Merger Negotiations
When it comes to mergers and acquisitions, a friendly negotiation isn’t what initially comes to mind. In reality, most mergers and acquisitions are negotiated in a friendly environment. It may be hard to believe because of the terms “takeovers” “hostile takeovers”, but it is the reality.
Differences in Merger Negotiations
Usually, in buyer-initiated takeovers, the process begins when one firm’s management contacts the management of the target company. This is often done with the help of the investment bankers of each company.
On the other hand, seller-initiated deals are done by hiring an investment banker. The investment banker will then contact the prospective bidders. If the contacted prospective bidders are interested, they will sign a confidentiality agreement and agree not to make an unsolicited bid. Additionally, potential bidders may also receive nonpublic information.
Next, the seller and their investment bankers can conduct an auction if they choose. Or they can also negotiate with just one bidder if they think they can reach an agreeable price.
When it comes to auctions, these can be conducted formally or in a less formal manner. Formal auctions usually have specific bidding rules established by the seller.
The management team of both the buyer and the seller must keep their respective board of directors up-to-date with any information and progress of the negotiations. This is because the board of directors usually has to approve of the mergers.
Examples of Different Merger Agreements
If the process is smooth-sailing from start to finish, a quick merger agreement commences. One great example of ta quick merger agreement was Pfizer’s acquisition of Wyeth Corp. back in 2009. It was an investment worth 68 billion dollars.
Usually, deals with this high of a price aren’t done in a quick manner. However, the quick meeting between the corporate minds and management of both firms leads to a quick and friendly deal.
This doesn’t mean that quick and friendly deals are often the best way to go, however. It depends on different circumstances. For instance, the $48 billion acquisition of TCI by AT&T was done in a swift and fast manner. Ultimately, it was found that the buyer did not do his homework and the seller did a fantastic job of fulfilling the buyer’s desires to make a quick sale at a higher price.
At a certain point, speed can help ward off unwanted bidders. But it can also open the possibility of working against close scrutiny of the transaction.
Negotiations Breakdown
There are also instances where friendly negotiations may break down. It leads to an end to the deal or a hostile takeover.
For example, let’s take Moore Corporation’s tender offer for Wallace Computer Service Inc. In this contract, talks in the area of business types and printing business between two archrivals have been going on for five months.
Time period of Negotiation
They were called after just five months of negotiations and it resulted in a hostile offer of $1.3 billion. Back in 2003, Moore and Wallance reached an agreement for the acquisition which led to the formation of Moore Wallace. A year passed, and with MooreWallace, RR Donnelley merged.
There are also instances where the target immediately opposes the bid and the transaction will lead to a hostile one quickly. In 2003, the takeover battle between Oracle and PeopleSoft immediately led to a very hostile bid.
It is one of the most infamous takeovers because it was unusual. Because of its protracted length, the takeover contest was considered unusual. A year before PeopleSoft finally capitulated and accepted a higher Oracle bid, the takeover battle continued.
Material adverse change clauses are usually included in most merger agreements. Where there is a major change in circumstances that would ultimately change the value of the deal, either party may be allowed to withdraw from the deal.
A great example of this is a merger that happened in recent history. The merger between Verizon and Yahoo! In 2017 made headlines because of the changed value. Because of Yahoo data breaches! both companies both agreed to reduce the price to $4.48 billion. That is $350 million less than the original agreement price.
Auctions v. Private Negotiations
There are a lot of people who believe that auctions may result in higher takeover premiums. There is a lot of research to back this too. The 377 completed and 23 withdrawn acquisition takeover processes that occurred in the 1990s were analyzed by Boone and Mulherin. In their analyzation, they found that 21 bidders were contacted and 7 eventually signed a confidentiality and standstill agreement on average.
On the other hand, the deals negotiated in private featured the seller dealing with a single bidder. Additionally, Boone and Mulherin found that more than half of the deals involved auctions. The question of why all deals are not made through auctions was raised by the belief in the financial effects of auctions, too.
