Ch.

1 Introduction
Sunday, April 24, 2016

1:12 PM

Consolidation
When 2 companies, A and B, come together and form a whole new company [C]
Merger
When 2 companies, A and B, come together and B gets sucked into [A] which is all that remains, usually A
and B are of completely different sizes, one big, one small
Enterprise Value
= Base Equity Price of Acquirer + Total of Target's Debt + Target's Preferred Stock - Target's Cash
Base Equity Price
= Total Price - Total Debt
Types of Mergers
Horizontal
When 2 direct competitors combine
Vertical
When 2 companies, in a supply chain relationship, combine
Conglomerate
When 2 vastly different, non-related companies combine
Merger Payment Plans
All Cash
The company might have to take on debt to get the cash to buy the target.
All Stock
Acquirer's Stock [Common or Preferred, Registered [freely tradeable] or Restricted [unable to be
publicly sold on an exchange]
Fixed or Floating
Floating: Bidder offers a dollar value to the target for its shares, the exact number of
shares the target receives is based on the BIDDERS trading price over the "pricing
period" which is a predetermined amount of time
Collar: Also adds a maximum and minimum number of shares to the contract that
can be exchanged after the pricing period
Fixed: Bidder offers to buy a certain number of the target's shares
Debentures
A secured loan certificate issued by the Bidder
All stock transactions provide tax benefits.
Stock & Cash Mix
Earn Out
Provides incentive for the target to keep performing after the deal closes, giving them extra
compensation if they keep performance up
Contingent Value Rights [CVR's]
CVRs guarantee some future value if the acquirer's shares that were given in exchange for the
target's shares fall below some agreed-upon threshold
Holdback Provisions
Holds back some compensation unless pre-specified targets are met
M&A Arbitrage
When arbitragers buy stock of a company that might be a target and wait for the takeover premium to
come through if the company gets bought; the risk lies in not knowing whether a deal will close or not
Leveraged Buyout
When the buyer uses debt to buy a target
Corporate Restructuring
Selling off of assets, like divestitures, spin outs, and equity carve outs
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 Selling off of assets, like divestitures, spin outs, and equity carve outs
Material Adverse Change Clause
Allows either party to withdraw from the deal if a major change in circumstances arises that would alter
the value of the deal
Auctions historically led to higher takeover premiums.
Confidentiality Agreements (NDA's: Non-Disclosure Agreements)
Important when the target doesn't want to make a big fuss that it is selling itself
Standstill Agreement
Lays out what moves a potential bidder can take, comes from the perspective of the target, for example
saying that the Bidder can only offer all cash
Term Sheet
What the buyer prepares that lays out their offer for the target
Can also come from the target to potential buyers if there is an auction, laying out the boundaries of a
sale by auction
Letter of Intent
What the buyer puts out to the seller with even more details than the term sheet, usually not binding
Basic v. Levinson Case
U.S. Supreme Court ruled that a company can NOT deny the fact that merger negotiations are taking
place if they really are. A company's hand can be forced to admit the merger negotiations if market
speculation is strong enough (and a reporter, for example, asks).
Asset Deal
When a bidder only buys certain assets of a target, thereby avoiding certain liabilities that the whole
entity of the target might possess
Asset Basis Step Up
When the buyer raises the assets of the target to fair market value rather than the value currently
on the seller's balance sheet, allows the buyer to have more time to depreciate the line item which
LOWERS taxable income and therefore the amount of taxes needing to be paid
Third Party Consents
If the target has contractual clauses regarding the financing of an asset that they are potentially selling to
another buyer; the more third parties there are with claims to an asset that is getting sold, the less likely
consent from all parties will come through and the deal will close
Whole Entity Deals
Stock Deal v. Merger
Stock Deal
The buyer goes DIRECTLY to the shareholders of the target and makes a bid, works well for
companies with few shareholders.
No conveyance issues: the assets of the target stay with the target, not the acquirer aka no
third party consent is needed.
No appraisal rights: no shareholder can go to the Delaware courts, for example, and argue
that their investment's management (the target's management) didn't get a high enough
value for the company
Merger
Constituent Companies: the term for both parties entering into a deal
If A merges with B, then A is called the survivor
Requires voting approval of shareholders (a simple majority for Delaware)
Forward Merger aka Statutory Merger
A + B = A; then the assets of B are liquidated and transferred over to A
Voting approval from both buyer and target's shareholders is necessary.
Solution: A creates a subsidiary to buy B.
This becomes a forward triangular merger.
The liabilities of the target are assumed not by the entire buyer but only by
its subsidiary. No shareholder vote is needed from the buyers side UNLESS
the buyer is using more than 20% of its own stock to finance the deal.
Reverse Triangular Merger
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 Reverse Triangular Merger

The Bidder creates a subsidiary. The subsidiary pays the Target's shareholders and
receives the Target's shares. The Bidder then pays the Target's shareholders. Assets do
not move ANYWHERE. In fact, the subsidiary created by the BIDDER merges into the
TARGET.

