Chapter 12 #4

Question 1

Define takeover

Answer 1

Occurs when control is transferred from one ownership group to another

Question 2

Define acquisition

Answer 2

Occurs when one firm purchases (absorbs) another

Question 3

Define merger

Answer 3

Combines two firms into a new legal entity and shareholders in both firms must approve the transaction in order for the new firm to be created

Question 4

Difference between acquisition and merger

Answer 4

Acquisition -one firm completely absorbs another
Merger - combination of two firms, new legal entity

Question 5

What is amalgamation?

Answer 5

A genuine merger which shareholders in both firms must approve the transaction
- 2 companies approve & special meeting of shareholders held to vote on the agreement
- 2/3 of shareholders of both firms must approve
-

Question 6

When is amalgamation a tense situation? What’s this situation called?

Answer 6

After a firm has partially completed a takeover

• the acquirer can end up with majority or the shares so it knows it can get 2/3 majority but there is still the other percentage of shares held by dissident shareholders who have not agreed to sell shares. - this is special form of acquisition called going private transaction, or issuer bid

Question 7

What safeguards are put up when a controlling shareholder seeks approval for an amalgamation

Answer 7

• Majority of the minority shareholders approve the special resolution to amalgamate the two companies
• fairness of opinion independent experts opinion about the value of a firms shares, based on external valuation

Question 8

How is the deal financed in amalgamation?

Answer 8

1) cash transactions: the shareholders of the target company receive cash in exchange for their shares
2) share transactions: shareholders of the target Company receive shares, or a combination of cash & shares in the acquiring company in exchange for their shares
3) going private transactions (issuer bids): acquisition where purchaser already owns a majority stake in the target company

Question 9

Main rules in securities legislation

Answer 9

• transparency & information disclosure
• fair treatment: avoid up oppression or coercion of minority shareholders
• to permit competing bids- the first bidder does not have special rights
• limit the ability of a minority to frustrate the will of a majority ( minority squeeze-out provisions)

Question 10

Exempt takeover in securities legislation

Answer 10

• private firms: exempt from provincial securities legislation
• public firms: have few shareholders in one province may be subject to
  takeover laws of another province where the majority of shareholders reside

Question 11

Exemption from Takeover Requirements for Control Blocks in securities legislation

Answer 11

Purchase of securities from 5 or less shareholders are permitted without a tender offer if price with premium of less than 15% over market price

Question 12

What is the 5% Rule in securities legislation

Answer 12

Normal course tender unfair not required us long as no more than 5% of the outstanding shares are purchased through exchange over 1 year period
- this allows creeping takeovers

Question 13

Critical shareholders percentages

Answer 13

Early warning (10%)- report is sent to OSC to alert shareholders

Takeover bid (20 %) -no further open market purchases & must make takeover bid

Control (50.1%) - shareholder controls voting decision under normal voting& can replace board, control management

Amalgamation (66.7%)- acquirer can approve amalgamation proposals requiring 2 thirds majority vote

Minority squeeze out (90%)- once shareholder owns 90% or more minority shareholders can be forced to tender their shares

Question 14

Takeover bid process ( moving past 20% threshold)

Answer 14

• takeover circular sent to all shareholders,
• target BOD has 15 days to circulate letter to shareholders with recommendation to accept or reject
• bid open for 105 days after but usually reduced to 35
• shareholders tender to the offer by signing authorization
• If another company submits a competing bid the takeover window is increased by 10 days
• shareholders can withdraw their acceptance of the original offer and accept the better one

Question 15

Takeover bid ( prorated settlement & price)

Answer 15

• tender offer cannot be for less than the average price that the acquirer bought shares in the previous 90 days
• If more shares are tendered than required under the tender, everyone who
  tendered shares will get a prorated number purchased
  (Example: acquirer wants to purchase 60%. 80% shares tendered, Each shareholder sells 75% of shares tendered (60/80))

Question 16

Define creeping takeovers

Answer 16

The acquisition of a target company over time by the gradual accumulation of its shares

Question 17

Define Friendly takeover

Answer 17

Friendly acquisition occurs when the target company is willing to be acquired
- target will accommodate overtures tuna provide access to confidential information to facilitate the scoping and due diligence processes

Question 18

Define memorandum and when it is used

Answer 18

• used in a friendly takeover process. Target company normally uses investment bank to perpare an offering memorandum

Offering memorandum – a document describing a target company’s important
features to potential buyers

Question 19

Takeover process: define data room, confidentiality agreements and due diligence and when they are used

Answer 19

Used in the friendly takeover process where target company may set up a data room and use confidentiality agreements to permit access to interested parties practicing due diligence

Data room – a place where a target company keeps confidential info about itself for
serious potential buyers to consult

Confidentiality agreement – a document signed by a potential buyer to guarantee the
buyer will keep confidential any information about a target company that is available in the
data room and will not use the data to harm the target company

Due diligence – the process of evaluating a target company by a potential buyer

Question 20

Define letter of intent and when it is used

Answer 20

Used during friendly takeover process

a letter signed by an acquiring company that sets out the terms of agreement of its acquisition, including legal terms

Question 21

Define no shop clause & when it is used

Answer 21

Used during friendly takeover process

a clause in a letter of intent stating that the target agrees not to find another buyer, demonstrating its commitment to close the transaction

Question 22

Define break fee and when it is used

Answer 22

Used during friendly takeover process

a fee paid to an acquirer or target should the other party terminate the acquisition, often 2.5 percent of the value of the transaction