One would argue that it may be the agency costs. And so, Boone and Mulherin analyzed the issue further. They used an event study methodology. In this study, they compared the wealth effects to targets of auctions and negotiated the transaction.
However, they failed to find support for the agency theory, which also comes as a surprise to most. The results of the analysation failed to show a lot of difference in the shareholder wealth effects of auctions compared to privately negotiated transactions. Additionally, there has been some vocal pressure to require mandated auctions which led to some important policy implications to the result.
The examples provided above shed light on important merger negotiation tactics and lessons. This should help you decide and plan mergers and acquisitions strategically. It also helps in deciding which route to take when it comes to merger negotiations, and which route is more beneficial to your company.
In the next article, we will talk about Merger Approval Procedures in depth. See you then!
© image credits to Sharon McCutcheon
The Williams Act In Depth
In a previous article, we discussed the basics of the Williams Act. We have discussed in detail how it came to be, who made this Act possible, and how it helps companies and corporations protect themselves against takeovers.
In this article, we will talk about the Time Period of the Williams Act. But first, let’s have a quick refresher. The Williams Act was created and designed to protect both parties in a possible acquisition.
There have been a few changes and alterations to the Williams Act to make it better for everybody. Now, it’s time to move on to the Time Periods of the Williams Act and other details of the Act.
Time Periods of the Williams Act
Let us discuss the time periods of the Williams Act and when these periods should take place. We will also talk about how the process is for each period.
Required Time of Bid
Any tender offer must be kept open for at least 20 business days, in compliance with the William Act. 20 business days is the bare minimum. During that period, it is a must for all acquiring firms to accept all the shares that are tendered.
However, that doesn’t mean that they must actually buy any of these shares until the offer period ends. This minimum offer period was added and designed to discourage shareholders from being pressured into tendering their shares. This is an option rather than risking losing out on the offer.
With the help of the minimum offer period, shareholders and both parties can actually have the time to consider the offer. This time can be spent comparing the terms of the offer with other offers and other options.
Additionally, on the 20-day offer period, the offering firm has the option to get an extension. For instance, if the offering firm highly believes that there is a better chance of getting the shares it needs should they have an extension, then it will be granted.
Tendered Shares at the Offer Price
The shares tendered at the offer price must be purchased by the acquiring firm as well. At least on a pro-rate basis, this can be achieved. This is true unless the firm does not receive the total number of shares it requested in the terms of the tender offer. However, the acquirer still has the option or the choice to purchase the tendered shares.
Moreover, a tender offer may also be written and worded to contain other escape clauses. For instance, when there is an issue with antitrust considerations, there may be a contingency option on attaining the regulatory agencies’ approval. If that is the case, the offer night is so worded as to state that the bidder is not bound to buy if there is an objection to the merger by the Justice Department or the FTC.
You’re probably thinking that if there is a minimum offer period, there should also be a maximum offer period. While that may be true in other countries, it is not the same in the United States. In the U.S., there is no maximum offer period.
Exchange Offers
This term usually refers to an offer that is a stock-for-stock. There is an exchange between both parties, hence the exchange offer. It can also refer to a cash and stock combination for a stock transaction.
After a registration statement for the shares being offered has been filed with the SEC, an exchange offer can commence according to the rules. At the time, the offered is not yet in effect or “effective,” the commencement will be considered as “early.”
However, in order for the early commencement to take place, the bidder must be the one to do the filing, disseminates a prospectus to all the security holders and file the Schedule TO.
Keep in mind that there shouldn’t be any actual purchase of the shares yet. They still have to wait until the 20-day minimum offer period is done after the commencement.
Withdrawal Rights
The shareholders also have their own withdrawal rights thanks to the Williams Act. This act has given the shareholders to power to withdraw their shares at any given time during the entire period as long as the offer remains open.