Merger Agreement: the contractual agreement signed by both parties

Articles for Merger: what gets sent to the Secretary of State [of likely Delaware] AFTER
shareholders approve the merger
Schedule 14A: once the Bidder determines what they are doing next with the acquired target
(liquidating it, etc.) they must file this with the SEC
Form 15: what gets filed by the Bidder to end the trading of the Target's securities on the
exchanges, filed with the SEC
Fairness Opinions: generally focus on whether the deal is true to the corporation itself, not its
shareholders, required to protect management from being sued by shareholders
Short Form Merger:
When a shareholder vote is not required in a merger situation, in Delaware, the firm
must be more than 90% owned by insiders to be eligible.
Dissenting shareholders in a simple majority vote may file a suit only if the corporation does
not file suit to have the fair value of the shares determined, after having been notified of the
dissenting shareholders' objections.
Reverse Merger:
When a private company merges with a corporate shell that is public in order to
become public Avoids the IPO process and its expenses and lengthy process.
The private company also won't get screwed over by dilution, which can happen if an
IPO isn't priced correctly.
SPAC's [Special Purchase Acquisition Vehicles]
Companies that are designed to raise money via an IPO solely to be earmarked for
acquisitions, like the building of a private equity type fund on the public markets.
Shareholders usually have the right to reject proposed deals. In addition, if the
founders do not recommend a deal within a defined time period, such as 18 months, or
complete a deal within 24 months, the monies are returned to investors less expenses
plus a return earned in the capital. This contrasts with private equity investments,
where shareholders do not have to approve specific deals.

Control
However, it is not necessary to own all of a company's stock to exert control over it. In fact, even a
51% interest may not be necessary to allow a buyer to control a target. For companies with a
widely distributed equity base, effective working control can be established with as little as 10% to
20% of the outstanding common stock.
However, if the holding company owns 80% or more of a subsidiary's voting equity, the Internal
Revenue Service allows filing of consolidated returns in which the dividends received from the
parent company are not taxed. When the ownership interest is less than 80%, returns cannot be
consolidated, but between 70% and 80% of the dividends are not subject to taxation.
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consolidated, but between 70% and 80% of the dividends are not subject to taxation.

Mergers and Acquisitions Page 4

Ch. 2 History of Mergers

Sunday, April 24, 2016

3:19 PM

Waves
1897 and 1904
Mining and Manufacturing
Horizontal Mergers --> Monopolies
1916 and 1929
Oligopolies
1965 and 1969
Conglomerates: management has private interests in diversifying, less risk of company failure
as one division may support another in times of need. Most successful deals leave the Target's
management in place during a conglomerate merger.
Mergers for the P/E Ratio
EPS of the Higher P/E firm rise after an acquisition.
Another Tactic: Debentures
Acquiring firms would issue convertible debentures in exchange for common stock
of the target firm. This allowed them to receive the short-term benefit of adding
the target's earnings to its EPS valuation while putting off the eventual increase in
the acquirer's shares outstanding.
1984 and 1989
Megamergers
Corporate Raiders: goal was to profit off of takeover ATTEMPTS (deal doesn't need to close)
Lots of debt financing for deals
International deals
1990 and 2000
Roll Ups and Consolidation
Emerging Market Acquirers
2003 and 2007
Thriving Private Equity
Shocks that cause merger waves
Economic
Technology
Regulatory
Capital liquidity must also be there.

Mergers and Acquisitions Page 5

Ch. 3 Legal Framework

Monday, April 25, 2016

12:30 AM

4 Regulatory Categories:
Friendly Merger, Cash
The bidder is required to file a proxy statement with the Securities and Exchange Commission (SEC)
that describes the deal.
Usually, the bidder has to file a preliminary statement first. If the SEC makes comments, the
preliminary statement may be changed before it is finalized. The finalized proxy statement is then
mailed to shareholders along with a proxy card that they fill out and return.
Following this, the deal has to be approved at a shareholders' meeting, whereupon the deal can
then be closed.
Hostile Merger, Cash
The bidder initiates the tender offer by disseminating tender offer materials to target shareholders.
Such offers have to be made pursuant to the requirements of the Williams Act.
However, unlike the friendly transactions just described, the SEC does not have an opportunity to
comment on the materials that are sent to shareholders prior to their dissemination. The SEC may
do so, however, during the minimum offer period.
Friendly Merger, Stock
This process is similar to a cash-financed merger except that the securities used to purchase target
shares have to be registered. The bidder does this by filing a registration statement. Once this is
approved, the combined registration/proxy statement can be sent to shareholders.
Hostile Merger, Stock
The bidder first needs to submit a registration statement and wait until it is declared effective prior
to submitting tender offer materials to shareholders.
The SEC may have comments on the preliminary registration statement that have to be resolved
before the statement can be considered effective. Once this is done, the process proceeds similar
to a cash tender offer.
3 Categories of Law
Securities Law
State Corporation Law
Anti-trust Law
8K Form
Must be filled within 15 days of the acquisition of more than 10% of a target firm's assets
S1 Form
IPO filing form
S4 Form
If a Bidder is acquiring another company using stock, it must register the shares with this form. For
acquisitions using more than 20% of a Bidder's stock, the Bidder's shareholders must be given the
opportunity to vote.
Required to be sent 10 days in advance to the SEC before being mailed to shareholders
Williams Act [1968]
4 Goals
To regulate tender offers, specifically which were becoming more popular
To add disclosure requirements
To give shareholders enough time to make a sound decision
To boost confidence in the securities markets
Tender off must be kept on the table for 20 days minimum. No maximum period.
If shares are tendered by the target's shareholders, but a majority approval is not received, the
bidder can still buy the tendered shares. The bidder has 3 days to make this decision and act after
the vote has taken place.
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the vote has taken place.

