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