MERGERS & ACQUISTIONS

WHAT IS CORPORATE RESTRUCTURING

Corporate restructure means actions taken to expand or contract a firm's basic

operations or fundamentally change its asset or financial structure.

Corporate restructuring refers to a broad array of activities that expand or

contract a firm’s operations or substantially modify its financial structure or
bring about a significant change in its organizational structure and internal
functioning.
 Need for restructuring

1. To respond to particular business need

2. To make organization more competent

3. To make it as counter strategies

4. Growth & globalization

 FORMS OF CORPORATE RESTRUCTURING
Expansion

· Mergers & acquisition

· Joint venture

Contraction
· Demerger
· Spin- offs
· Split-offs
· Split-ups
Corporate · Divestures
Restructuring · Equity carve outs

Changes in Ownership Structure

· LBO
· Going Private
 WHAT IS MERGER?

Two or more companies combine into one

company
Ono or more companies may merge with
an existing company or
they may merge to form a new company
There is complete amalgamation of the assets
and liabilities as well as shareholder's interests
and businesses of the merging companies
 WHAT IS AMALGAMATION?

Laws in India use the term Amalgamation

for Merger.
 WHAT IS AMALGAMATION?

Amalgamation is the merger of two or more

companies to form a new company in such a way
that all assets and liabilities of the amalgamated
company and shareholders holding the shares in
the amalgamation company or companies
become shareholders of the amalgamated
company.
 TYPES OF MERGER OR AMALGAMATION

Merger through absorption

Merger through consolidation
 ABSORPTION

Absorption is a combination of two or more

companies into an existing company. All
companies except one lose their identity in a
merger through absorption.
Example: Absorption of Tata Fertilizers Ltd (TFL)
by Tata Chemicals Ltd (TCL).
 Mergers
STRUCTURE 1

 A = Amalgamating Company: Ceases to Exist

 B = Amalgamated Company
 B receives all of A’s assets and liabilities
 Shareholders of A receive shares in B and maybe other benefits
like debentures, cash

Transfer assets and liabilities

A B
 CONSOLIDATION

Consolidation is a combination of two or more

companies into a new company. In this form of
merger, all companies are legally dissolved and
a new entity is created. The acquired company
transfers its assets, liabilities and shares to the
new company for cash or exchange of shares.
 Mergers
STRUCTURE 2

 A, B and C = Amalgamating Companies: Cease to exist

 D = Amalgamated Company: may or may not have existed
before Merger
 All assets and liabilities of A, B and C transferred to D
 Shareholders in A,B and C get shares in D.

B D

C
 CONSOLIDATION

Example:
Consolidation of Hindustan Computers Ltd,
Hindustan Instruments Ltd, Indian Software
Company Ltd, and Indian Reprographics Ltd in
1986 to an entirely new company called HCL
Ltd.
 ACQUISITION

A corporate action in which a company buys most, if not

all, of the target company's ownership stakes in order to
assume control of the target firm. Acquisitions are often
made as part of a company's growth strategy whereby it
is more beneficial to take over an existing firm's
operations and niche compared to expanding on its own.
Acquisitions are often paid in cash, the acquiring
company's stock or a combination of both.

Acquisition is an act of acquiring effective control over

assets or management of a company by another
company without any combination of businesses or
companies.
 MERGER AND ACQUISITION

In merger, the acquiring company takes over the

ownership of other company and combines its
operations with its own operations.
But in acquisition, two or more companies may
remain independent, separate legal entities, but
there may be change in control of companies.
 TAKEOVER

Takeover occurs when the acquiring firm takes

over the control of the target firm.
 TAKEOVER VS ACQUISITION

When acquisition is a forced or unwilling, it is

called a takeover. In an unwilling acquisition, the
management of ‘target’ company would oppose
a move of being taken over.
When management of acquiring and target
companies mutually and willingly agree over the
takeover, it is called acquisition or friendly
takeover.
Different methods of hostile take over:
The two primary methods of conducting a hostile
takeover are the
 tender offer and
 the proxy fight.
 Tender Offer