Section 13D
"The Early Warning System"
Buyer must disclose if they hit a threshold of more than 5% of a target's common stock
Must be done within 10 days of hitting the 5% mark
Designed for shareholders more so than the corporation
Schedule 13G
For institutional investors, if they acquire 5% or more of a firm's shares, but less than 2% was
added to their books within the last 12 months
They are called "5% Beneficial Owners."
Must be filed on Valentine's Day, February 14th, each year.
Schedule 14D
Very similar to Schedule 13D, just an add-on
Was combined with Schedule 13D to created Schedule TO
Schedule 14D-9
What the target company sends to the SEC with either an "accept" or "reject"
recommendation for its shareholders
Tender offers begin at 12:01AM on the date that any of the below begins:
Publication of the offer
Advertisement of the offer
Submittal of tender offer materials to the target
Tender offer materials must arrive to shareholder desks within 5 days of the above.
Two Tiered Offer
An offer with a certain value for let's say 51% of the shares and a different value for the remaining 49%,
considered "coercive"
Wellman v. Dickinson
A U.S. court case that laid out 8 factors that define a tender offer
Court applies the "totality of circumstances" test
Would target shareholders be disadvantaged by lacking information should the procedures of the
Williams Act not been followed in this case? If yes, then it should be considered a tender offer.
S-G v. Fuqua
Defined a tender offer as existent if either of the below are met:
A bidder publicly announcing its intention to acquire a substantial block of a target's shares for the
purpose of acquiring control of the company.
A substantial accumulation of the target's stock by the bidder through open-market or privately
negotiated purchases.
Paying Agent: a financial intermediary that holds the stocks tendered until the deal closes
As stockholders seek to participate in the tender offer, they submit their shares to the paying agent in
exchange for cash or securities, in accordance with the terms of the offer.
Attached to their shares must be a letter of transmittal.
The agent accumulates the shares but does not pay the stockholders until the offer expires. In the event
that the offer is extended, the paying agent holds the shares until the new offer expires, unless instructed
otherwise by the individual stockholders.
The bidder may extend an undersubscribed tender. In fact, it is not unusual for an offer to be extended
several times as the bidder tries to get enough shares to ensure control. If the bidder decides to extend
the offer, it must announce the extension no later than 9:00 a.m. on the business day following the day
on which the offer was to have expired.
At that time the bidder must disclose the number of shares that have already been purchased. As noted,
shareholders have the right to withdraw their shares at any time during the offer period. The fact that
they originally tendered them in response to the offer does not limit their ability to change their mind or
tender these same shares to a competing offer after they withdraw them.
Amended Offer: any change made to the offer restarts the process for 10 days, even ADDING value to the offer
can be considered an amendment
Most offers have a stipulation that if successful, the bidder will re-elect a new board. The bidder can do this
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 Most offers have a stipulation that if successful, the bidder will re-elect a new board. The bidder can do this
without a shareholder vote if they hold 50% or more of the company.
Form 25
The bidder must file a Form 25 to end the sale of the target's securities on the open market
Multiple Offers and Timing
Bidder 1 sends an offer, waits 16 days.
Bidder 2 jumps into the ring on the 16th day.
Shareholders must be given at least 10 days to consider this second offer.
Therefore, Bidder 1's offer period gets extended naturally to 26 days total = 16 + 10.
Convertible Debt is considered equity for tender offer rules.
Business Judgment Rule (U.S.)
If a shareholder files suit against a company for not retrieving the full value of their investment, the
burden of proof shifts to the directors who must prove that the transaction was "entirely fair."
Unocal Standard
Reasonableness Test
An inadequate price is considered a danger to corporate policy. It would be reasonable here to
reject a takeover offer.
Proportionality Test
Any defensive actions taken by the board to rid itself of an offer must be proven to be
"proportional" to the scale of the danger to their corporate strategy.
Edgar v. MITE
Concerned an Illinois law that was extraterritorial in nature in that it permitted the state to block a
nationwide tender offer for a state-affiliated target corporation if the bidder failed to comply with the
disclosure laws of Illinois.
The government said this violated the interstate commerce clause.
Second Generation Laws
Mergers laws that hit the books as questions of constitutionality and shareholder fairness emerged.
4 Categories:
Fair Price Provision
Shareholders who decide NOT to sell must receive the same price as those who DID agree to
sell, an attempt to prevent two-tier offers.
Business Combination Provision
The bidding company cannot enter into business contracts with the target company for some
period of time; prevents leveraged buyouts from running rampant amongst low-risk capital
structure companies who can easily be extorted by private equity for their consistent assets.
Control Share Provision
Says that if a bidder starts creeping up in the percentage of stock it owns in a target, it must
gain the approval of other large block shareholders.
Cash Out Statute
If a bidder starts creeping up in the percentage of stock it owns in a target, it must finish the
entire entity purchase at the same price that it bought the original stock for; this prevents
companies from constantly creeping up the percent they own in another company because
they most likely don't have the capital on hand to buyout the whole thing at once.
Delaware State Anti-Takeover Law
The law stipulates that an unwanted bidder who buys more than 15% of a target company's stock may
not complete the takeover for three years except under the following conditions:
If the buyer buys 85% or more of the target company's stock. This 85% figure may not include the
stock held by directors or the stock held in employee stock ownership plans.
If two-thirds of the stockholders approve the acquisition.
If the board of directors and the stockholders decide to waive the antitakeover provisions of this
law.
Sherman Antitrust Act of 1890
Section 1: Prohibits contracts that restrain trade
Section 2: Prohibits industry monopolies
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Section 2: Prohibits industry monopolies

