corporate and investment...

Corporate and Investment Banking

Lecture 4.1 – M&A Tactics

1

M&A Tactics

Art or Science?

Hostile

Shareholder Activism

2

M&A Tactics

Hostile M&A

3

Hostile M&A

Hostile M&A is really only possible in public M&A situations

As a bidder in a private sale process, there are opportunities to exert pressure on a seller, but

truly hostile bid tactics are the preserve of public M&A

Hostile M&A comes in many forms, but at its core involves making an offer to public

shareholders (formally or informally) that bypasses the target’s management or board

Exerting pressure through publicity has become an increasingly common tactic in recent years

4

‘01 – ‘16 YTD EMEA M&A Volume Friendly vs. Hostile Transactions ($bn)

98.5% 98.3% 98.4%

91.2%

98.4% 98.1%

94.7%

99.6% 99.7% 100.0% 99.8% 100.0% 99.7% 99.1% 99.9% 98.5%

1.5% 1.7% 1.6%

8.8%

1.6% 1.9% 5.3%

0.4% 0.3% 0.0% 0.2% 0.0% 0.3% 0.9% 0.1% 1.5%

651 566 556

778

1,062 1,482 1,607 1,056

499

694

770 776 705 959

1,146

728

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016YTD

Friendly Hostile Total Volume

Source: Thomson Reuters and Mergermarket as of 27 September 2016.

Hostile Pros and Cons

Hostile

Advantages

Can acquire a target against the management’s wishes

Seizes PR initiative

Greater control over timing of announcements and

offer timetable

Disadvantages

Possible reputational damage to offeror

Higher risk / uncertainty

target incentivised to seek alternative solutions (i.e. white

knights)

No due diligence access or co-operation with respect to

regulatory issues

Greater costs

Higher premium likely

Unwanted press attention

Unlikely to close early in 60 day timetable

Institutional shareholders can be averse to hostile bids

Cannot implement via a scheme of arrangement

Friendly

Advantages

Friendly and recommended by the board

Board support may reduce likelihood of counter bid

Greater level of due diligence possible

Ongoing co-operation from management

Traditionally lower premium

Likely to run to shorter bid timetable

Board irrevocables

Possible to implement via a scheme of arrangement

Possible to address any regulatory / anti-trust issues with

co-operation of the Offeree

Disadvantages

Risk of leak

‘Cost’ of board recommendation and support

Management control of enlarged group may

be compromised

5

Usually initiated by a

call to the Chairman

(or CEO)

Followed by an offer

letter

Can be helpful to

have meeting with

the potential bidder

(may be through

advisers) to get

clarity on offer

terms

Value and

assumptions

Deal structure

Diligence

requirements

Confidentiality

Financing

Intentions for the

business

Financial adviser to

assist with

evaluation of offer

terms and provide

advice on

recommendation

Private

Approach Made

to Target Board

Meet to Clarify

Terms

Announce

Offer

Reject

Bidder

Options

Target

options

Board to Consider

Terms

Accept Key

Terms

Due

Diligence

Walk Away

Go Public – Bear Hug

Hostile Bid

Improve Terms

Reject – ‘Just Say No’

Seek White Knight

Other Defence Options

Seek Improved Terms

1

2

3

Typically a potential bidder will seek to engage with the target board in private in order to secure a

recommendation before considering other tactical options

Approach Tactics: Key Steps and Options

6

Private Approach

Seek Board

Recommendation

Public Statement and Engagement with Shareholders – ‘Bear Hug’

Short Announcement

of Interest / Rejection

Fuller

Announcement of

Intentions e.g. Price

Full Announcement

Subject to

pre Conditions

Majority of bids initiated

via a private approach

1

Go Hostile

Launch

Unrecommended

Offer

Launch Hostile Offer

3

May be triggered by

a leak

/

/

/ /

/

/

/

Decision to go public

2

Approach Tactics: Spectrum of Potential Approach

Strategies

7

/

Strategies to Avoid Being Targeted

Peer and Sector Review

Declining valuation metrics, “missing the numbers” or other signs of financial weakness (particularly as compared to peer) should prompt immediate focus on rectifying financial performance

Focus on short and long term shareholder value

Waiting for the sector or economic conditions to improve is unlikely to be sufficient

Review of Investor Base and Trends

Monitor investor base

Monitor actively trading volumes and ownership trends

Keep track of equity, debt and convertible securities holders

Maintain a proactive and constant dialogue with all investors/classes of investor

Tailor presentation and messages to hedge funds

Engage in dialogue with equity advisory services (when appropriate)