A tender offer is a public bid for a large chunk of the

target’s stock at a fixed price, usually higher than the
current market value of the stock. The purchaser uses
a premium price to encourage the shareholders to sell
their shares. The offer has a time limit, and it may
have other provisions that the target company must
abide by if shareholders accept the offer. This method
is currently employed by Microsoft as they offered
$44.6 billion which Yahoo hasn’t accepted. The dead
line has already passed.
In a proxy fight, the buyer doesn’t attempt to buy
stock. Instead, they try to convince the
shareholders to vote out current management or
the current board of directors in favor of a team
that will approve the takeover
 EXAMPLE

Takeover
The most famous recent proxy fight was
Hewlett-Packard’s takeover of Compaq. The
deal was valued at $25 billion.
Acquisition
Shaw Wallace, Dunlop, Mather and Platt and
Hindustan Dorr Oliver by Chhabrias.
 CLASSIFCATION OF MERGER

Merger can be of different categories:

Horizontal Merger
Vertical Merger
Conglomerate Merger
 CLASSIFCATION OF MERGER

Horizontal
A merger in which two firms in the same industry
combine Often in an attempt to achieve
economies of scale.
• Horizontal Integration – Buying a competitor
 Acquisition of equity stake in IBP by IOC
 CLASSIFCATION OF MERGER

Motives of Horizontal Merger

1. Elimination or reduction in competition
2. Putting an end to price cutting
3. Economies of scale in production
 CLASSIFCATION OF MERGER

 Vertical
A merger in which one firm acquires a supplier or
another firm that is closer to its existing customers often
in an attempt to control supply or distribution channels.
 Vertical Integration : Internalization of crucial forward or
backward activities
Vertical Forward Integration – Buying a customer
Indian Rayon’s acquisition of Madura Garments
along with brand rights

Vertical Backward Integration – Buying a supplier

IBM’s acquisition of Daksh
 CLASSIFICATION OF MERGER

Motives of Vertical Merger

1. Low buying cost of materials
2. Lower distribution costs
3. Assured supplies and market
 CLASSIFCATION OF MERGER

Conglomerate
A merger in which two firms in unrelated
businesses combine Purpose is often to
diversify’’ the company by combining
uncorrelated assets and income streams
 CLASSIFCATION OF MERGER

Product Extension: New product in Present territory

P&G acquires Gillette to expand its product
offering in the household sector and smooth out
fluctuations in earning
Free-form Diversification: New product & New territories
Indian Rayon’s acquisition of PSI Data Systems
Motives for Conglomerate Merger
-Diversification of risk
 Classification of Mergers

Cross-border (International) M&As

A merger or acquisition involving a Foreign firm
either the acquiring or target company.
 TATA – Tetley Deal
 TATA tea acquired Tetley tea in February 29, 2000

 Value of deal:$431.3 million

Acquisitions 12/08/2021 31
 Tata Tea Limited

 Owned by India’s Tata group

 Set up in 1964 as a joint venture with UK based James
Finlay and Company
 World’s second largest manufacturer and distributor of
tea
 Largest tea brand in India
 Operations in 40 countries around the world
 It is one of India's first multinational companies
 Tetley Tea
 Found in 1822 by Joseph and Edward Tetley

 largest tea company in the United Kingdom

 Inventor of the tea bag

 Tetley blends, packs, markets and distributes tea products

Acquisitions 12/08/2021 33
 Ranbaxy – Daiichi deal
 Daiichi-Sankyo acquired 69.8% stake in Ranbaxy on
12th nov, 2008

 Value of deal : $ 4.6 billion

 Deal scheduled to be completed by March 2009

 M. Singh to remain C.E.O. and M.D. of the company

34
Acquisitions 12/08/2021
 Daiichi Sankyo
 Second largest pharmaceutical company in Japan

 Net sales in the financial year ended March 2008: $8.2 billion

 PAT in the financial year ended March 2008: $915 million

 Presence in 21 countries and employees 18000 people

 Makes prescription drugs, diagnostics, radiopharmaceuticals

And over the counter drugs

35
Acquisitions 12/08/2021
 Ranbaxy
India’s leading pharmaceutical company

 Among the top 10 global generic companies

 Global sales in 2007: $1.6 billion

 PAT in 2007: $190 million

Footprints in 49 countries and manufacturing facilities in 11

 Employees 12000 people including 1200 scientists

36
Acquisitions 12/08/2021
 History of Mergers and Acquisitions

Tracing back to history, merger and acquisitions

have evolved in five stages and each of these
are discussed here.
As seen from past experience mergers and
acquisitions are triggered by economic factors.
The macroeconomic environment, which
includes the growth in GDP, interest rates and
monetary policies play a key role in designing
the process of mergers or acquisitions between
companies or organizations.
 First Wave Mergers