American Sugar Refining Company: a ruling that made the Sherman Antitrust Act useless for some time;
they effectively argued that all contracts could be considered a "restraint of trade;" the law needed
rewording
Clayton Act of 1914
No corporation shall acquire the whole or any part of the stock, or the whole or any part of the
assets, of another corporation where in any line of commerce in any section of the
country the effect of such an acquisition may be to substantially lessen competition or tend to create
a monopoly.
The law was later amended to include asset transactions as well, not just stock.
Celler-Kefauver Act of 1950
Hart Scott Rodino Antitrust Act [1976]
Size of Transaction Requirement
If the buyer is buying securities worth more than $75.9M, then they must file.
Size of Person Requirement
If one party has > $151.7M in assets and the other has > $15.2M in assets
The target must file a response within 15 days of the bidder's tender offer.
The Justice Department has 30 days to decide on the antitrust grounds of a merger for tender offers; just
15 days for asset transfers or all cash deals.
Exceptions to Hart Scott Rodino
If a passive investor holds up to 10% of a company solely as an investment
Convertible securities, options, and warrants are also exempt
Herfindahl-Hirschman (HH) Index of American antitrust policy.
The HH index is the sum of the squares of the market shares of each firm in the industry multiplied by the
number of firms market shares used in the valuation (ie. 8 firms).
Also need to consider whether or not post-merger both bidder and target can maintain their market
share's prior to the merger
Postmerger HH < 1,000
Unconcentrated market; should be NO anti-trust issue
1,000 < Postmerger HH < 1,800
Moderately concentrated industry; merger is safe if it doesn't increase the HH by more than 100
points
Postmerger HH > 1,800
HEAVILY concentrated industry; merger is safe if it doesn't increase the HH by more than 50 points
1984 Merger Guidelines
5% Test
Government would evaluate how impactful a 5% increase in an industry's prices would be after a
merger was completed.
Elasticity Test
Government would also evaluate elasticity.
e > 1 Elastic
Demand will decrease is the price goes up (consumer products).
e = 1 Unitary
e < 1 Inelastic
Demand won't change if the price goes up (life-saving drugs).
If demand is INELASTIC after a 5% change; the two merged companies gained greater market
power (people are still willing to pay after the price increase!)
1992 Merger Guidelines
5 Points of Governmental Consideration
Market Concentration
Competitive Effects
Barriers to Market Entry
Efficiency Gains/Losses
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 Efficiency Gains/Losses
Failing Firm Defense
Will the either party fail as a firm if the merger doesn't go through?
European Competition Policy
Merger Regulation
Adopted by the EU in 1989
Says the European Commission must approve megamergers in Europe
90% of mergers pass EC regulatory inspection
Collective Dominance
Reviews the impact that a merger has on competition within the EU
Market shares can be as low as 40% and draw scrutiny from European regulators; in the U.S.
market share is typically above 60% before the government steps in. Europe is stricter on
monopolistic control.

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Ch. 4 Merger Strategy

Monday, April 25, 2016

8:25 AM

M&A Motives
"External" Growth
Diversification
Industry Market Share Gain
International Growth
Breaking into a much needed foreign distribution network
Only a good idea if the firm is completely new to the market, else wise diminishing returns
of foreign acquisitions
Organic, internal growth is often to slow for companies to wait for.
Synergy
"2 + 2 = 5;" the sum of two factors is more than what their sums would be individually added up
Net Acquisition Value [NAV]
Va is the Value of Firm A
Vb is the Value of Firm B
P is the premium paid for B, the target
E are the expenses of the acquisition process
NAV = Vab - [Va + Vb] - P - E; or for example (see above) NAV = 5 - [4] - P - E
If NAV is positive, the firm's merger was a wise choice; if negative, they overpaid for the target.
Operating Synergy
Revenue Enhancements (hardest to achieve)
Combination of functional strengths (one firm's R&D with another firm's marketing)
Cost Reductions
Due to economies of scale, spreading overhead
Economies of scope, being able to provide more products and services
Financial Synergy
Lower cost of capital possible post-merger
Synergistic gains can be discounted to their present value.
Debt Coinsurance
The less correlated two firm's streams of revenues are, the lower the likelihood of bankruptcy.
Lerner Index
Looks at price and marginal cost
Lerner Index = P - MC/P
A way of measuring market power aka how a firm can keep prices high in the market
Market Power
3 Factors
Product Differentiation
Barriers to Entry
Market Share
Roll Up Acquisitions
When a growing company goes through a series of buying multiple small companies
Hubris Theory
Managers execute M&A for their own personal pride.
Winner's Curse
Happens in oil asset auctions, the winner gets screwed over by possibly overpaying for an asset
Redomicile Deals
When a merger happens so that the buyer an relocate its headquarters and change its tax structure

