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.
Konstantin KontorDirector and Professor of Finance and Strategy