 The first wave mergers commenced from 1897

to 1904.
 During this phase merger occurred between
companies, which enjoyed monopoly over their
lines of production like railroads, electricity etc.
 The first wave mergers that occurred during the
aforesaid time period were mostly horizontal
mergers that took place between heavy
manufacturing industries.
 End Of 1st Wave Merger

Majority of the mergers that were conceived

during the 1st phase ended in failure since they
could not achieve the desired efficiency.
The failure was fuelled by the slowdown of the
economy in 1903 followed by the stock market
crash of 1904. The legal framework was not
supportive either.
 Second Wave Mergers

 The second wave mergers that took place from 1916 to 1929
focused on the mergers between oligopolies, rather than
monopolies as in the previous phase.
 The economic boom that followed the post world war I gave
rise to these mergers.
 Technological developments like the development of railroads
and transportation by motor vehicles provided the necessary
infrastructure for such mergers or acquisitions to take place.
 Cont…

 The 2nd wave mergers that took place were

mainly horizontal or conglomerate in nature.
 The industries that went for merger during this
phase were producers of primary metals, food
products, petroleum products, transportation
equipments and chemicals.
 End Of 2nd Wave Mergers

The 2nd wave mergers ended with the stock

market crash in 1929 and the great depression.
The tax relief that was provided inspired mergers
in the 1940s.
 Third Wave Mergers

 The mergers that took place during this period

(1965-69) were mainly conglomerate mergers.
 Mergers were inspired by high stock prices,
interest rates.
 Mergers were financed from equities; the
investment banks no longer played an important
role.
 End Of The 3rd Wave Merger

 The 3rd wave merger ended with the plan of the

Attorney General to split conglomerates in 1968.
 It was also due to the poor performance of the
conglomerates.
 Fourth Wave Merger

 The 4th wave merger that started from 1981 and ended
by 1989 was characterized by acquisition targets that
were much larger in size as compared to the 3rd wave
mergers.
 Mergers took place between the oil and gas industries,
pharmaceutical industries, banking and airline industries.
 Foreign takeovers became common with most of them
being hostile takeovers.
 The 4th Wave mergers ended with Financial Institutions
Reform.
 Fifth Wave Merger

 The 5th Wave Merger (1992-2000) was inspired by

globalization, stock market boom and deregulation.
 The 5th Wave Merger took place mainly in the banking
and telecommunications industries.
 They were mostly equity financed rather than debt
financed. The mergers were driven long term rather than
short term profit motives.
 The 5th Wave Merger ended with the burst in the stock
market bubble.
 Cont…

Hence we may conclude that the evolution of

mergers and acquisitions has been long drawn.
Many economic factors have contributed its
development. There are several other factors
that have impeded their growth.
 BENEFITS OF MERGER

Increased Market Power

intended to reduce the competitive balance of the industry

Overcome Barriers to Entry

overcome costly barriers to entry which may make “start-ups” economically
unattractive
 BENEFITS OF MERGER

Increased Speed to Market

Closely related to Barriers to Entry, allows market entry in a more timely
fashion

Diversification
Quick way to move into businesses when firm currently lacks experience and depth
in industry
 BENEFITS OF MERGER

Lower cost and risk of new product

development
Buying established business reduces risk of
start up ventures.
Economies of scale
They can make savings from being bigger this is
known as gaining ‘economies of scale
 Problems

 Incompatibility of partners:
Alliance between two strong companies is a
safer but than between two weak companies.
Many strong companies actually seek small
partners in order to gain control while weak
companies look for stronger companies to bail
them out.
 Problems

Integration Difficulties
Differing financial and control systems can make integration of firms difficult

Large or Extraordinary Debt

Costly debt can create onerous burden on cash outflows
 Problems

Overly Diversified
Acquirer doesn’t have expertise required to manage unrelated
businesses

Too Large
Large bureaucracy reduces innovation and flexibility
 The top 10 acquisitions made by Indian companies worldwide:

