfolio of deals
• Performance of these funds is often high
• But, funds are highly exposed to market crashes
Chapter 1-11
Risk Arbitrage in M&A Activity
Illustrative Example
• Sears announced a cash tender offer for Land’s
End
• Tender offer was for $62; at close on
announcement date, LE was at $61.72
• Investing at $61.72 would yield 3.7% annual
return if deal closed in the forecasted 45 days
36545
62 61.72
Annual return 3.7% 1 1
61.72
Chapter 1-12