Keep credit rating agencies informed

Actively build-up supportive shareholder base

Capital Structure and Distribution Review

Optimize capital structure and cost of capital

Historically, share repurchases and increased dividend

Now, focus on financial stability and size

8

Strategies to Avoid Being Targeted (Cont’d)

Portfolio Optimization

Evaluate regularly whether mix of businesses and activities is optimized

Focus on core competencies

Monetize low growth assets

Highlight value of high growth assets

Review Takeover Defenses

Review the strategic and financial alternatives on a regular basis

Review Business Plan, operating performance and competitive positioning

Have up-to-date structural defenses available, where allowed

Maintain an open shareholder dialogue

Ensure Supervisory Board / Non Executive Support

Supervisory board/non-executive support is important

A supervisory board that is used to be involved in the company’s affairs is more likely to support

management in a crisis than a pure “ceremonial board”

9

Defense Tactics

10

Preemptive Reactive

Anti-takeover Amendments (Shark repellents)

Charter changes that aim at limiting a Bidder’s ability to get the

control of the Target, e.g.:

Staggered boards

Fair price provision

Super-majority provision

Dual class recapitalization

Restructuring

Divestures and break up transactions: sale of “crown

jewels”

Acquisition of undesirable assets

Share repurchase or leveraged recapitalization to increase

the leverage of the Target to intolerable levels for the

Bidder

Golden Parachutes

Provisions that generously compensate the top managers in

case they are fired after a change in control

Greenmail

The Target repurchases its shares from the Bidder at premium,

in exchange for the Bidder’s agreement not to make an hostile

bid over a given time span

Labor Agreements

Union representatives might be part of the board of directors.

Since hostile takeovers typically result in downsizing the Target,

labor representatives are likely to oppose an attack

White Knight

Friendly Bidder to contrast the hostile bid

White Squire

Company purchasing a block, without gaining control

Poison Pills

Issuance of securities to make costly and difficult to gain

control of the Target

Pac-Man

The Target launching a counter bid on the Bidder

Poison Puts

Covenants that grant bondholders the right to sell Target

bonds at par (or even above par) in case of a change in control

Litigation

Case Studies

Olivetti Takeover of Telecom Italia (1999)

Defense plan not approved at shareholder meeting. The Italian Government didn’t use its “golden” share

with veto power

White knight (Deutsche Telekom) not successful

Olivetti ultimately purchased 52% of Telecom Italia’s voting shares at a cost of €31bn

Vodafone Takeover of Mannesmann (2000)

It was an hostile takeover but the merger was backed in a private deal. The Mannesmann board agreed

to an increased offer of £112bn, then the largest corporate merger ever

Never before in Germany had a large company been acquired by a foreign owner

Total Takeover of Elf Aquitaine (2000)

Elf Aquitaine counterbid (Pac-Man defense strategy) – but institutional investors strongly preferred

Total’s deal

11 Source:Kruse, T., 2005. Ownership, Control and Shareholder Value in Italy: Olivetti's Hostile Takeover of Telecom Italia. ECGI - Finance Working Paper

No. 83/2005 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=728284; http://www.nytimes.com/1999/09/21/business/a-french-concoction-totalfina-s-

acquisition-of-elf-may-be-only-a-prelude.html?pagewanted=all&src=pm; http://news.bbc.co.uk/2/hi/business/445868.stm

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=728284







M&A Tactics

Shareholder Activism

12

Hostile - Shareholder Activism

Shareholder Activism: a way in

which shareholders can assert their

power as owners of the company

to influence its behavior

Source of monitoring of managers

and/or blockholders (principal-agent

relationship)

Shareholder Activist: a

shareholder who attempts to use

his or her rights as a shareholder of

a publicly-traded corporation to

bring about social change

13

Who are the Activists?

Types of Shareholders

Large Shareholders

Individual Shareholders

Institutional Shareholders: banks, insurance companies, retirement or pension

funds, investment advisors

The Old: Defensive Activism (ex-post): the investor disagrees with managers’

decisions and reacts to protect or enhance the value of pre-existing holdings (i.e.:

Reluctant Activist)

Traditional Institutional Investors as mutual and pension funds (e.g.: CalPERS,

CalSTRS)

The New: Offensive Activism (ex-ante): specialized activists, lacking a sizeable

stake in the target, build up one “offensively” with the intention of actively prompt

changes to maximize their investment return

Specialist Activists and Activist Hedge Funds (e.g.: Knight Vinke Asset

Management, Hermes Fund Managers TCI, Cevian, Icahn Partners)

14

Can activism deliver over the long-term?