As we said in a previous article, the Williams Act gives the shareholders an ample amount of time to evaluate the offer. That is the goal of the Withdrawal Rights rule. With this rule in effect, shareholders can evaluate the offeror offers (should there be multiple bids.)
After the expiration of the 20-day period, the bidder may also provide an option to extend for an additional three days to accept additional shares tendered. This is all under the new 14d-11 Rule of the Williams Act. This is all assuming that the bidder promptly pays for the shares that are already tendered. It is also a must for the bidder to give the shareholders who tender during the same three-day period the same consideration and prompt payment.
Partial and Two-Tiered Tender Offers
Now we have the partial and two-tiered tender offers. Partial tender offers are when there is a bid for less than 100%. For instance, the bidder bids for 51% of the company. This will usually afford the acquirer control of the target firm, but it is still considered a partial offer.
On the other hand, we have two-tiered tender offers which are bids that provide one type of compensation for the first tier and other compensation for the remaining shares. Generally, courts consider these types of bids to be coercive and opposing the spirit of the Williams Act.
This is because the shareholders in the backend may find that their shares trade for less than before the bid. It also means that the shareholders will be in constant fear that their stock positions will be frozen out. Fortunately, the Best Price Rule exists, and when combined with similar state laws as well as other similar corporate charter amendments, coercive offers such as the ones mentioned above are much less effective.
These coercive rules and types of bids are not illegal in the United States. However, courts have found that targets may be freer to take aggressive defensive measures should they face such offers.
© image credits to Johannes Plenio
State Antitakeover Laws
In the United States alone, there are plenty of laws with regards to running a business. These laws also differ from state to state, so there is a lot of stuff to memorize and get familiar with. However, if you have studied laws and business administration, you already know a majority of these laws. But as for non-Americans, it can get a little confusing as most of these laws are conflicting sometimes. It refers in general to government anti-takeover legislation.
The combination of federal laws and state laws creates some conflicts sometimes. For instance, under the current federal and state takeover laws, there is still a possibility that you are violating certain state laws by conforming to some aspects of federal laws.
With this in mind, you are probably asking yourself, where do we draw the line? Well, the line of demarcation has something to do with the focus of both federal takeover laws and their state counterparts. There is a thin line in between.
Federal Laws vs State Laws
First things first, you need to distinguish federal laws and state laws when it comes to running a company. For instance, federal laws are more directed towards security regulations, antitrust considerations and tender offers
On the other hand, state laws are focused more on governing corporate charters and their bylaws. To this day, there is still a lot of inconsistency when it comes to state laws. And that’s all across the U.S.
Why were these laws passed?
When particular corporations found themselves as the object of interest by potential acquirers, the pressure was on. Picture this: a local firm finds out that they are the target of an acquirer? What is the next logical step?
They petition the state legislature to pass an antitakeover law or amend the current one. By doing so, it is more difficult for the acquirer to take over. And so, the passing of state antitakeover laws commenced. We will discuss more this in a little bit.
Politics and Pressure
Allegations that a takeover by a “foreign raider” will result in a significant loss of jobs put a lot of political pressure on the state legislature. Not only will millions of hard-working Americans lose their jobs, but also community support such as charitable donations by the local corporation.
This is not only happening in the United States but in other countries as well. Take the EU for instance. They also have a system of differing state laws. The country has worked to achieve a common set of merger rules. In the end, they only achieved approval for a limited set of rules.
In the EU, countries have the right not to abide by the new EU merger rules and apply their own differing country-specific laws. It is somewhat similar to what is happening in the United States.
Laws for both the United States and the United Kingdom emphasize the rights of shareholders. On the other hand, certain European countries such as Italy, Germany, Austria, and France the creditors’ rights are more emphasized.
Additionally, in the United States and the United Kingdom, in the hands of families and insiders, shareholdings are less concentrated. This sheds some light on why the laws have evolved differently in these two great nations, to some extent.
