Chapter 12.3 Flashcards
Friendly vs. Hostile Takeovers
1
Q
Why might it be difficult to value a potential acquisition target using only public information?
A
Because public sources may not reveal critical details like lab test results for biotech firms or the remaining resources in oil, gas, or mining operations.
2
Q
What is the typical approach an acquirer takes when facing valuation uncertainty?
A
The acquirer approaches the target company to see if it is open to being acquired—seeking a friendly takeover.
3
Q
What is a friendly takeover?
A
A situation where the target company agrees to be acquired and cooperates with the acquiring firm during the process.
4
Q
What was the premium offered in the URS-Flint friendly takeover?
A
70%.
5
Q
How much of a premium was offered in the 2012 friendly bid by Fortis Inc. for CH Energy Group Inc.?
A
10.5 percent.
6
Q
Can we generalize about the size of acquisition premiums based on whether a takeover is friendly?
A
No—the size of premiums in friendly takeovers varies significantly and depends on the specific deal.
7
Q
What is a friendly acquisition?
A
The acquisition of a target company that is willing to be taken over
8
Q
How can a friendly acquisition begin other than by an external approach?
A
It can begin when the target company voluntarily puts itself up for sale.
9
Q
What is a common reason a firm might decide to sell itself?
A
Often when the founder is no longer actively involved, and it’s time for the firm to leave the controlling owner and be sold to other interests
10
Q
What happened in the friendly acquisition of CHUM Ltd. in 2006?
A
The estate of founder Allan Waters agreed to sell its controlling 88.6% of the voting shares to Bell Globemedia for $1.7 billion.
11
Q
What role does an investment bank play when a company wants to sell itself?
A
It helps prepare an offering memorandum to present key company information to potential buyers.
12
Q
What is an offering memorandum?
A
A document describing a target company’s important features to potential buyers, similar to an abbreviated prospectus
13
Q
What must a company be willing to do if it agrees to be acquired?
A
Regardless of whether the company decides to sell itself or an acquirer approaches it, the company that’s willing to be sold has to provide more info so that it’s fair value can be estimated
14
Q
How does a target firm disclose confidential information with serious potential acquirers?
A
By setting up a data room containing sensitive information, which acquirers can access after signing a confidentiality agreement.
15
Q
What is a data room?
A
A place where a target company keeps confidential information about itself or serious potential buyers to consult
16
Q
What is a confidentiality agreement?
A
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
17
Q
What is the purpose of a confidentiality agreement in an acquisition?
A
To restrict how the acquirer can use the information, protecting the target from potential harm such as poaching employees or approaching customers.
18
Q
Why might some acquirers hesitate to sign a confidentiality agreement?
A
Because it limits their freedom of action, including the use of the information for competitive purposes.
19
Q
What kinds of restrictions are typically included in a confidentiality agreement?
A
Prohibitions against using the information to harm the target (by hiring away key employees for example or approaching key customers) and a time limit on how long the restrictions apply.
20
Q
What is the process called where a potential acquirer evaluates the target firm’s information?
A
Due diligence
21
Q
What is due diligence?
A
The process of evaluating a target company by a potential buyer
22
Q
What typically happens after an acquirer evaluates the target’s confidential data and wants to proceed?
A
The acquirer signs a letter of intent outlining the terms of the proposed agreement
23
Q
What is a letter of intent?
A
A letter signed by an acquiring company that sets out the terms of agreement of its acquisition, including legal terms
24
Q
What is the purpose of the third stage of due diligence after signing a letter of intent?
A
The acquirer’s legal team verifies the accuracy of the target’s claims by checking property titles, contract terms, and ownership of assets.
25
What type of clause does the letter of intent usually contain?
A no-shop clause which states the target agrees not to try to find another buyer.
26
What is a no-shop clause?
A clause in a letter of intent stating that the target agrees not to find another buyer, demonstrating its commitment to close the transaction
27
Why is a no-shop clause important to the acquiring firm?