Total Return S&P 500 Index vs. S&P US Activist Interest Index(1)

US companies targeted from activists have consistently outperformed the market

15 Source: Bloomberg as of 27 September 2016. Notes: (1) The S&P U.S. Activist Interest Index is designed to measure the performance of companies

within the S&P U.S. BMI that have been targeted by an activist investor within the last 24 months.

(1)

0

100

200

300

400

500

600

Sep 2006 Mar 2008 Aug 2009 Jan 2011 Jun 2012 Nov 2013 Apr 2015 Sep 2016

Ind

ex

Re

bas

ed

to

10

0

S&P 500 Index S&P US Activist Index

`

Range of Activist Shareholder Objectives

TUI (Wyser-Pratte)

Curanum (Wyser-Pratte)

Cadbury Schweppes

(Nelson Peltz)

Valora Holding (Golden

Peaks Capital, Pictet-Fund,

3V Asset Management)

Minerva (Kifin)

HSBC (Knight-Vinke)

TUI (Wyser-Pratte)

Freenet (Various)

Sainsbury (Tchenguiz)

Lagadere (Wyser-Pratte)

Techem (Various)

Cumerio / Norddeutsche

Affinerie (A-Tec)

ABN Amro (TCI)

Wyevale (Laxey)

Philips (Jana Partners, D.E.

Shaw Group)

Deutsche Borse (TCI,

Atticus)

Deutsche Borse (TCI,

Atticus)

BA-CA (Various)

HVB (Various)

Dis Deutscher Industrie

Service (Various)

Wella (Various)

Monetise

other Assets

Frustrate M&A

Capital

Measures/

Integration

Influence

Takeover

Outcome

Fair Takeover

Compensation Sell Company

Change

Management

Team

Break-up

Old Mutual (Cevian)

ENI (Knight-Vinke)

Elan (Cabtree)

Mitchells & Butlers

(Piedmont)

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Increase

Capital

Distribution

Influence

Decision Making

Process

Stages of Shareholder Activism

Private Correspondence

with Board

Activist funds typically have team of ‘analysts’ reviewing undervalued companies

Many will take significant time to get to know business and perceived opportunity

Initial Acquisition

PR Campaign

Requisition EGM

Litigation

Identification of Target

Activist investor takes initial position in target – typically 5% - 15%

May choose to build over time or buy in one block

Share price may react strongly to presence of investor on the register

Investor seeks meetings with key management / board figures to discuss perspectives on business

Frequently also send ‘formal’ letter to board setting out perceived short-comings in current

strategy and suggested improvements

Starts with mere presence on the register, particularly for the well-known funds

Will be ratcheted up depending on progress with the Board

Leaks / press briefings or ‘open letter’

Likely to be coordinated with approaches to other key shareholders

Rights to requisition EGM common to most markets

Typically seeks to place representation on the Board (or remove

existing board) rather than requiring specific action

Typically dependent on gaining support of majority of

shareholders who vote

Much less common in European situations than in

the US

Lack of poison pulls, no-jury trials, potential

for award of costs

17

Shareholder Activism in Europe is Here to Stay

18

Background

Traditionally, activism has been seen as a US Phenomenon, with European Investors tending not to intervene in the running of their portfolio companies

While EU legislation is creating a common base of applicable laws and regulations, historically some jurisdictions have had very different starting places to the US in

terms of

Board structure

Availability of, and appetite for, litigation

Shareholder based (including cross-holding structures)

Political and market environments

Primacy of shareholder value

However, the activist model is taking root in Europe and institutions such as ISS are becoming increasingly important in determining the outcome of shareholder

campaigns

The market in Europe has evolved, with shareholder activism now recognised as a legitimate economic activity which can, in some cases, be beneficial for companies

and shareholders as a whole

A shareholder prepared to challenged an incumbent board of a European company will find a range of tools at its disposal and increasing support and engagement of

‘vanilla’ investors

Some Recent Examples

Shareholder activism has been a common phenomena in the US for some time. US funds are

now looking to Europe – as demonstrated by Elliott with Actelion (as well as Danisco and

National Express).

