Better late than never

Finance Strategy is a subject that I found very tough initially... but towards the end of the term, before the exams, as I read more, I started liking the subject . (Don’t judge my interest in the subject by the marks I get!).

The best part from the course is that when I read the Financial Times now, the contents makes more sense. When the Tata group acquired Corus, I had my own set of comments and analysis.

Anyway, here are some key concepts that I liked in the text book on Mergers and Acquisitions:




Some sound reason for acquiring companies
-Economies of Scale
( Chevron and Texaco, the firm's combined costs were cut by $1.8 billion per year, and $400 million per year of further savings.)
-Economics of vertical integration
-Complementary Resources ( Eg: eBay and Paypal)
-Surplus funds ( not invest in negative NPV projects)
-Eliminating Inefficiencies
-Industry Consolidation

Some dubious reason for mergers
-To diversify ( stock holder can do that themselves)
-Increasing earnings per share ( Boot strap game!)
It generates earnings growth not from capital investment or improved profitability, but from purchase of slowly growing firms with low priced earnings ratios.
-Lower financing costs


So what are the Defense Tactics ?
Pre offer Defense:

Shark-repellent charter amendments:
Staggered Board: The board is classified into three equal groups. Only one group is elected each year. Therefore, the bidder cannot gain control of the target immediately

Super majority: A high percentage of shares is needed to approve a merger , typically 80%

Fair Price: Mergers are restricted unless a fair price ( determined by the formula or appraisal is paid)

Restricted Voting Rights: Shareholders who acquire more than a specified proportion of the target have no voting rights unless approved by the target's board

Waiting period: Unwelcome acquires must wait for a specified number of years before hey can complete the merger.


Other:
Poison Pill: Existing shareholders are issued rights which, if there is a significant purchase of shares by a bidder , can be used to purchase additional stock in the company at a bargain price
Poison Put: Existing bondholders can demand repayment if there is a change of control as a result of hostile take over.
Pac man defense : Try to take over the attacker before it takes over you.



Post offer defense:
Litigation: File suit against bidder for violating antitrust or securities laws
Asset Restructuring: Buy asset that bidder does not want or that will create an antitrust problem
Liability Restructuring: Issue shares to a friendly third party or increase the number of share holders. Repurchase shares from existing shareholders at a premium.