Difference between US & UK
However, while there are plenty of similarities between the United States and the United Kingdome when it comes to the security markets and laws, there are also significant differences.
For instance, there are plenty of states in the U.S. that allow management to engage in aggressive antitakeover actions. On the other hand, the laws of the United Kingdom forbid management from engaging in such evasive actions without the approval of the shareholders first. There are also plenty of differences between the United States and the United Kingdom’s antitakeover laws, but that is another topic for another day
History of the State Antitakeover Laws in the United States
We have previously talked about how state antitakeover laws came about. Let’s discuss the history. In 1968, the state of Virginia was the first to adopt an antitakeover law.
Shortly after, many states started following and applied antitakeover laws. Typically, it is required for these statuses for disclosure materials to be filed following the initiation of the bid.
However, the process was not as smooth as it was intended. The “first-generation” state antitakeover laws had flaws and problems on its own. One of the major problems with these first state antitakeover laws was that they applied to firms that did only a small amount of business in that state.
As you can imagine, this did not go down well with bidding corporations. It just seemed unfair to the bidding corporations. And so, the stage was set and a legal challenge ensued.
Key Court Decisions Relating to Antitakeover Laws
As one would expect, legal challenges take place in court, and certain court decisions have defined the types of state antitakeover laws that are acceptable and those that are not. Most of these decisions were recorded back in the 1980s, but they are still relevant to this day.
Challenges to State Antitakeover Laws
As previously mentioned, the first-generation antitakeover laws had some flaws. In 1982, the constitutionality of these first-generation antitakeover laws was successfully challenged in the famous Edgar v. MITE decision. The United States Supreme Court ruled that the Illinois Business Takeover Act was unconstitutional on the grounds that it violated the commerce clause of the U.S. Constitution.
In 1987, the first-generation antitakeover laws were once again challenged in the Dynamics v. CTS and again in November 1989 in the Amanda Acquisition Corporation v. Universal Foods Corporation.
These challenges brought forward the second-generation antitakeover laws. Changes have been made to the anti-takeover laws of the first century. Most of the second-generation laws incorporate some incredible provisions such as fair price provision, control share provision, business combination provision, and cash-out statute.
There are also constituency provisions in some state laws (with the exception of Delaware) mentioned in the article Type of Merger: Short-Form Merger. These provisions allow the board to take into account the impact of a certain deal on other relevant stakeholders.
© image credits to Steve Johnson
Williams Act
When it comes to Mergers and Acquisitions in the United States (and in any country for that matter), there are several law regulations, like we also discussed in previous article “Type of Merger- Short-form Merger“. These laws are there to govern the merger and acquisition process. Today, there are three main groups of laws: securities laws, state corporation laws, and antitrust laws. In this article, we will focus more on securities laws, more specifically the Williams Act.
These laws were put in place or both target companies and acquiring firms. Some target companies use some of these laws as a defensive tactic when there is a chance of takeover. Because of this, an acquiring firm must take careful notes of legal considerations.
Securities Laws
In the field of M&As, there are a wide variety of important securities laws. The Williams Act is one of these statutes. If you haven’t heard about William’s Act or are generally curious about this law, we will discuss it in detail in this article.
The Williams Act
In 1968, the Williams Act was passed, and to this day, it remains one of the most important pieces when it comes to securities regulations in the field of mergers and acquisitions. This law had a major impact on merger activities between the 1970s and 1980s.
Before the Williams Act
In the 1960s, tender offers were largely unchecked. It simply wasn’t a major concern before the 60s because there were only a small number of tender offers made.
However, the 60s came and tender offers became more popular in the field of M&As. It was a famous way to take control of corporations. Tender offers were also a way to ousting entrenched management, and so plenty of corporations started using it.
The disclosure requirement of the Securities Act of 1933 provided some regulation (albeit limited) in tender offers that used securities as the consideration. However, no such regulation was found in cash offers.
