Chapter 6

-Friendly Deals

-Unsolicited “friendly” bid

-Hostile Bid

-Target board is required to consider other offers until target’s shareholders render their final approval (Even with friendly agreement)

-Ramifications for bidders —> prepare for rival bidder

-No Shop Provisions

-Go Shop Provisions

Where bidder requires target not to solicit bids after bidder makes offer

Bidder makes offer and then asks the target to go shop the company

Fee that gets paid if the target ends up being sold to someone else

-Acquirer’s stock price often falls (if bidder withdraws —> price rises)

-Target’s stock price rises (if bidder withdraws —> price declines)

Allows less expensive purchase of a target’s stock

-Lower average cost of takeover

-Bidder has leverage with target management

-Short-Term: Held < 6 months from offer date

-Long-Term: Held > 6 months from offer date

-Disclosure: file with SEC within 10 days of acquiring 5%

-Cost related to failed bid (share prices falls)

-May not get termination fee (target reacts negative to toehold)

-Runup

• stock price in upward movement prior to announcement of bid

-Markup

• how much is offer price above price on annoucement date

-Premium

• Runup + Markup

-Information Asymmetry

-Bidder has to make offer without knowledge of possible friendly deal

-Bid based on public avaible data

-Target access its worth better than bidder —> bidder in disadvantage

-Riskless Arbitrage

-Risk Arbitrage

Buying & selling the same asset in different markets & different prices

Buying shares in potential or actual targets & possibly selling shares in acquirers

-Gain on sread between acquisition price & arbitrage purchase price

-Short sale also possible

-That Deal may be canceled

-Financing environment may change

-Sub-prime crisis of 2007

-Regulatory Approval may not be secured

-Material Adverse change clause may be activated

-Arbitragers may play significant role

Assume market will react negatively so short-sell stock of bidder

-Cause: bidder’s stock price falls

-Bear Hugs

-Tender Offers

-Proxy Fights

-Bidder brings offer directly to Target’s Directors

-Threat that hostile bid will be forthcoming

-Legal duties of directors: due diligence on offer

-Charter Communications sent bear hug to Time Warner’s Board

-Oracle sent bear hug to BEA

-Teddy Bear Hug

-Regular Bear Hug

-Less threatening

-Doesn’t include a price

-Not public

-Includes price

-Made public

-Two tiered tender offers

-Best price rule

-Fair price provisions

-1. Make an ostensibly friendly offer

-2. Do hostile tender offer

-Target shareholder returns were negatively correlated to combined company´s board

-Directors are more focused on job —> pay premium instead of paying shareholders

-Have low book / market ratios

-Popular —> high market values —> high denominator

-Market value declines due to M&A —> book/market ratio rise over time

-High book / market ratios

-Unpopular —> low market value —> low denominator

-Contests for Seats on the Board of Directors (Maybe replace management)

-Contests about management proposals (M&A, antitakeover amendments)

-Management has insufficient vontig support

-Poor operating performance

-Sound alternative operating plan

-Professional Fees (solicitors, attorneys)

-Communication costs

-Litigation costs

-Other fees

-Most shares owned by instituitons

-Institutional investors

-Investors often get proxy advisory firms to make recommendations (they follow on)

-Example: ISS