Acquirer Target Company Country targeted Deal value ($ Industry

ml)

Tata Steel Corus Group plc UK 12,000 Steel

Hindalco Novelis Canada 5,982 Steel
Videocon Daewoo Electronics Corp. Korea 729 Electronics

Dr. Reddy's Betapharm Germany 597 Pharmaceutic

Labs al

Suzlon Energy Hansen Group Belgium 565 Energy

HPCL Kenya Petroleum Refinery Kenya 500 Oil and Gas

Ltd.
Ranbaxy Labs Terapia SA Romania 324 Pharmaceutic
al
Tata Steel Natsteel Singapore 293 Steel
Videocon Thomson SA France 290 Electronics
VSNL Teleglobe Canada 239 Telecom
 B. JOINT VENTURE

Joint ventures are new enterprises owned by two or

more participants. They are typically formed for
special purposes for a limited duration.

It is a contract to work together for a period of time

each participant expects to gain from the activity but
also must make a contribution.
 Example for JV
PARTNERS Product Strategic Objective

GM & TOYOTA Autos Cut-cost

 Reasons for forming a joint venture

 Build on company's strengths

 Spreading costs and risks
 Improving access to financial resources
 Economies of scale and advantages of size
 Access to new technologies and customers
 Access to innovative managerial practices
 DEMERGERS

A demerger results in the transfer by a company of one or more of

its undertakings to another company. The company whose
undertaking is transferred is called the demerged company and the
company (or the companies) to which the undertaking is
transferred is referred to as the resulting company.
A demerger may take the form of
• A spin-off or
• A split-up.
• A split off
 DEMERGERS STRUCTURE

 Demergers are one type of spin-offs: (under/section 391)

 A = Demerging Company
 B = Resulting Company: may or may not have existed earlier
 A transfers undertaking to B
 B issues shares to shareholders of A

Transfers undertaking Y
X Y Y

Company B
Company A
Shareholders of Issues shares
A
 SPIN OFF’S

 Spin-off is a transaction in which a company

distributes on a pro-rata basis all the shares it owns
in a subsidiary to its own shareholders.
 In a spin-off an undertaking or division of a company
is spun off into an independent company.

 After the spin-off, the parent company and the spun

off company are separate corporate entities.
Ex: AT &T
The creation of an independent company through the
sale or distribution of new shares of an existing
business/division of a parent company.
 SPLIT – OFF

 A transaction in which some, but not all, parent co.,

shareholders receive shares in a subsidiary in return for
relinquishing their parent co., share.

In other words……………….

Some parent company shareholders receive the subsidiary’s

shares in return for which they must give up their parent
company shares.

Features
 A portion of existing shareholders receives stock in a
subsidiary in exchange for parent company stock.
 SPLIT - UP
In a split-up, a company is split up into two or more independent
companies.

As a sequel, the parent company disappears as a corporate entity

and in its place two or more separate companies emerge.

In other words a transaction in which a co., spins off all of it

subsidiaries to its shareholders & ceases to exist.

Features
 The entire firm is broken up in a series of spin-offs.
 The parent no longer exists and
 Only the new offspring survive.
 DIVESTITURES
• Represent the sale of a segment of a company (assets, a
product line, a subsidiary) to a 3rd party for cash and or
securities
Ex: VSNL
Features:
 It is used as a means of eliminating or separating:
a) Product line
b) Division
c) Subsidiary.
 It represents the sale of a segment of a co., to a 3rd
party.
 The assets are revalued, by the sale, for purpose of
future depreciation by the buyer.
 MOTIVES FOR DIVESTITURES

 Change of focus or corporate strategy

 Unit unprofitable can mistake

 Sale to pay off leveraged finance

 Need cash

 Good price.
 Equity carve-out

 A transaction in which a parent firm offers some of a

subsidiaries common stock to the general public, to bring in a
cash infusion to the parent without loss of control.

