Updated: Jun 21, 2020
Before getting into the crux of this short article, if you’ve not read Part 1 of Investing 101: Mergers and Acquisitions, click on the link and give it a read first! Also, feel free to subscribe to email updates at the bottom of this page. It means that you’ll be sent posts from The Student Investor automatically as soon as they’ve been published.
Now that we’ve got all that stuff out of the way, in this post, we’re going to be discussing whether all mergers and acquisitions (M&A’s) are friendly, and if not, why? So, get those shin pads ready because this is (maybe) going to get hostile…
When companies merge, or when one company acquires another, the process can be cordial, peaceful, and easy. However, without a doubt, it can also go sour very quickly. Although the end goal and result is always the same (in that two previously different and separate entities come together and combine into one entity), it can either be a very easy process, or a very, very, messy one.
In a friendly merger, the two companies work together. Taking a current M&A deal as an example, Peugeot are planning to merge with Fiat Chrysler, another automobile company. In a friendly merger, both Peugeot and Fiat would work together – their merger is agreed and approved by both companies’ board of directors, because ultimately, they both agree that the merger and acquisition is beneficial for both parties and their respective shareholders.
There has been significant academic research into the dynamics of an M&A transaction, and, coming as little surprise, it has been proven that friendly mergers are more likely to bring about positive change and growth than hostile takeovers – (Wow, absolute shocker). In short, people who actively want and choose to work together are more likely to have success than employees who are forced to work together.
On the other hand, a hostile takeover is generally opposed by the target company’s board of directors. What this means is that, if, for example, Tesco (the acquiring company) were to want to acquire Curry’s/PC World (the target company), in a hostile takeover, the latter would be opposed to this deal. This could happen for several reasons. Perhaps, if Tesco wanted to improve their electronic department, they’d buy Curry’s/PC World to do so. However, the management at the latter would be against the deal, because there would be a possibility that they’d lose their jobs. Tesco may just buy Curry’s and use all of their products, but get rid of all the staff!
*Please note that the Tesco/Curry’s PC World example is not real – they were the first two retail firms that came to mind!*
If this happens and the target company do oppose the M&A, there’s a lot of mess, because the acquiring company has to gain control of the target firm to get it to accept the deal. So, in a hostile takeover, the following can happen:
The acquiring firm can make a Tender Offer
A tender offer is a public offer to buy shares in the target company at a fixed price (which is significantly more than their current market price). If a sufficient number of shareholders agree to sell (tender) their shares (usually needs to be 51% of all shareholders), the acquiring company can legally take control over the company, remove its board members, and replace it with its own management team. Pretty brutal, eh?
Tender offers are always good news for the shareholders of the target company, because usually, a tender offer = a great increase in stock price, to reflect the value of the tender offer.
N.B. Even though there is no guarantee that the tender offer will be successful, it may lead to a bidding war. This is because if other companies know are aware that a tender offer has been made, they may believe that the target company is vulnerable, and so may make an offer for it themselves.
2. Proxy Fight
While a proxy fight differs from a tender offer, the end goal is exactly the same – to seize full control of the target firm, so that the M&A transaction can be processed successfully. In a proxy fight, the acquiring company will seek to undermine the leadership of the target company by getting its shareholders to proxy vote – i.e. in the example above, Tesco would get the shareholders of Curry’s/PC World to vote out their existing Board of Directors and Management Team, which in turn would allow them to vote a management team that is amenable to being acquired. With proxy authority, the acquiring company could take control of the target firm, replace its management team with its own, and thus approve the merger resolution. It is not an easy process, and it’s extremely messy and hostile, but it can work. A real-life example is that of Weyerhaeuser’s acquisition of Willamette Industries in 2002. After Willamette twice rejected two previous friendly offers to be acquired, as well as two tender offers, Weyerhaeuser managed to take control of the target firm’s Board of Directors via a proxy fight, some four years later.
In the next article, we’ll be looking at ways that target companies can defend themselves from being taken over in a hostile manner. It’s going to be a busy and exciting few weeks ahead for The Student Investor, so get into that festive feeling by making sure to subscribe below to find out more!