Clearly, there was a gap in the law, the SEC sought to fill this gap. This is where Senator Harrison Williams came in. As the chairman of the Senate Banking Committee at the time, Senator Williams proposed legislation for that specific purpose in 1967.
By July 1968, the bill won congressional approval and so the Willaims Act was born. This law provided an amendment to the Securities Exchange Act of 1934 which is a legal cornerstone of securities regulations.
The government’s concern for greater regulation of the securities market inspired the combination of the Securities Act of 1933 and the Williams Act. As a result, both acts eliminate some of the abuses that a lot of people believe contributed to the stock market crash of October 1929.
Both these laws also provide greater disclosure of information by firms that issue securities to the public. For instance, under the Securities Act of 1933, companies that go public are required to file a detailed disclosure statement. Additionally, the same act proscribed certain activities of the securities industry. This includes wash sales and the churning of customer accounts.
Moreover, the Act provided an enforcement agency, specifically the SEC. The SEC was established to enforce federal securities laws. The Williams Act added five new subsections to the law. This is in an amendment to the Securities Exchange Act of 1934.
The Four Major Objectives of the Williams Act
Upon passing the Williams Act, it had four major objectives which are stated below. These objectives have played a crucial role in the field of mergers and acquisitions. Read more about these objectives below:
To regulate tender offers
Stockholders of target companies were rushed into tendering their shares before the Williams Act was passed. They were stampeded to do so to avoid receiving less advantageous terms.
To provide procedures and disclosure requirements for acquisitions
Thanks to the Williams Act, there is now greater disclosure. This allows stockholders to make more enlightened decisions when it comes to the value of a takeover offer. With greater disclosures, the target shareholders gain more knowledge of the potential acquiring company.
For instance, in a stock-for-stock exchange, the target company stockholders would become stockholders in the acquiring firm.
To provide shareholders time to make informed decisions with regards to tender offers
Target company stockholders still need some time to analyze the data even if the necessary information is available. Through the Williams Act, they are now allowed to make more informed decisions.
To increase confidence in the securities market
The Williams Act also increases investor confidence. As a result, securities markets can attract more capital. Thanks to this Act, investors will be less worried about being placed in a position of incurring losses when they make decisions based on limited information.
Section 13(d) of the Williams Act
Thanks to the Williams Act, specifically Section 13(d), stockholders and target management have an early warning system. This system alerts them to the possibility that a threat to control may soon occur.
Additionally, when these holdings reach 5% of the target market’s firm total common stock outstanding, this section also provides for disclosure of a buyer’s stock holdings. Stockholders and target management can see if a buyer has come from open-market purchases, tender offers or private purchases.
The threshold level was original 10% when the law was first passed. However, changes were made because the 10% was later considered to be too high. And so, it embraced the more moderate 5 percent.
Even when there is no tender offer, under the rules of Section 13(d), the disclosure of the required information is still necessary. It is necessary for the buyer to disclose the required information if he or she intends to take control of a corporation. This follows the attainment of 5% holding in the target.
The buyer is required to file a Schedule 13D to make this disclosure. Even though no one individual or firm actually owns 5% of another firm’s stock, filing of Schedule 13D may still be necessary. Additionally, if a group of investors acts in concert, their combined stockholdings are considered as one group under this law.
© image credits to Anni Roenkae
Deal Structure: Asset vs Entity Deals
When it comes to structuring a deal, there are different factors you need to consider. For instance, you might ask yourself: Is an asset deal better than an entity deal?
In this article, we will discuss the difference between the two further and dwell deeper on how each one has its own purpose. First, let’s discuss asset deals.
Asset Deals
There are plenty of advantages when it comes to asset deals. One of these advantages is that the buyer doesn’t have to accept all the target’s liability. This is a great advantage for the acquirer. It is the subject of most negotiations between the seller and the buyer.
In almost all cases, the seller will want the buyer to accept more liabilities, naturally, and the buyer will want a few liabilities. Buyers usually prefer an asset deal because of limited liability exposure.