 In other words……………………..
Equity carve outs are those in which some of a subsidiaries
shares are offered for a sale to the general public, bringing an
infusion of cash to the parent firm without loss of control.
 Difference between Spin-off and Equity carve outs:

1. In a spin off , distribution is made pro rata to shareholders of

the parent company as a dividend, a form of non cash
payment to shareholders

In equity carve out , stock of subsidiary is sold to the public

for cash which is received by parent co

2. In a spin off , parent firm no longer has control over

subsidiary assets

In equity carve out, parent sells only a minority interest in

subsidiary and retains control
 Poison Pill
A strategy used by corporations to discourage
hostile takeovers. With a poison pill, the target
company attempts to make its stock less
attractive to the acquirer. There are two types
of poison pills-
1. Flip-in
2. Flip-over
Flip-in
 A ‘’flip-in’’ allows existing shareholders (except the acquirer) to
buy more shares in the target company at a discount, upon the
mere accumulation of a specified percentage of stock by a
potential acquirer. By purchasing the shares cheaply, investors
get instant profits and, more importantly dilute the shares held
by the competitors. As a result, the competitor’s takeover
attempt is made more difficult and expensive.

 Internet major Yahoo! adopted this form of poison pill in 2000

allowing the board to issue upto 10 million shares on new
stock in the event of an acquisition offer on the table that they
did not want to endorse (like that of Microsoft) and each share
cane have nearly unlimited voting power. This defense made it
practically impossible for Microsoft to proceed with a hostile
bid after Yahoo! expressed its unwillingness towards
Microsoft’s offer for Yahoo! and ultimately resulted in the
withdrawal of the same.
Flip-Over
A ‘’flip-over’’ allows stockholders to buy the
acquirer’s shares at a discounted price after the
merger. The holders of common stock of a
company receive one right for each share held,
bearing a set expiration date and no voting power.
In the event of an unwelcome bid, the rights begin
trading separately from the shares. If the bid is
successful, all shareholders except the acquirer
can exercise the right to purchase shares of the
merged entity at discount. For instance, the
shareholders have the right to purchase stock of
the acquirer on a 2-for-1 basis in any subsequent
merger. The significant dilution in the
shareholdings of the acquirer makes the takeover
expensive and sometimes frustrates it. If the
takeover bid is abandoned, the company might
Benefits

The obvious benefit of a poison pill is that it

offers the target company enviable options
even in the critical situation of a coercive
takeover:
a) The first option, allows the target to
successfully ward off an unwelcome bid.
b) As for the second option, in case the
target company is considering going ahead
with the deal, it makes the raider negotiate
and buys time for the target company to get
a proper evaluation of the offer and thereby
maximizes the takeover premium, in the best
interest of the shareholders of the target
company.
Limitations

a) Ignores merits of takeover

Firstly, these defenses tend to block all hostile
takeovers without weighing out its merits. An
unsolicited bid may sometimes cause the stock
prices to shoot up and may have vast potential to
increase shareholder wealth. Also, it may offer an
attractive takeover premium which the
shareholders might be interested in. A case in
point is the Microsoft’s offer of a 62 percent
premium to acquire internet giant, Yahoo! in
February 2008 which was turned down by the
Yahoo! Board and the Board’s decision was met
with heavy criticism for having acted irresponsibly,
followed by a spate of lawsuits alleging
undermining of shareholder interests and a
shareholder revolt led by billionaire investors like
Carl Icahn.
b) Shield to Inefficient management
Secondly, as was seen in Japan and U.S.A.,
poison pills tend to shield managers of
dismally performing companies from the
pressures of the stock market as well as
from the ‘threat’ posed to its incumbent
management by a better offer. Sometimes,
such threat of takeovers by ‘outsiders’ is
primarily in the best interest of the
shareholders but is against the vested
interest of the management of the target
company which failed to maximize
shareholder wealth. This in turn denies the
shareholders the opportunity to accept a
welcome offer.
c) Step to improve company image:
Thirdly, with corporate governance becoming the
order of the day, companies have poison pills in
order to enhance their corporate governance
ratings. The more transparent and shareholder
friendly the company practices, the better the
company image and hence bigger the size of the
company.
d) Blocking Foreign Investment:
Fourthly, in an era of economic liberalization,
economic growth is but a function of foreign
investment. Thus adoption of extreme
defense measures by domestic companies
creates the impression of a closed marked,
thereby waning foreign interest in that
country. This is in itself is reason enough for
companies such as e-Access thriving in
developing nations to scrap their poison pills
and be open to takeover offers.
 Example