Mergers and Acquisitions Page 11

Ch. 5 Antitakeover Tactics

Monday, April 25, 2016

5:33 PM

Antitakeover Methods
Preventative Methods
Active Methods
Management Entrenchment Hypothesis
Managers defend against takeovers to solidify their positions of leadership.
Shareholder Interests Hypothesis
Companies with low bargaining power can improve shareholder gains by adopting antitakeover
measures.
Preventative Methods
Company Profile
Looks at the inner workings and likelihood of a corporate takeover
Need to analyze the "type" of shareholder base that a firm has
Institutional Investors
Hold the company's stock as an investment, may be interested in earning a
return from a takeover
Employees
Not likely to cede to a takeover
Poison Pills
Preferred Stock Plans
The first generation of poison pills.
Allows existing target shareholders to purchase more shares of the BIDDER company
at a discount; gives them an incentive to not go for the takeover
Flip Over
The second generation of poison pills
Instead of allowing target shareholders to buy more BIDDER shares at a discount,
the firm issues a "warrant" which doesn't mess with leverage calculations
Flip In
Only works if the bidder is acquiring 100% of the target
Instead of allowing target shareholders to buy more TARGET shares at a discount,
the firm issues a "warrant" aka a form of option which doesn't mess with leverage
calculations
Back End Plans
aka Note Purchase Rights Plans
Under a back-end plan, shareholders receive a rights dividend, which gives
shareholders the ability to exchange this right along with a share of stock for cash or
senior securities that are equal in value to a specific back-end price stipulated by
the issuer's board of directors. These rights may be exercised after the acquirer
purchases shares in excess of a specific percentage of the target's outstanding
shares. The back-end price is set above the market price, so back-end plans establish
a minimum price for a takeover.
Voting Plans
Under these plans the company issues a dividend of preferred stock. If any outside
entity acquires a substantial percentage of the company's stock, holders of
preferred stock become entitled to supervoting rights. This prevents the larger block
holder, presumably the hostile bidder, from obtaining voting control of the target.
The Numbers of a Poison Pill
Let us consider a very simplistic example of the mechanics of flip-in poison pills.
Assume that Corporation A makes a bid for Company B and the target has a poison
pill. Let us further assume that the pill has an exercise price (Pe) of $60, while the
target's stock price (Ps) is $10. Then the number of shares that can be purchased are
as follows:
Pe = $60 and Ps = $10, so the number of shares that can be purchased are
Pe/(Ps/2) = $60/($10/2) = $60/5 = 12 shares.

It is important to note that when the board sets the exercise price, often with the
assistance of a valuation firm, it is not putting forward an appropriate transaction
value of acquisition price. It tries to consider the long-term value of the stock over
the life of the plan. Often a range of three to five times the current value of the
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the life of the plan. Often a range of three to five times the current value of the
stock may be a norm, but it can be higher for growth companies and lower for
mature firms. So our example is of a firm that may be more growth-oriented.

Let us also assume that there are 1,000 shares outstanding (SO) prior to the bid and
that the bidder has purchased 200 of them, so the remaining 800 shares are not in
the hands of the bidder. Then the poison pill allows each of these 800 shares to be
used to purchase 12 new shares, for a total of 9,600 shares. If all of the warrants are
exercised, then the total shares outstanding will be 1,000 + 9,600 = 10,600 shares.
In this simplistic analysis the value of the target's equity prior to the exercise of the
warrants was $10 1,000 shares or $10,000. The exercising of the warrants adds to
this equity in the amount of $60 800 shares or $48,000. At this point total equity
capital is $10,000 + $48,000 or $58,000. There are 10,600 shares outstanding so the
per share equity value is $58,000/10,600 or $5.47.
The loss of the value of the shares to the control shareholder is as follows:
($10.00 $5.47) = 0.453 or 45.3%

The loss of the value of the shares does not fully capture the control shareholder's
total loss. In addition to losing a significant portion of the value of its shares, the
control shareholder has also lost a very significant amount of its control in the target
company. After the warrants are exercised, we have 10,600 shares outstanding.
Prior to the exercise of the warrants, the control shareholder owned 20% of the
company (200/1,000). After the warrants are exercised, this control shareholder
now owns 1.89% of the firm (200/10,600).
Poison Pills do NOT have to be voted on by shareholders to be implemented by a
company.
Chewable Pill: shareholders can mull the takeover deal over before enacting the
poison pill, prevents management entrenchment
TIDE: 3 Year Independent Director Evaluation Plan; poison pill plan must be
reviewed every 3 years by the firm's independent directors
Blank Check Preferred Stock
Used with a white squire defense
The target company is able to issue preferred stock to an outside investor not
interested in control, giving them additional voting rights, protecting from a
takeover
Dead Hand Provisions
Poison pills can only be deactivated by the target's board of directors that ENACTED
the antitakeover plan to begin with. Not liked by Delaware
Slow Hand Provisions
Poison pills can only be deactivated by the target's board of directors that ENACTED
the antitakeover plan to begin with for a certain period of say 180 days.
Shadow Pill
Bidders cannot know definitively whether a firm has an antitakeover plan in place;
ie. some firms have the ability via their corporate governance to wait for a takeover
offer and incite an antitakeover measure the very same day, effectively pop up
blocking it
Net Operating Loss Poison Pill [NOL]
NOL's are tax losses that can be used to offset other income in the future and lower
tax obligations. NOL's provide excuses for target management to reject a hostile
takeover offer. Effectively, these mangers have the "rights" to see out the
company's performance, protected against potential losses.
Triggered by an investor going above a 5% stake within a three year period
Corporate Charter Agreements
Supermajority positions
A supermajority provision provides for a higher than majority vote to approve a
mergertypically 80% or two-thirds approval. The more extreme versions of these
provisions require a 95% majority. Supermajority provisions may be drafted to
require a higher percentage if the size of the bidder's shareholding is larger.
Board Out Clauses
Allows the firm to cancel the supermajority provision, ie. if the firm
thinks the takeover value is actually a good offer, approval can be
dropped back down to 50+%
Mergers and Acquisitions Page 13