Minority Rights

19

UK Germany France Italy Spain

Disclosure

Threshold

3%

But in practice 212

notices out investor

earlier

3% 5%

Specific company by-

laws, often 1% or even

below

2% 3%

Power to

call EGM

10%

Board has to fund

circular to all

shareholders

5%

AoA may provide for a

lower threshold

10% 10% 5%

Blocking

Thresholds

25% for special

resolution (changes to

articles, schemes,

share capital)

50% for ordinary

25% for special

resolution

50% ordinary

resolutions provided

that AoA do not

provide for different

majority

33% for special

resolutions

50% for ordinary

>1/3 of votes in EGM

50% for ordinary

33% for special

resolutions

50% for ordinary

Marketing

Bid Level

30%

Bid price equal to or

greater than highest

price paid in past 6

months

30%


greater than weighted

average price over

past 3 months

30% (new regulation

being implemented)



price paid in past 12

months

30%



price paid in the past

12 months

30%



price paid in the past

12 months

Election/

De-selection

of Board

50% Supervisory Board is

elected by the general

assembly with > 50%

Members of

Supervisory Board

may be dismissed by

general assembly with

> 75%

Simple majority (i.e.

50%) but by-laws often

introduce specific

procedures

50% Simple majority (i.e.

50%) but by-laws often

introduce specific

procedures

Corporate and Investment Banking

Lesson 4.2 – Contract Negotiation

20

Contract Negotiation

Sales and Purchase Agreement

Due Diligence Process

21



22


Legally binding contract between the acquiring and selling parties. It is subject to

conditions such as shareholder approval

The contract can take the form of a stock purchase agreement, asset purchase

agreement, tender offer document, or merger agreement

The SPA is a risk management device focused on the completion of the transaction

Therefore it may not include further details such as synergies, plans for

integration, governance and organization, etc.

23 Source: Bruner, 2004. Applied Mergers and Acquisitions. Wiley Finance: chapter 29

Key Sections in Purchase and Sale Agreements

Section Highlights

Execution

Provisions

Details the structure and mechanics of the transaction

Specifies purchase consideration amount and form (e.g. cash, stock, or mix)

Purchase Price Adjustments clauses

Representation

s and

Warranties

Details exactly what is being bought and sold, and its condition

Seller represents that it has clean title to (i.e. ownership of) the property being sold

Outlines each parties' ability to act

Covenants

Agreements to take (or not to take) certain actions between signing and closing

For example, covenants define who must seek regulatory approval

Requires the seller to operate the business as normal and not impair the business by firing employees, for

example

Conditions to

Closing

Conditions that must be met before closing can take place, such as regulatory approval, shareholder

approval

Termination

Provision

Conditions upon which the transaction may be terminated, such as a higher bid received by the seller or

the buyer's inability to secure financing

Break-Up Fees Specifies the amount that must be paid by the seller (buyer) to the buyer (seller) if the seller (buyer)

terminates the transaction


Purchase Price Adjustments

Type Comments

Working Capital

Adjustments

Most important for financial buyers who are trying to arrange financing and where working capital may

impact the credit statistics

Detailed adjustments are often made in working capital-intensive and/or seasonal industries, such as

retailing

Negotiation of working capital adjustment clauses centers on establishing the appropriate target level

of working capital

Net Debt

Adjustments

When net debt is to be assumed by the buyer, it is important to define how net debt is calculated and

determine how much debt is expected to be on the balance sheet at closing

Define whether the price is defined in terms of enterprise value or equity value

Define whether cash flows of the business between signing and closing are allocated to the buyer or,

more typically, the seller (important in businesses that are cash flow negative)

Operating Metric

Adjustments

Occurs where an acquirer insists on an adjustment to reflect business performance between signing

and closing - Especially true in situations where there is uncertainty as to the underlying business

performance or the financial estimates in use

E.g.: If an acquisition and the related financing is made on the basis of an EBITDA multiple, the

buyer may want to be able to adjust the purchase price to reflect any deterioration of the

business


Covenant Categories

Category Comments

Operation of

Business

(handcuffs)

Regulate the operation of the business for the purpose of ensuring that the buyer gets the business in the form and

condition it expects

Adjustments for capex and management of cash flows are generally tied to the purchase price adjustments in the

execution provisions

In general, the seller agrees to operate the business in the "ordinary course", limiting the target's ability to make

acquisitions or dispose of assets between signing and closing

In general, the seller agrees to refrain from undertaking certain actions specified in the contract, e.g.: terminating

employees

"Efforts"

The seller and buyer agree to use certain "efforts" to complete the transaction: this can range from "best efforts" to

"reasonable efforts"

There is often a specific regulatory efforts covenant which commits the buyer and seller to jointly work towards

obtaining the necessary regulatory approvals

Financing

If the buyer needs financing, the agreement may contain a specific covenant for the buyer to take certain efforts to

obtain the financing

Together with the "efforts" clause, this clause may determine the specific level of the commitment required of the

financing (e.g. fully committed, best efforts)