 The world's second- largest soft-drink maker, Pepsi

Co has sued its bottler, the Pepsi Bottling Group
(PBG), the world's largest manufacturer, seller and
distributor of Pepsi-Cola beverages for its poison pill
defense against the soft drink makers' proposed
acquisition.
 Pepsi filed a lawsuit in Delaware yesterday against
PGB and certain board members for intentionally
holding a board meeting without giving notice to all
the directors of the PGB board and adopted a
"poison pill," implemented certain new executive
compensation packages and purported to amend the
PBG bylaws in ways Pepsi believes are detrimental
to its rights as a shareholder.
Since Pepsi is a majority shareholder in PGB
by virtue of it's 33.1-per cent stockholding, it
has two directors on the board of PGB. Both
these directors were not informed about the
board meeting called by PGB last week.
In the suit, Pepsi alleges, ''PBG and its board
breached their fiduciary duties to PBG
shareholders by adopting a shareholder
rights plan, commonly referred to as a
"poison pill," because it restricts Pepsi's
rights as a PBG shareholder and constitutes
an unreasonable and disproportionate
response to Pepsi's constructive proposal.''
The suit seeks declaratory and injunctive
relief.
 Pac-Man

The Pac-Man defense is a defensive option to

stave off a hostile takeover in which a
company that is threatened with a hostile
takeover "turns the tables" by attempting to
acquire its would-be buyer.
A major example in U.S. corporate history is
the attempted hostile takeover of MARTIN
MARIETTA by BENDIX CORPORATION in
1982. In response, Martin Marietta started
buying Bendix stock with the aim of
assuming control over the company. The
incident was labeled a "Pac-Man defense" in
retrospect.
 How do companies use Pac-
man defense
To employ the Pac-Man defense, a company will
scare off another company that had tried to acquire
it by purchasing large amounts of the acquiring
company's stock. By doing so, the defending
company signals to the acquiring company that it is
resistant to a takeover and will use the majority, if
not all, of its assets to prevent the acquisition. The
resisting company may even sell off non-vital assets
to procure enough assets to buy out the
acquirer. Often, the acquiring company sees the
potential risk of being taken over as motivation
to halt pursuit.
 
The name refers to the star of a video game
Pac-Man, in which the hero is at first chased
around a maze by 4 ghosts - Inky, Blinky,
Clyde and Pinky. However, after eating a
"Power Pellet", he is able to chase and
devour said ghosts. The term (though not the
technique) was coined by buyout guru Bruce
Wasserstein.
 Laws

 In 1984, Securities Exchange Commission

commissioners said that the Pac-Man defense was
cause for “serious concern,” but balked at
endorsing any federal prohibition against the tactic.
The commissioners acknowledged a Pac-Man
defense can benefit shareholders under certain
circumstances, but emphasized that management, in
resorting to this tactic, must bear the burden of
proving it isn’t acting solely out of its desire to stay
in office. One concern is that the money spent to
gain control of the intruding company, which
includes payment for the services of lawyers and
other professionals needed to mount that defense,
represents substantial funds that could have
otherwise been used to improve the company’s
business or increase its profits.
 Greenmail

Greenmail or greenmailing is the practice of

purchasing enough shares in a firm to
threaten a takeover and thereby forcing the
target firm to buy those shares back at a
premium in order to suspend the takeover.
The term is a derived from blackmail and
greenback as commentators and journalists
saw the practice of said corporate raiders as
attempts by well-financed individuals to
blackmail a company into handing over
money by using the threat of a takeover.
 Tactic

 To generate large amounts of money by hostile takeovers of large,

often undervalued or inefficient (i.e. non-profit-maximizing)
companies, by either asset stripping and/or replacing management
and employees. However, once having secured a large share of a
target company, instead of completing the hostile takeover, the
greenmailer offers to end the threat to the victim company by selling
his share back to it, but at a substantial premium to the fair market
stock price.
 From the viewpoint of the target, the ransom payment may be referred
to as a goodbye kiss. The origin of the term as a business metaphor is
unclear, although it will certainly be understood in context as kissing
the greenmailer and, certainly, millions of dollars goodbye. A company
which agrees to buy back the bidder's stockholding in the target
avoids being taken over. In return, the bidder agrees to abandon the
takeover attempt and may sign a confidential agreement with the
greenmailer who will agree not to resume the maneuver for a period of
time.
 While benefiting the predator, the company and its shareholders lose
money. Greenmail also perpetuates the company's existing
management and employees, which would have most certainly seen
their ranks reduced or eliminated had the hostile takeover
successfully gone through.
 Examples

