Developing a Merger and Acquisition Bidding Strategy

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This article attempts to summarize the key elements of common bidding strategies undertaken in corporate takeovers.

Source: This article is extracted from Donald M. DePamphilis’ Mergers, Acquisitions, and Other Restructuring Activities: An Integrated Approach to Process, Tools, Cases, and Solutions, 5th edition, Elsevier Academic Press, 2010. For more information about the 5th edition or to buy online, click here

Understanding Mergers, Acquisitions, and Other Corporate Restructuring Terminology


Developing a Merger and Acquisition Bidding Strategy
Mergers, Acquisitions and
Other Restructuring Activities
by Donald M. DePamphilis
 


This article is extracted from the textbook Mergers, Acquisitions and Other Restructuring Activities by Donald M. DePamphilis. For more information about this textbook, or to buy online, click here.
 
The tactics that may be used in developing a bidding strategy should be viewed as a series of decision points, with objectives and options usually well defined and understood before a takeover attempt is initiated. Pre-bid planning should involve a review of the target’s current defenses, an assessment of the defenses that could be put in place by the target after an offer is made, and the size of the float associated with the target’s stock. Poor planning can result in poor bidding, which can be costly to CEOs.  Studies show that almost one-half of acquiring firms CEOs are replaced were replaced within five years of a major acquisition. Moreover, top executives are more likely to be replaced at firms that had made poor acquisitions sometime during the prior five years.

Common bidding strategy objectives include winning control of the target, minimizing the control premium, minimizing transaction costs, and facilitating post-acquisition integration. If minimizing the cost of the purchase and transaction costs, while maximizing cooperation between the two parties is considered critical, the bidder may choose the ‘friendly’ approach.

The friendly approach has the advantage of generally being less costly than more aggressive tactics and minimizes the loss of key personnel, customers, and suppliers during the fight for control of the target. Friendly takeovers avoid an auction environment, which may raise the target’s purchase price. Moreover, friendly acquisitions facilitate pre-merger integration planning and increase the likelihood that the combined businesses will be quickly integrated following closing. The primary risk of this approach is the loss of surprise. If the target is unwilling to reach a negotiated settlement, the acquirer is faced with the choice of abandoning the effort or resorting to more aggressive tactics. Such tactics are likely to be less effective because of the extra time afforded the target’s management to put additional takeover defenses in place. In reality, the risk of loss of surprise may not be very great because of the pre-notification requirements of the Williams and the Hart-Scott–Rodino Acts.

Bidders often initiate contact casually through an intermediary (i.e. a casual pass) or through a more formal inquiry.  The bidder’s options under the friendly approach are to either walk away or to adopt more aggressive tactics if the target’s management and board spurn the bidder’s initial offer. If the choice is to become more aggressive, the bidder may undertake a simple bear hug to nudge the target toward a negotiated settlement due to pressure from large institutional shareholders and arbitrageurs (i.e. investors who typically attempt to profit from M&A transactions by buying the target’s shares and selling the acquirer’s shares short.  Short-selling refers to the practice of selling borrowed shares whose price is expected to fall and then repurchasing them at a lower price, returning the shares to the original owner, and profiting on the difference between the selling and repurchased prices..

If the bear hug fails to convince the target’s management to negotiate, the bidder may choose to buy stock in the open market.  This tactic is most effective when ownership in the target is concentrated among relatively few shareholders. The bidder may accumulate a sufficient number of voting rights to call a special stockholders’ meeting if a proxy fight is deemed necessary to change board members or to dismember the target’s defenses.  If the target’s defenses are viewed as relatively weak, the bidder may forego a proxy contest and initiate a tender offer for the target’s stock. In contrast, if the target’s defenses appear formidable, the bidder may implement concurrently a proxy contest and a tender offer. However, implementing both simultaneously is a very expensive strategy.  Tender offers are costly, because they are offers to buy up to 100 percent of the target’s outstanding stock at a significant premium. 

While a proxy fight is cheaper than a tender offer, they are still costly, involving professional fees paid to such advisors as proxy solicitors, investment bankers, and attorneys. Printing, mailing, and advertising costs can also be substantial. Finally, both proxy fights and tender offers involve significant legal fees due to the likelihood of extensive litigation. Litigation is a common tactic used to put pressure on the target board to relent to the bidder’s proposal or to remove defenses. Litigation is most effective if the firm’s defenses appear to be especially onerous. The board may be accused of not giving the bidder’s offer sufficient review or it may be told that the target’s defenses are intended only to entrench senior management. As such, the acquirer will allege that the board is violating its fiduciary responsibility to the target shareholders.  Table 1 relates takeover tactics to specific bidder objectives and strategies.
 
Table 1.  Advantages and Disadvantages of Alternative Takeover Tactics

 

For more information 

 
This article is one of five available for free on Google Knol, including The Role of Holding Companies in Mergers and Acquisitions and Poison Pills as a Merger and Acquisition Defense. Search on the name ‘Donald DePamphilis’ or use the links on the right hand side to access and read the others.
 
 

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