Additionally, the buyer can pick and choose which assets they want and they don’t necessarily have to pay for assets that they are not interested in. This is an additional benefit for the buyer’s side.
Benefits of Asset Deal
Furthermore, an asset deal has potential tax benefits. Of course, all of the assets acquired as well as the liabilities incurred should be listed in the asset purchase agreement once the buyer and seller come to a mutual understanding.
There’s also what we call the asset basis set-up where the buyer can raise the value of the acquired assets to fair market value as opposed to the values they may have been carried at on the seller’s balance sheet. This way, the buyer can benefit from more depreciation in the future. As a result, the buyer may also lower their taxable income and taxes paid.
Whole Entity Deal
But what about the seller? Most sellers prefer a whole entity deal. This is because a seller may be left with assets they do not want in an asset deal. For instance, a seller wants to sell most of their asset, and that can’t be done immediately in an asset deal. Especially because the seller might be left with liabilities that they would prefer to get rid of.
Additionally, the seller may possibly get hit with negative tax consequences due to the potential taxes on the sale of the assets and then the taxes on a distribution to the owners of the entity. Keep in mind that tax issues are very crucial when it comes to Mergers and Acquisitions.
This is only one of the reasons why there is a lot of legal work that needs to be done in mergers and acquisitions. These legal works are not only done by transactional lawyers but by tax lawyers as well. When it comes to doing these deals, having attorneys who are merger and acquisition tax specialist are crucial.
More Drawbacks to Asset Deals
There are also more drawbacks to asset deals. For instance, the seller may have to secure third-party consents to the sale of the assets. This is especially necessary when there are clauses in the financing agreements that the target used to acquire the said assets. Or if the seller has a lot of contracts with nonassignment or nontransfer clauses that are associated with them.
In order to do these an asset deal, the target first needs to get approval from all the relevant parties. If there are a lot of relevant parties involved, the deal becomes more complicated. In these cases, the asset deal becomes less practical, and if it is necessary for the deal to be done, it may have to be an entity transaction. Which leads us to entity deals:
Entity Deals
For starters, you need to understand that there are two ways to do an entity deal. First is a stock transaction, second is a merger. A stock deal is ideal and more practical when the target has a limited number of shareholders. This is because securing the approval of the sale by the target’s shareholders may not be as difficult. The fewer shareholders, the more practical a stock transaction is.
In stock entity deals, the buyer does not have to buy the assets and send the consideration to the target corporation as opposed to an asset deal. In these cases, the consideration is sent directly to the target’s shareholders who sell all their shares to the buyer instead.
There are no conveyance issues when it comes to stock deals, this is one of its main advantages. There are no instances where they may have been the aforementioned contractual restrictions on the transfer of assets. The assets firmly stay with the entity and remain at the target when it comes to stock deals.
Another benefit of a stock deal is that there are no appraisal rights. As opposed to mergers where shareholders who do not approve of the deal may want to go to a court to pursue their appraisal rights. The shareholders may also seek the difference between the value they received for their shares in the merger.
Merger Entity Deal
On the other hand, we have a merger. Merger entity deals are more common for publicly held companies. These merger deals are partly a function of the relevant state laws which vary from state to state. In merger deals, constituent corporations are the companies doing the deal where one survives (called the survivor) and the other one ceases to exist.
In these type of deals, the surviving company succeeds to all of the liabilities of the nonsurviving company. In any case that there are assets that the buyer doesn’t want, these can be spun or sold off before the merger is complete.
Mergers also require the voting approval of the shareholders. The percentage of approvals can vary across different states. There are also cases where a corporation enacted supermajority provisions in each bylaw. For those shareholders who do not approve of the deal, they can go to court to pursue their appraisal rights.
There you have it, the difference between asset and entity deals. Take this information at heart, study each type of deals and decide which one is more suited for your company.