 Greenmail proved lucrative for investors such as T. BOON PICKENS

and SIR JAMES GOLDSMITH during the 1980s. In the latter example,
Goldsmith made $90 million from the GOOD YEAR RUBBER AND
TYRE COMPANY in the 1980s in this manner. OCCIDENTAL
PETROLEUM paid greenmail to David Murdoch in 1984.
 The St. Regis Paper Company provides an example of greenmail.
When an investor group led by Sir James Goldsmith acquired 8.6%
stake in St. Regis and expressed interest in taking over the paper
concern, the company agreed to repurchase the shares at a premium.
Goldsmith's group acquired the shares for an average price of $35.50
per share, a total of $109 million. It sold its stake at $52 per share,
netting a profit of $51 million. Shortly after the payoff in March 1984,
St. Regis became the target of publisher Rupert Murdoch. St Regis
turned to Champion International and agreed to a $1.84 billion
takeover. Murdoch tendered his 5.6% stake in St. Regis to the
Champion offer for a profit. (Source: J. Fred Weston, Mark L.Mitchell J.
Harold Mulherin -- Takeovers, Restructuring, and Corporate
 Anti-Greenmail Provision

A special clause located within a firm's

corporate charter that acts as a deterrence
against the board of directors passing a
share buyback.
This provision acts as a preventative
measure, restraining managers from buying
back company stock at significant premiums
due to greenmail. A majority shareholder may
be able to influence the board into
purchasing shares at a significant premium,
so the anti-greenmail provision requires that
a majority of shareholders (excluding the
majority shareholder) agree to the buyback.
Bear Hug

 An offer made by one company to buy the shares

of another for a much higher per-share price than
what that company is worth. A bear hug offer is
usually made when there is doubt that the target
company's management will be willing to sell.
 The name "bear hug" reflects the persuasiveness
of the offering company's overly generous offer to
the target company. By offering a price far in
excess of the target company's current value, the
offering party can usually obtain an agreement.
The target company's management is essentially
forced to accept such a generous offer because it
is legally obligated to look out for the best
interests of its shareholders.
 Strategy
The basic strategy of the bear hug generally
involves the attempted acquisition of a
company that is currently not for sale.
Investors take note of a company that is
consistently performing well, and decide to
take step to acquire that company. In many
cases, an initial offer may have been
rejected. This leads to the implementation of
more aggressive methods that are designed
to lead to the eventual acquisition of the
company, whether the board of directors of
the corporation like it or not.
 Selling off Assets
Corporate raiders have long employed the
strategy of the bear hug as a means of
acquiring a company and then systematically
dismantling the operation. By acquiring a
company and selling off its assets,
equipment, and property, the raider can often
make an impressive profit from the venture
 While the bear hug is often successful, companies
have managed to avoid this sort of situation. When it
seems that a corporate raider is acquiring an
inordinate amount of stock, steps can be taken to
minimize the amount of influence that the raider may
assert on the board and the other shareholders.
 In some countries, raiders have to file papers with
the local government upon acquiring a certain
percentage of available stocks. These papers outline
the intent of the raider to acquire the company, and
are made available to the current ownership.
 When steps are taken early in the process, it is
possible to avoid a hostile takeover, and thus defuse
the bear hug before it ever has a chance to damage
the operations or reputation of the company.
 Bear Hug Letters

 Bear hug letters are an art form. They are designed

to put an unwilling takeover target on notice that
they are no longer safe, but to fall short of being
blatantly hostile.
 Microsoft’s bear-hug letter to Yahoo, made public
along with Microsoft’s unsolicited $44.6 billion
takeover bid, is no different. It contains all the
nice-nice language you typically see in these
letters (this is the hug) as well as a warning that
there is a bear waiting to come out.
 Examples

Comcast has offered more than $40 billion in

stock for AT&T's cable business.
Satellite TV provider EchoStar dangled a $30
billion bid for Hughes Electronics, the owner
of EchoStar rival DirecTV.
And telecom company Alltel is wooing
CenturyTel shareholders with a $9 billion
deal.