5.3. Anti-takeover defenses (1) – returns to bidders and targets

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From the course by Moscow Institute of Physics and Technology

Mergers and Acquisitions – The Relentless Pursuit of Synergy

1 оценка

Moscow Institute of Physics and Technology

Mergers and Acquisitions – The Relentless Pursuit of Synergy

1 оценка

Course 4 of 5 in the Specialization Understanding Modern Finance

The area of mergers and acquisitions (M&As) is special in finance. Incredible amounts of money are employed in such transactions. Deals draw a lot of public attention and dispute. Oftentimes, stories look more like fairy tales rather than financial reality. The key idea in any M&A transaction is to create value through a potentially synergetic activity. To this end, it is important to have a clear motive and implementation plan. Of special importance are the correct valuation, proper financing, and actual deal completion. But this is not the end – value mostly accrues from the post-merger integration. The understanding of the motives of various stakeholders is instrumental in the analysis of the potential creation of value. The learners will gain insight into the core value creating M&A strategies. They will be able to use the obtained knowledge and skills to successfully advance in their career at a financial institution, as well as in the area of financial management at non-financial businesses. Finally, the Course is very helpful in successful completion of the Specialization’s Final Project.

From the lesson

Value-Creating Strategies. Anti-Takeover Defenses. Corporate Governance and Performance. Conclusions – the Relentless Pursuit of Value

Week 5 – the final week of the Course – focuses on the details of value creating strategies. We start with share repurchases and their effect on value. Then we analyze anti-takeover defenses as value creating strategies. We proceed with the discussion of corporate governance. Although in M&As this concept has somewhat narrower meaning, we try to relate the advantages and costs of a well-functioning and efficient corporate governance system to the development of the M&A market. On a specific example we analyze the potentially value-destroying conflicts that may arise from the underdeveloped corporate governance system. Finally, we identify the role of post-transaction merger integration in the creation of value. We provide some conclusions on M&A efficiency and synergy. At the very end, we summarize the Course and the Specialization and briefly discuss the Final Project.

5.1. Value creating strategies4:45

5.2. Share repurchases. Fixed-price tender offers14:29

5.3. Anti-takeover defenses (1) – returns to bidders and targets10:10

5.4. Anti-takeover defenses (2) – pre-offer defenses8:41

5.5. Anti-takeover defenses (3) – post-offer defenses9:24

5.6. Corporate governance in the US – an overview18:14

5.7. Corporate governance in other countries – who will pay?9:59

5.8. An example of corporate governance – Russian preferred shares9:19

5.9. Implementation and integration – key to success5:16

5.10. Some conclusions – the relentless pursuit of synergy7:28

5.11. Summary of the Specialization. Overview of the Project5:46

Meet the Instructors

Konstantin Kontor
Director and Professor of Finance and Strategy
American Institute of Business and Economics (AIBEc)

We are now entering a broad set of strategies that are

associated with the anti-takeover defenses.

So I will put them just takeover defenses like this,

and this is our first part.

Well, you know that when you engage in an M&A transaction,

there are generally two ways.

One is friendly when you negotiate with the target management,

and if you reach an agreement,

then, clearly, it all goes smoothly.

If for any reason,

you cannot reach an agreement,

then you can engage in a hostile transaction in which you

really surpass the management that go directly to the target shareholders,

and we discussed some strategies associated with that.

And the first question is

whether supposedly you attack the company in a hostile way,

and that means that the management sort of did not reach an agreement with you.

So they fought back, and they disagreed.

And the big question is whether it's good or bad.

And we have to really go back to

this idea of stakeholders here.

And the question is good or bad is in itself sort of

strange or even senseless or irrelevant.

It's important to show that sometimes

people say takeover defenses are bad because they're about one thing.

This is about the management entrenchment.

So these people would not like to lose their jobs and

their bonuses and all their privileges.

But if, for example,

the bidder comes and makes an offer and then the management says,

"Well, it's too small an offer.

