M&A: Question and Answer - Negotiation and Takeover Strategies

Negotiation and Takeover Strategies

• Why can't acquirer retain control by simply purchase shares on market?
• Regulations --> limit the purchase amount of shares and transparency
• Shareholders hold-out problems.
• Difficult to buy large ownership blocks on publicly traded market, since they not actively trade their shares.
• What is the theoretical final offer price in a tender offer if shareholders are rational and there is no info asymmetry?
• Final offer price is the final decisions made by acquirer about their offer price and target wouldn't accept more than this.
• Reservation price reflect all synergies and all available benefits.
• No extension --> clear and final
• Does the holdout problem come back to hurt target shareholders and how do they deal with this problem?
• Target shareholder will probably lose the deal and lose the premium price.
• They could deal this situations by performing:
• Collective voting / auction environment, in order to attract more acquirer or potential white knight. Thus, this will push-up the bid price, close to target's reservation price. 
• Wait & see -- attract multiple acquirer and discover their reservation price (target's board play for time to attack acquirer's financing strength and earn more profits).
• What are some tactics that acquirer can use to overcome the holdout problem?
• Purchase a toehold --> purchase less than 5% of target's stock in the market (not required to register and explain one's purchase to the SEC until one meets the 5% threshold). In the instance of a shareholder vote, toehold shareholders hold a significant place in such votes.
• Partially tender offer for target's share --> to discover the price and obtaining necessary control with minimum amount of capital.
• Partially asset acquisition --> Dictate and create an implicit threat to holdout shareholders that they interest may not be protected. Creating an option to acquire the asset fully in the future.
• Intense negotiation with large block of shareholders --> no collective actions, only to communicate with 1 block. --> create a threat that holdout shareholders interest may be diluted or expropriated. 
• Private Bear Hug --> Bypass CEO, go directly to board. Intense on board to board communication.
• Public Bear Hug --> media rumours to create pressure to shareholders. 
• Why is it important for acquirers to achieve control of the M&A process? What are their common bargaining chips?
• To dictate the negotiation process.
• Limit target flexibility and extract the reservation price.
• Bargaining chips: 
• Final price bid --> final offer, acquirer's final decisions, price will not going up no more, exit  negotiations if target continue to ask more.
• Deadline: timing of the offer price, not valid any more in certain due date.
• Offer reasonable price for more synergies and benefits. Push more target to negotiation table.
• Penalty and limit of the offer.
• Should you set your reservation prices based on the theoretical boundary formulae? How should you set your initial bid price?
• Due to information asymmetry --> acquirer should limit the reservation price and be prepared to switch to other target.
• Initial bid price: reasonable low, but not too low. Push target to negotiate and place a bid and discover they true value, try to dictate and renegotiate the bid price close to acquirer's reservation price.
• What is the value created from an auction environment? Why do you think that most auctions in M&As are a hybrid between open and sealed bid auctions?
• Auction environment could trigger multiple acquirer and push-up the bid price.
• Give control of the process back to the seller.
• Save time and effort (of target management), high probability that the target will be sold.
• Open Auctions: First bidder advantages, since no body will put the first bid forward close to their reservation price. The last bidder can free-ride previous bidders by offering higher bid price.
• Sealed Auctions: Overpayment risk, since overall the bidder will place their best price as high or close to reservation price.