dropped back down to 50+%

Staggered boards
A normal direct election process provides for each director to come up for election
at the company's annual meeting. When a board is staggered or classified, only a
certain percentage, such as one-third, will come up for election during any one year,
so that each director is elected approximately once every three years.25 Staggered
boards require shareholder approval before they can be implemented.
Leaky Staggered Board
If the company's corporate charter implements a staggered board but
THEN also allows a new acquirer to ADD people to the board
Fair price provisions
A fair price provision is a modification of a corporation's charter that requires the
acquirer to pay minority shareholders at least a fair market price for the company's
stock. This may be stated in the form of a certain price or in terms of the company's
price-earnings (P/E) ratio.
Usually states that stockholders must receive at least the maximum price paid
by the acquirer when he or she bought the holdings
Dual capitalizations
Dual capitalization is a restructuring of equity into two classes of stock with different
voting rights. This equity restructuring can take place only with shareholder
approval.
Another example of a dual classification is the Ford Motor Company, which has both
Class A and Class B shares, with the Class B shares having 16.561 votes per share as
opposed to Class A shares, which have one vote per share. The greater voting rights
of the Class B shares allow those shareholders to command 40% of the voting power
in the company even though they own only 2% of the total shares issued.
Some shareholders seek financial gain and don't care about control, this is why a
dual cap might work for a company.
Corporate Charter v. Corporate Bylaws
Corporate Charter aka 'Articles of Incorporation'
Outlines company's "purpose" and the types of shares it will offer
Bylaws
Laid out by the Board of Directors, talks about company operations
Poison PUTS
Are an issuance of bonds that contain a PUT option exercisable only IF the takeover
actually occurs; remember, puts allow the owner of the option to PUT (aka force) the
security on someone else within a certain time period at a pre-designated price
The acquirer has to convince the bondholders not to exercise this option
Meetings of Shareholders
Unless there are specific restrictions in the corporate charter, most states require
corporations to call a special shareholder meeting if a certain percentage of the
shareholders request it. Such meetings may be used as a forum whereby insurgents try to
gain control of the company.
Some boards try to limit shareholder meetings to prevent things like poison pills from
being dismantled.
Golden Shares
Shares of a recently made private sector company that are owned by the government,
giving the government certain rights
Greenmail
Share repurchases of the bidder's stock at a premium
Targeted Share Repurchases, which is a general term that is more broadly applied to also
include other purchases of stock from specific groups of stockholders who may not ever
contemplate a raid on the company
One of the earlier reported instances of greenmail occurred in July 1979, when Carl Icahn
bought 9.9% of Saxon Industries stock for approximately $7.21 per share. Saxon
repurchased Icahn's shares for $10.50 per share on February 13, 1980.
Standstill agreements. These agreements usually accompany a greenmail payment. Here the
bidder agrees not to buy additional shares in exchange for a fee and usually cannot make a full
offer for the company for a certain amount of time (ie. 1 year).
Dont Ask, Don't Waive Standstills
Prevents the bidder in question above from doing an additional thing, submitting a
private proposal/bid to the board
White knight. The target may seek a friendly bidder, or white knight, as an alternative to the
hostile acquirer. White nights still have to offer more than the original hostile bidder and
oftentimes have to promise not to disassemble the company or lay target workers off.
Mergers and Acquisitions Page 14

oftentimes have to promise not to disassemble the company or lay target workers off.
White squire. The target may place shares or assets in the hands of a friendly firm or investor.
These entities are referred to as white squires.
Capital structure changes. Targets may take various actions that will alter the company's capital
structure. Through a recapitalization, the firm can assume more debt while it pays shareholders
a larger dividend. The target can also simply assume more debt without using the proceeds to
pay shareholders a dividend. Both alternatives make the firm more heavily leveraged and less
valuable to the bidder. Targets may also alter the capital structure by changing the total number
of shares outstanding. This may be done through a new offering of stock, placement of shares in
the hands of a white squire, or an ESOP. Instead of issuing more shares, some targets buy back
shares to ensure they are not purchased by the hostile bidder.
Litigation. Targets commonly sue the bidder, and the bidder often responds with a countersuit.
It is unusual to see a takeover battle that does not feature litigation as one of the tools used by
either side.
Pac-Man defense. One of the more extreme defenses occurs when the target makes a
counteroffer for the bidder. This is one of the more colorful takeover defenses, although it is
seldom used.
Incentives for White Nights and White Squires
Lockup Options
When the target leaves assets in the hands of a friendly squire, rather than stock.
Topping Up Fees
Aka Breakup Fees
When the target promises to cover the expenses of the bidder should the target not
follow through with the deal
Reverse Termination Fees
Allow the BIDDER to break up with the TARGET and walk away for a fee
No Shop Provisions
An agreement that the target will NOT actively solicit other bidders
Bustup Fees
Leveraged Recap
The firm substitutes a chunk of its equity for debt; stockholders receive 'stubs' which
represent their new share of ownership in the firm
Defeats hostile bidders; allows companies to act as their own white knight; by adding debt
to their capital structure, bidders become less interested; think of it like an internal LBO
Debt can come through a lender (bank) or the issuance of bonds but if it chooses to issue
bonds it will have to take the risk of waiting for the SEC to approve the bond issuance
Shelf Registration Rule
The SEC allows firms to plan ahead and gain initial approval for all bonds it
plans to issue within the next 2 years; some corporations "shelf" the potential
use of bonds for a leveraged recap in case they need it.
Scorched Earth Defense
If the firm goes through with a leveraged recap, and then can't pay down the new debt
they took on, they might go bankrupt.
Share Issuance Defense
By issuing more shares, the bidder is less able to gain majority control (there's more to
buy). Oftentimes, shares are issued right into a friendly person's hands, like a white
squire, further preventing the takeover.
Employee Stock Option Plan [ESOP]
Stock can be issued into an ESOP, employees generally don't want to be taken over.
Share Repurchase Defense
The company can suck back up the shares on the market, preventing the hostile bidder
from getting enough shares to have control.
Corporate Restructuring Defense
If the firm sells off massive amounts of assets, it is less attractive to a bidder.
Going Private
A drastic way to end a hostile takeover
Liquidation
Another drastic option
Litigation (Lawsuit Defense)
Targets first request an injunction to prevent the takeover from happening.
Just Say No Defense
Literally the target just says "No" publicly and sometimes the bidder walks away