Question 23

Structuring of a friendly takeover

Answer 23

1) taxation issues: where cash for share purchases trigger capital gains so share exchanges may be a viable alternative
2) asset purchase: purchase of the firms assets rather than share purchases, that may
- give target film cash to retire debt and then liquidate itself
- Give the acquiring firm a new asset base to maximize CCA deductions
- Permit escape from some contingent liabilities
3) Earn-outs, where there is an agreement for an initial purchase price with conditional later payments depending on the performance of the target after acquisition

Question 24

define hostile takeovers

Answer 24

Occur when the target has no desire to be acquired and actively rebuffs the acquirer and refuses to prove any confidential information
- there is usually a tender offer which the acquiring firm makes a public offer to purchase shares of the target firm from its esisiting shareholders
- the bidder includes the provision saying the offer will only proceed if they acquire a minimum percentage of outstanding voting shares

Question 25

Market clues for the potential outcome of a hostile takeover attempt. Define Arbs as well

Answer 25

1) The market price jumps above the offer price: competing offer is likely or the bid is too low, bidder will have to increase price 2) The marker price stays too close to the offer price: it indicates that the price is fair and the deal is likely to go through 3) very little trading: bad sign to investors because it mean shareholders are sitting on shares and reluctant to sell 4) a lot of trading: shares are cycling from regular investors into the hands of arbs Arbs: specialists who predict what will happen in takeovers and buy and sell shares in target companies with the possibility of earning a premium

Question 26

Hostile takeovers defensive tactics

Answer 26

Shareholders right plan (Poison Pill): a plan by a target company that allowed its shareholders to buy 50% more shares at a discounted price in the event of a takeover, which makes the company less attractive Selling Crown Jewels: target company sells its assets in which their acquiring company is most interested in order to make it less attractive - can involve large cash dividend to remove excess cash from balance sheet White knights: other potential and friendly acquires that the target company actively seeks to make counter-offers and reduce the target from the hostile takeover

Question 27

The typical hostile takeover process

Answer 27

1) slowly acquire a toehold (beach head) by open market purchases of shares at market prices without attracting attention 2) file a statement with the securities of commission at the 10% early warning stage while not trying to attract too much attention 3) accumulate 20% of outstanding shares through open market purchases over a long period of time 4) make a tender offer to bring ownership percentage to the desired level ( either 50.1% for control or 67% for amalgamation); offer contains provision requiring acquisition of a certain minimum percentage

Question 28

Motivation for mergers and acquisitions

Answer 28

1. Horizontal: merger in which two firms in their same industry combine - often attempt to achieve economies of scale or scope 2. Vertical: Merger where one firm acquires a supplier or another firm that is closer to its existing customers - often an attempt to control supply or distribution channels 3. Conglomerate: two firms of unrelated businesses combine - often an attempt to diversify by combining uncorrelated assets and income streams 4. Cross border or international: merger or acquisition involving a Canadian and foreign firm as either the acquiring or target firm

Question 29

Mergers and aquisition activity’s usually occur in waves in response to…..

Answer 29

Domestic economic cycles or globalisation issues such as the formation of trading zones, deregulation and booms in sector of the economy

Question 30

What is the primary motive for mergers and acquisitions

Answer 30

Synergy: value is created from economics of integrating a target and acquiring company; the amount by which the value of the combined firm exceeds the sum value of the two individual firms Additional Value created= post-merger firm value - the same of the pre-merger firms values of the acquiring and target firms

Question 31

Types of operating synergies

Answer 31

Economies of scale - reducing capacity ( Overcapacity merger or acquisition- occurs when an industry has too many firms operating in it) - spreading fixed costs - geographic synergies (geographic roll up- creation of a national firm from a series of regional ones) Economies of scope - expanding the business type - combination of two activities reduces costs when products share similarities in their production process Complementary strengths - occurs when one firm is more efficient in one ore more areas of operation than another - combining the different relative strengths of the two firms creates a firm with both strengths that are complementary to one another - Extension M&A- merger or acquisition that extends a firms expertise

Question 32

Efficiency increases synergy

Answer 32

- materialise whenever one or both of the firms involves has excess capacity - new management tram will be more efficient and add value - combines firm can make use of unused production

Question 33

Financing synergies

Answer 33

Reduced cash flow variability - Diversity in businesses reduces the risk in earning revenue Increase in debt capacity - Less risk due to size means I can borrow more money Reduction in average issuing costs - costs of accessing money is smaller due to large company Fewer information problems - the firm is large and well known to investors

Question 34

Tax benefits from synergy

Answer 34

- occur when one firm has sustainable operating loss credits that it cannot take advantage of (carry forward to use against future profits) because it is not operating profitability Higher Tax Brackets: Deductions are more valuable in higher tax brackets because they save more money. Capital Losses Offset Gains: The merged firm can use the target’s unused losses to reduce its taxable capital gains. CCA Utilization: The merged firm’s larger income allows it to make full use of previously unused depreciation deductions

Question 35

Managerial motivations

Answer 35

Increased firm size - managers highly rewarded financially for building a bigger business Reduced firm risk through diversification - managers have a undiversified stake in the business unlike shareholders, so they tend to dislike risk - M&A can diversify company and reduce risk that might concern managers

Question 36

What is SVAR?

Answer 36

Shareholder Value at Risk: the potential that M&A synergies will not be realized or that the premium paid will be greater them the synergies that they are realized - when using cash, the acquirer bears all the risk - when using share swaps, the risk borne by shareholders in both the auditing and target companies