You have to pay more."

Well, that is not only the way to entrench themselves but

also the way to raise the potential benefit to their shareholders.

So it's not such a trivial question of what is the main motive.

You could always say that and then and they take over the move or any kind of

a takeover defense strategy the management really pursues more than one goal.

And it may not be the main idea of

just keeping your job or just making sure that you are fine.

That may well be the best outcome for their target shareholders.

Now, so basically, that's one idea but

before we went deeper and in some detail here,

there is one even bigger question.

When the transaction takes place,

we have to ask the question of is it better

to buy or to sell?

And a huge question mark,

what do we mean by that?

Well, if the company grows and buys everyone,

then the company becomes bigger and it's sort of a path of winning over,

but at the same time we know that if someone approaches us as

a company and goes to our management or towards directly as shareholders,

we would always ask for a premium.

So it seems that it's better to sell

because you don't sell when you go on the market and say, "Well, buy me.

Instead, this is issues when someone comes in and says,

"I'd like to buy you," and then in this case,

you charge a higher price.

Now, I will provide

two most simplistic charts that are in the book and the Kindles everywhere.

And these are just the simplified charts.

If this is a time or days surrounding the transaction,

and this is sort of the rate of return,

cumulative rate of return or whatever.

And this is let's say the announcement date,

then the classic behavior of

the stock of the target is like this.

So there is a significant premium.

However, for the bidder, it's like this.

So this is bidder.

Maybe there is some growth,

but it's much smaller and sometimes it's not even statistically significant.

And, as always, we can ask a big question, why?

And one idea, sort of a general one,

we keep in mind that if someone comes in and wants to buy us,

we would always ask for a premium.

But the question is not what we ask for but why actually

these people indeed pay us more than the initial stock price.

So these premia, they are not only asked

for by the target shareholders may be directly or indirectly from the management,

but they are actually enjoyed.

And we have to answer these questions.

Well, one idea is

that buyers are bigger,

I'll put it this way,

and sometimes way bigger.

So that means that on the strategic path,

if indeed they have to pay a premium to the target shareholders, they say fine.

For us, it's a small amount of money proportional to our overall sales or

overall assets or our overall value of the M&A program.

But, also, and I would say that this is even more important,

is that sometimes we see competitive bidding.

So maybe we would like to pay less,

but there is a competitor,

and these and at some point in time because of hubris,

because we may be well become the victims of the classic winner's curse situation,

but we do pay more.

Remember our example of KKR winning bid for RJR Nabisco when

it was very close to the value of this company.

So the winning bid had a very thin positive margin in terms of NPD,

but that is reality.

That's what happened.

So and also we can say that there are some other winners here that I mentioned before,

but these winners, they are around almost in all transactions.

These are professionals, lawyers, investment bankers, accountants,

so all of the people who provide sort of technical support for this because

they are being paid not if the transaction takes place,

but they have some fixed fees,

and they just do the work,

and even if the transaction falls apart,

they still pocket the fees.

So there are quite a few winners here,

but then the next question is that if we

see that it's basically good to be the target because of this.

Now the next question is

a takeover defense because

if someone wants to pay

a premium and if someone else steps in and say, "Well, no, no, no, no.

You do not have to buy this company."

That seems to be an offensive move.

But like I said in the vast majority of cases,

this is in the bottom line not such an offensive thing.

This is just a way to push for a higher premium.

And then like I said, I mentioned professionals,

but they're also speculators,

and they're also some insiders in this case.

And although any kind of insider activity is illegal,

but when you talk about the transaction that has lots of

risks ahead and when you cannot claim that the actual value will be like that,

then many of these things that are in essence

insider-related but in technical details and in reality, they are not.

They can hardly be traced as just this insider motive,

then that also adds to these potential fights.

So that produces a sort of a bad ground for the idea of take over defenses.

And in the next episodes,

we will study that in somewhat greater detail.

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