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A primer on Mergers & Acquisitions

  • Investment Manager
  • Blog post submitted on 27th June 2019
Mvblog

Economists, analysts and the majority working in the financial services sector, speak regularly and monitor closely GDP, unemployment figures, inflation. Why do we view these factors as being so important? Amongst many others, these are the main drivers of a country’s economic performance.

When the economy is booming, companies tend to identify numerous growth opportunities and such opportunities can present themselves in the form of mergers and acquisitions (M&A).

A merger can be set in a number of ways and usually takes place when two companies join forces and combine into a new entity, with a new management and corporate structure. Sometimes a subsidiary or statutory merger can also be opted for.

In a subsidiary merger, one of the companies becomes the parent company and the other its’ subsidiary.

In a Statutory merger, instead of a new entity being formed, one of the companies, usually the acquiring company, maintains its legal name while the other (usually the target) ceases to exist and the target company’s assets and operations then operate under the acquiring company’s name.

Acquisitions, similar to a statutory merger, usually involve one company acquiring another, whereby the target company usually ceases to exist and all of its assets fall under the acquirer. Sometimes, where similarities present themselves between M&As, the difference relates to the manner in which a deal was met.

M&As usually involve friendly or hostile offers, whereby the term mergers would usually relate to instances of friendly takeover offers. In friendly takeovers, both sets of management or board of directors are willing to reach a compromise and to see through the deal in the best interest of their shareholders.

Hostile takeovers usually relate to acquisitions and usually involves an offer opposed by the target’s management but whereby the acquirer nonetheless pursues a number of legal methods to push through a deal. Target management can then trigger a number of defense mechanisms in attempting to fend-off the bidder/s.

Defense mechanisms usually only relate to hostile takeovers and a number of companies usually have such mechanisms embedded in their articles of association. If they don’t, then it should be best practice for companies operating in highly cyclical industries with high risks of takeovers to implement defense methods against unwanted bidders.

There are numerous forms of defense mechanisms. To mention a few, poison pills and poison puts are popular pre-takeover methods of defense.

A poison pill allows a target company to issue additional shares to its shareholders, once a percentage of ownership level is triggered, at a price significantly below the market price. This not only makes the bid price more expensive to a bidder but dilutes the percentage of shares it would already have acquired in the open market.

Poison puts usually involve debt holders and gives them the right to ask for the immediate redemption of their bonds at or above par level at a pre specified price in the debt covenants. This makes it more expensive for the bidder and riskier too as the potential acquirer would most likely have to borrow funds to redeem to bondholders. There are numerous other methods of defense companies can consider.

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