Due Diligence Process

27

Due Diligence Definition & Principles

Definition

An investigation or audit of a potential investment. Due diligence serves to confirm all material

facts in regards to a sale

Generally, due diligence refers to the care a reasonable person should take before entering into

an agreement or a transaction with another party

Principles

Avoid a compliance mentality and adopt an investor mentality (look at the risk-return trade-off )

Due diligence is a risk management device

Narrow- vs. Broader-scope due diligence: risk bearing is always costly

Broader-scope Due Diligence: Yields the basis for thinking like an investor. Focus mainly on wise

acquiring rather than on legal issues. (Higher cost of the due diligence, but lower risk surprise

now)

Narrow Scope Due Diligence: Focus mainly on the legal and accounting issues to get the deal

done. Should be bundled with other risk management devices. (Lower cost of the due diligence,

but higher risk surprise later)


What to Look for in a Due Diligence

Legal Issues Accounting

Issues Tax Issues

Information Technology

Risk and Insurance

issues

Environmental issues

Market Presence and Sales issues

Operations Real and Personal

Property issues

Intellectual and Intangible

Assets Finance

Cross-Border issues

Organization and Human Resources

Culture Ethics


Due Diligence Process: Timing

Due Diligence over the Life Cycle of a Deal


Focused on public

data. Very small

team. Due diligence

oriented toward

strategic or financial

benefits of a

combination

Focused on public

and some target

private data. Team

grows to include

important outside

advisers and some

integration

managers. Aims to

advise LOI

negotiators, and plan

detailed due

diligence

Focused on target

private documents as

requested by buyer.

Target provides data

room. Aim is to

support negotiators

in their preparation

of price,

representation and

warranties and other

final terms.

Focused on target

documents, field

visits, interviews,

consultants’ reports.

Very large team. Aim

is to test

representations and

warranties in

advance of closing,

and prepare for

post-merger

integration

First Proposal Letter of Intent Deal Contract Signed Closing

Due Diligence Process: Team

Attorney, general corporate review

Attorney, tax specialist

Attorney, regulation specialist

Attorney, risk management specialist

Attorney, environment specialist

Attorney, intellectual property specialist (e.g.: patents)

Attorney, pension and benefits specialist

Accountant, general audit

Accountant, tax specialist

Accountant, internal reporting

Consultant, information technology specialist

Buyer employee, information technology specialist

Actuary

Buyer employee(s), human resources, compensation, pension, benefits, and training

Consultant, human resources, compensation, pension, benefits, and training

Buyer employee, risk management specialist

Consultant, environment risk assessment specialist

Buyer employee, environment risk assessment specialist

Buyer employee(s), marketing and sales

Buyer employee(s), operations

Buyer employee(s), post-merger integration specialist

Buyer employee, cash management

Buyer employee, finance and valuation

Consultant, solvency analysis and credit analysis

Consultant, business forecast and operations

Consultant, real and personal property appraisal

Consultant, valuation specialist

Hypothetical Due Diligence Review Team


Due Diligence Process: Outputs

Primary work papers and other resources

These are the raw material of the diligence effort (i.e.: list of records checked, work papers

and notes from the checking process, transcripts and audiotapes from interviews,

videotapes from field visits and inspections, photographs, etc.)

Summaries by specialists

In each of the areas of focus a specialist should be tasked with preparing a summary of

findings

Diligence synthesis

Technical overview of the entire due diligence effort usually written for the benefit of

negotiators, and to combine the specialists’ findings for possible future reference

Integration recommendations

Recommendations for integration planners, that begin their work after the signing of the

definitive agreement and draw on the findings from the diligence review

Executive summaries

Summaries suitable to informing and guiding executives along the way


References

Bruner, 2004. Applied Mergers and Acquisitions. Wiley Finance: chapters 8, 29, 30, 32-34

Fleuriet, 2008. Investment banking explained, McGraw-Hill: chapter 14

Iannotta, G., 2010. Investment Banking, Springer-Verlag Berlin Heidelberg: chapter 9

Kruse, T., 2005. Ownership, Control and Shareholder Value in Italy: Olivetti's Hostile Takeover

of Telecom Italia. ECGI - Finance Working Paper No. 83/2005

Miller, E.L.J., 2008. Mergers and Acquisitions: A Step-by-Step Legal and Practical Guide. Wiley:

chapter 2

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