Mergers and Acquisitions Page 15

Shareholder Wealth
Effects of Standstill
Agreements
From
<https://www.safaribooksonline.com/libr
ary/view/mergers-acquisitionsand/9781118997543/12
_chapter05.html>

Mergers and Acquisitions Page 16

Ch. 6 The Process of a Takeover

Tuesday, April 26, 2016

5:15 AM

Casual Pass
When a bidder tries to casually alert the target that they are interested in a deal
Toehold
The initial accumulation of the target's stock
Short Term Toeholds
Purchased less than 6 months before an offer
Long Term Toeholds
Purchased a long time ago, more than 6 months before an offer
Fiduciary Out Clause
Allows the target to still receive other bids (as they are required to in their responsibilities to
shareholders)
Bear Hug
When a bidder goes to the target and kindly threatens that the offer will be taken to
shareholders to vote on if it's not well received first by management; this move forces
management to respond publicly to the offer with a stance
Teddy Bear Hug
Doesn't include a set price but is made publicly known that an offer was made
Premium = Run-up of Stock (before the deal) + Markup
Bypass Offer
An "out of the blue" offer; no previous talks
8 Parts of a Tender Offer: Is it a Tender Offer?

Short Form Merger

If the bidder buys up a large enough chunk of the company, they can freeze out the
remaining shareholders.
Long Form Merger
When the bidder attempts to buy 100% of the stock with a single shareholder vote.
What is a Tender Offer?
When the bidder goes directly to SHAREHOLDERS for a vote, rather than management.
Tender offers have a speed advantage.
Can be a tender offer of either cash or stock, or a mix
If the bidder uses its own shares, it is called an exchange offer.
Double Barreled Tender Offer
Target shareholders are given the option of receiving cash or securities in exchange
for their shares
Mergers and Acquisitions Page 17

for their shares

4 Responses to an Offer from a Target
Recommend Accept
Recommend Reject
Neutral
Cannot take a position on the offer
Two Tiered Tender Offers
Aka a Front End Loaded tender offer
Superior Compensation for the early shareholders who tender
Inferior Compensation, what the late tendering shareholders get stuck with
"Coercive Offer;" forces shareholders to rush into tendering; prisoner's dilemma

Mergers and Acquisitions Page 18

Ch. 8 Wealth Transfer Effects

Tuesday, April 26, 2016

9:09 AM

Bondholders frequently claim to lose large sums of money after firm's go private (often through a
P/E firm's LBO), however, it is not statistically significant.
Covenant Agreements
Now, creditors ask for guarantees that their full principal will be returned to them in
the case of a buyout that lowered the value of their debt holdings.
Poison PUTS
Allows bondholders to sell the bonds/"put" the bonds back to the issuer at an agreed
upon price
Because the mega LBO has been around for some time now, risk premiums in
corporate bonds now account for the potential of bondholder loss through an LBO
deal.

Mergers and Acquisitions Page 19

Ch. 13: Corporate Governance

Tuesday, April 26, 2016

7:42 AM

3 Types of Businesses
Sole Proprietorships
Limited Partnerships
Corporations
Owners personal assets NOT at risk
Corporate Structure
Shareholders > Board of Directors > Management
Agency Costs
How motivated is management in making progress for shareholders?
Agency Costs are the costs that shareholders must bear if management is pursuing their
own self-interests rather than shareholder interests.
Compensating CEO's with stock options is one tactic to get around agency costs.
Golden Parachutes
The ability of managers at the target firm to negotiate their own special arrangements at the
post-takeover company alongside the actual merger talks
Prevents management from getting distracted by their own job security in the event of a
merger, they should be focused on getting the highest value for shareholders
Evergreen Agreement
Says that the term of the parachute is 1 year from the completion of the merger
Typical parachutes are a lump sum payment to managers in the event that they choose to
leave or are fired; either way they get money.
Rabbi Trusts
A special account set aside to prove to management that no matter what
happens after the merger, the money for their parachute will be there to
deploy.
Silver Parachutes
For lesser employees beneath top-tier management
Single Trigger Parachute
Kicks in with a change of control
Double Trigger Parachute
Kicks in with a change of control AND termination of a manager
Parachutes do NOT require shareholder approval
Golden Handcuffs
The belief that golden parachutes handcuff management to the company at the
expense of shareholders
Competition Effect
The higher the takeover threat, the less managers are paid statistically.
Risk Effect
CEO's who take more risks statistically are more effective in creating returns for
shareholders.
Interlocking Boards
When director's/CEO's sit on each other's boards
Inside Board v. Outside Board
Inside Board: members of the BOD who are also employees of the company
Outside Board: any member of the BOD who is NOT an employee
Bright Line Board Standards
Came into play after Enron's collapse
Says that a majority of the board must be 'independent'
Mergers and Acquisitions Page 20

