Fin management materials / P4AFM-Session08_j08

SESSION 08 – MERGERS & ACQUISITIONS

5.3Defences after a bid is made

¾If a bid is initially rejected the following defences are common:

the terms of the offer are unacceptable;

there is no logic/synergy to the merger;

victim’s shares are undervalued and bidder’s overvalued;

appealing to the loyalty of the shareholders;

seeking a bid from a friendly third party – a “white knight”;

claiming that the bid is contrary to the City Code;

appealing to the Competition Commission that the bid is against public interest.

“Pacman defence” – bid for the predator i.e. reverse takeover.

6POST MERGER MONITORING

¾Many M&A’s fail and therefore if a deal is agreed it must be carefully monitored by management.

¾The most common reasons given for failure of M&A’s are:

over-optimistic assessment of potential economies of scale;

inefficient amalgamation of the two parties;

insufficient appreciation of the problems of the merger, in particular personnel problems;

excessive concern with matters such as dominance of the boards of directors;

problems of determining value and terms of the offer;

inaccurate assessment of future resource needs;

incompatibility of systems/processes.

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SESSION 08 – MERGERS & ACQUISITIONS

Key points

Many company directors view mergers and acquisitions as the key to maintaining a high level of growth for the business.

However there is significant empirical evidence to suggest that many reallife M&A’s actually destroy wealth for the bidding company’s shareholders.

Either the premium paid for control is too high and/or the magical “synergy” benefits of combining the companies never become a reality.

Therefore it is critical that a target company is accurately valued. However this tends to be complicated, partly due to problems in forecasting synergy benefits, but also because adding another company to the group is likely to disturb the group’s WACC and hence the value of existing operations.

Hence a target company cannot be valued as a separate entity – it must be valued as if it becomes embedded into the existing group.

Financing M&A’s is in many ways standard sources of project finance.

Methods of defence against hostile takeover – which can be legally used depends on whether the bid has already been announced.

FOCUS

You should now be able to:

¾discuss alternative methods of organisational growth;

¾discuss the arguments for and against mergers, methods of financing mergers, strategies and tactics of mergers and defences against mergers;

¾advise on the value of target companies.

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