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Bid Tactics

5 chapters

Bid Tactics

An immediate critical decision has to be made about the absolute maximum price to be paid for the acquisition at the start of the takeover process.

An immediate critical decision has to be made about the absolute maximum price to be paid for the acquisition at the start of the takeover process. A sensible price leaves a positive net advantage of merging (NAM) to the acquiring firm. The value a buyer will be prepared to pay is based upon realising benefits against the costs of the acquisition. Although the costs are well known, there is less certainty as to the value of (and the ability to realise) the benefits. The value of the acquisition will be a combination of relatively safe existing asset value (tangible and intangible assets) together with an element derived from these assets of future predictable cash flows. In order to realise a positive NAM, the acquirer will need to realise value enhancements. These will include the private benefits that the acquiring firm may be able to make from scale and scope economies, synergies and market power

This section takes a look at the basic offensive and defensive tactics. In a bid situation, there are many different possible scenarios for the acquirer and the target. First, the bid can be either friendly, where the two sides negotiate on the terms and price, or unfriendly, where the bidder makes a hostile grab for the target. Second, a number of different mechanisms for taking control of the target exist. A general framework for understanding the choices is given in the Figure. Note that the range of choice is likely to be jurisdiction specific.

The key element for an acquirer is whether to seek a negotiated acquisition or to go hostile and forgo the possibility of negotiating an agreement. This is matched by the possible reactions of the target: whether to agree to a negotiated settlement or whether to be hostile to the approach. If the target’s board is hostile, then a bidder can try to force negotiation through a bear hug. That is, the bidder makes an offer designed to force the target’s managers into having to consider the offer rather than simply turn it down out of hand – and hence they are forced to discuss the merits of the bid. Or a bidder can simply opt for a hostile approach right from the start. In practice, many mergers are agreed by both sides.

Given the issues raised in the previous section, it makes sense for an acquirer to get the target management on their side. If they recommend the takeover, then the target firm’s shareholders are likely to endorse the proposal. If, on the other hand, for some reason the target managers are hostile to the bid, the acquirer can go over the management’s head and appeal directly to the target firm’s shareholders. This can be done in two ways. First, the acquirer can seek the support of target firm’s shareholders at the next annual general meeting (AGM) to replace the management.

This approach involves mobilising shareholders to vote in favour of the acquiring company in a process known as a proxy fight. That is, they obtain the right to vote someone else’s shares. The evidence suggests that holding a block of between 20 and 30 per cent of the votes would give effective control. Such battles are expensive and, in the past, have proved difficult to win. But where the company is protected by takeover defences, getting share-holders’ cooperation may be the only way forward.

The types of defences firms create are discussed in a later section. The second way of bypassing the target firm’s managers is to bring the takeover Offer directly to the target’s shareholders. In this case, the management of the target firm may either advise its shareholders to accept the offer or they may elect to fight the bid. Note that, in fighting, the target managers may not be acting in the best interests of shareholders who might stand to gain more from the deal going through than by its being rejected.

The One of the characteristics in any takeover is that both sides will use investment banks, brokers, accountants, public relations specialists and other professional firms to advise and assist their aims. They will be employed in helping speed the transaction. For instance, investment banks often prepare the bid documents on behalf of the acquiring firm. They will also be involved in advising on pricing, in terms of both the offer terms and the value of the target as an acquisition. As mergers and acquisitions involve complex legal, regulatory and compliance issues, firms will also seek guidance in these matters. As the bid process is dynamic, and requires strategies to achieve the desired result, advisors will be intimately involved in the strategies and tactics. Ultimately, they may be called upon to help finance the deal, if successful.

Regulation of takeovers takes two forms. There is the effect on competition or anti-trust, which is a public policy issue. Most countries have laws that prevent firms simply establishing monopolies through acquiring competitor firms. The other area is merger process regulation, which governs how bids can be mounted – and defended. This is the domain of securities regulation and company law.

Different companies expect different results from acquiring a company and basically their bids depend upon the expected synergies, and we have already discussed offensive and defensive tactics used in bids.