 Says that a majority of the board must be 'independent'

Mergers of Equals
Two companies combining in a friendly deal that is the product of extensive negotiations
between the management teams of both companies and especially between the CEO's of
both firms

Mergers and Acquisitions Page 21

Ch. 15 Valuation
Tuesday, April 26, 2016

9:15 AM

TransUnion Pritzker Case (Smith v. Van Gorkom)

The courts decided that the board of directors was negligent in their
actions to arrive at a valuation of their own firm. They simply heard the
offer from Pritzker and accepted, even though they knew that Pritzker's
offer was still "at the low range" of what they might have been able to
receive. Found guilty of shareholder neglect.
Enterprise Value
Combined value of the claims of equityholders and debtholders
Both common and preferred equity are included in the equity value that
goes into enterprise value
DCF Analysis and Adjustments
2 Commonly Forgotten Liabilities
Unfunded Pensions
Contingent Liabilities
What is Free Cash Flow?
The money that is available to both debt and equity investors
after capital expenditures, ie. after the operating costs of the firm
to keep it running have been removed.
FCF = EBITDA - CapEx - Change in Working Capital - Taxes Paid
The higher the discount rate, the lower the present value of the cash
flows will be.
Cost of Preferred Stock
= (Annual Dividend)/(Net of Proceeds Value)
How to find Net of Proceeds Value?
Let us consider a firm that has issued 8% preferred stock with a
par value of $100. Let us further assume that flotation costs are
2.0% of the par value. This suggests a net of proceeds value of
$98.
CAPM
= rf + B(MRP)
= rf + B(rm - rf)
Leveraged Betas are calculated for multiple companies.
They include BOTH business risk and financial risk.
Bidder's Hurdle Rate
The rate of return that the bidder requires its investments to generate
Black Scholes Option Pricing Model [BSOPM]
Review online.
5 Major Inputs
Trailing Multiples
Based on historical analysis of earnings
Forward Multiples
Based on forecasts of future earnings
Float Shares
Determining market liquidity of a firm's shares, float shares are the
number of shares available for trading (aka not locked down, can be
potentially bought)
Because when an acquirer crosses the 51% threshold line they are given the
ability to control the company, they must pay out a control premium to get to
this point (51%).
Delaware doesn't view stock for stock mergers as changes in control,
therefore, control premiums are not necessary for stock mergers.
Cash offers are better for the acquirer in terms of valuation.
Stock financing tends to be used when the target is overvalued.
Exchange Ratio
The number of acquirer's shares that are offered for each share of the
target. A is the acquirer; B is the seller. An exchange ratio of 3 means
that a shareholder of the seller (B) will receive 3 shares of A for every
share it owns of itself, B.
ER = (Per Share Offer Price)/(Market Price of Acquirer's Shares)
Total Shares to be Issued = [(Offer Price)(Total Outstanding Shares of
Target)]/(Price of Acquirer)
Dilution of EPS
When a higher offer is made for a target, the BIDDER's EPS declines.
Also happens whenever the P/E of the Target > P/E of the Acquirer
How to find the highest offer price that won't dilute EPS?
Maximum Price without Dilution = P'
P/E Ratio PAID (X) = (Target EPS)/(Per Share Offer Price)
Solve:
X = (P')/(Target's EPS)
Breakeven Point of EPS
Premerger Bidder EPS = m
Mergers and Acquisitions Page 22

PREMIUMS AND MERGERS OF EQUALS

From <https://www.safaribooksonline.com/library/view/mergers-acquisitions-and/9781118997543/24
_chapter15.html#c15>

Premerger Bidder EPS = m

Postmerger Bidder EPS = n
G = GDP Growth Rate
g = Firm Growth Rate
m(1 + G)^t = n(1+g)t
How much will EPS change by?
The larger the gap between the EPS's of the Bidder and Target, the
higher the increase in the EPS of the bidder.
The larger the gap between the EARNINGS of the Bidder and Target, the
bigger the increase in the EPS of the bidder.
Postmerger Stock Price Calculation
X = (P)/(EPS)
P = Postmerger Stock Price of BIDDER
Bootstrapping EPS
Mergers bring the EPS of the bidder up.
Value of TARGET
B = Bidder
T = Target
Value of Target = (Shares of T)*(Exchange Ratio)*(Value of B Shares)
Value of BIDDER
Value of Bidder = (Shares of B)*(Predeal Value of Bidder Shares)
Combined Value of Postmerger Equity
= Value of Target + Value of Bidder (see above)
Collar Agreement
As stock prices change within the predetermined minimum and
maximum range, the exchange rate to be applied also fluctuates.
Domestic Market Flowback
When target shareholders of different continents (in a foreign deal, ie.
U.S. and Britain) sell off large amounts of the bidder's stock (foreign
stock to them), causing the bidder's price to drop. The U.S. investors
actively "flowed back" to their domestic market, where they feel the
most confident in their investment. In this case, the bidder would be
British.
Minority Discount
The value that minority holders lose out on since they have less control
than the majority owners.
MD = 1 - [(1)/(1 + Average Premium)]

Mergers and Acquisitions Page 23