By TJEF Editor Ishan Kekre
Today mergers and acquisitions are in their fifth generation. Over the years, in order to adapt to the dynamic economic changes, firms have often taken decisions to merge, acquire or takeover in order to develop a competitive advantage and ultimately increase shareholder’s wealth. Companies can mutually agree to merge or one firm can acquire another firm by making an offer. In case of the latter, if the target is unwilling to get acquired it can plan to foil the takeover attempt by the acquirer. The target can employ several defence mechanisms which have become a source of a lot of fancy jargons and buzzwords that are used in the M&A parlance. Some of the frequently used jargons are listed below:
Hostile Takeover Strategies by Acquirer Firm
- Dawn Raid – The acquirer firm instructs the stockbrokers to buy the shares at the current market price, early in the morning as soon as the market opens. The target firm remains uninformed of these actions until it is too late as the acquirer masks its identity and its takeover intent.
- Saturday Night Special – This tactic was used by the acquirer by making a tender offer to the target suddenly over the weekend and hence the name.
Defense Strategies Employed by the Target Firm
- Golden Parachute – This strategy involves giving incentives like bonuses and stock options to the top management by the target firm which makes of the takeover attempt a lot costlier for the acquirer and hence acts as a strong deterrent.
- Greenmail – In this case, a substantial block of stock is held by a raider, who then forces the target firm to repurchase the stock at a premium to foil any takeover attempt.
- Macaroni Defense – In this strategy, target firm issues a large number of bonds with the guarantee that they will be redeemed at a higher price if the company is taken over. It can be a double-edged sword because if a lot of debt is issued the target can default on interest payments.
- People Pill – In this defence mechanism, the management team threatens to resign if the takeover is successful. The efficacy of this strategy depends on how good is the management.
- Poison Pill – In this strategy, the target firm makes its stock less attractive to the acquiring firm. There are forms of the poison pill. First is the ‘flip-in’ poison pill where shares that are held by the bidder are diluted to make the takeover more expensive. Second is the ‘flip-over’ in which shareholders buy the acquirer’s stock at a discounted price in the event of a merger. The third form is the ‘suicide pill’ whereby the target company takes decisions that ultimately lead to its own destruction.
- Sandbag – In this case, the target firm stalls and delays the takeover attempt that another favourable company will make a takeover attempt.
- White Knight – It is that firm that comes in to save the day for the target company that is on the radar of corporate raider (Black Knight) by offering a way out with a better deal.
Thus mergers and acquisitions have an extensive jargon of their own and have some rather fancy and interesting strategies listed above. The next time if you read about an M&A that is going to happen, you can make an informed buying decision to purchase more shares at a cheap price.
Meaning – A takeover defense tactic that involves the acquisition of a business or assets by a target company. The strategy is based on the premise that the bulked-up company – the “fat man” – would have reduced appeal to a hostile bidder, especially if the acquisition increases the acquirer’s debt load or decreases available cash.
This is a type of “kamikaze” defense tactic, which inflicts potentially irreversible damage on a company to prevent it from falling into hostile hands. However, it involves adding assets rather than divesting them as is the case with other kamikaze defense strategies. A disadvantage of this tactic is that acquisition candidates need to be identified well in advance of a hostile bid, otherwise there may be insufficient time to complete a fat man transaction.
Meaning – The estimated value of a company if it were to be taken private or acquired.
A firm’s takeout value considers various metrics, such as cash flows, assets, earnings and multiples used in similar takeovers. The mergers and acquisitions environment can also affect the takeout value of a company. There is no exact formula for takeout valuation, since a variety of metrics, such as EBIDTA multiple, P/E ratio and even firm-specific information can be taken into account. The value is used by both financial analysts and shareholders. The analysts will use the valuation to determine a range of possible price levels for takeover bids, while shareholders can estimate how much return they might receive if their shares are acquired.