The target shows that it is committed to making the transaction work
28
What is a termination or break fee?
A fee paid to an acquirer or target should the other party terminate the acquisition, often 2.5% of the value of the transaction
29
What was the break fee in the URS-Flint deal, and what percentage of the deal was it?
$42 million, or 3.4% of the deal value.
30
What was the break fee in the Teachers’-BCE deal, and what percentage did it represent?
$800 million, which was 1.55% of the $51.7-billion deal value.
31
Why have break fees become controversial in acquisition deals?
Because even with no-shop clauses, competing bids can still arise, and break fees may discourage or complicate fiduciary-driven decisions by the board.
32
What is the justification for break fees?
That once companies get into the final round of due diligence, the expectation is that a deal will be completed
33
What fiduciary duty does a company’s board of directors have when faced with multiple acquisition offers?
The board must act in the best interests of shareholders and seek the highest possible price for the company.
34
Why might the original acquirer lose out on a deal, despite initiating the process?
Because the board may choose a higher competing offer that better serves shareholder interests, even if the original acquirer invested significant time and resources.
35
Why is a break fee included in acquisition deals when a competing bid is accepted instead of the original offer?
To compensate the original acquirer for the resources spent during negotiations and due diligence, and to reward it for prompting a higher competing bid that benefits shareholders.
36
What happens once the final due diligence phase is completed to the acquirer’s satisfaction?
The final sale agreement is reached and ratified, or agreed to, by both parties
37
What is required after a final agreement is reached for a public company?
The deal then goes to the shareholders for approval
38
Is shareholder approval required for private company acquisitions
No—if the company is private, the transaction ends with the final agreement and ratification.
39
What are the key steps in a friendly acquisition
Approach target → Information memorandum → Confidentiality agreement → Sign letter of intent → Main due diligence → Final sale agreement → Ratified.
40
Why is there a considerable scope for structuring friendly acquisitions?
Because the parties are cooperating, allowing them to plan for tax efficiency, minimize liabilities, and align incentives, and the possibility of "cherry picking" for certain more valuable assets
41
Why is careful tax planning important in any transaction?
When an acquirer uses cash to purchase a company, that cash is always taxable in the hands of the target company shareholders. If the share price has run up significantly, this could mean the shareholders must pay capital gains tax on the appreciation in the value of their share
42
How can a share swap benefit target shareholders in terms of tax?
Share swaps are usually non-taxable, helping shareholders defer or avoid immediate tax liabilities.
43
Why are share swaps for preferred shares commonly used in smaller acquisitions?
Because share swaps are usually non-taxable, allowing target shareholders to defer capital gains taxes that would be triggered by a cash acquisition.
44
Why do founders of a target company often receive preferred shares in an acquisition?
Because preferred shares provide a steady income and allow the founders to step away from day-to-day management as the acquiring firm integrates the business.
45
Why might a target company sell its assets instead of its shares in an acquisition?
Due to tax advantages, the target firm receives the proceeds from the sale and uses these proceeds to pay off its debts
46
What is an asset purchase?
A purchase of the firm's assets rather than the firm itself
47
What does the target firm typically do with the proceeds from an asset sale?
It uses the proceeds to pay off its debts and can then either reinvent itself or liquidate and distribute the remaining proceeds to shareholders.
48
Why is an asset purchase attractive to the acquiring firm?
Since it can depreciate the assets at the value that it has paid for them; there are usually tax advantages from having a higher CCA value
49
How can the target firm reduce tax liabilities from an asset sale?
By using existing losses to shield or offset potential tax payments from the sale.
50
How can an asset purchase help an acquirer avoid specific contingent liabilities?
By allowing the acquirer to exclude certain obligations—such as potential warranty claims—that would otherwise be inherited in a share purchase.
51
Can asset purchases always be used to avoid contingent liabilities?
No—some liabilities, like environmental claims, follow the asset regardless of ownership so you can't dodge an environmental lawsuit from a polluting factory by selling the factory to someone else
52
Why can’t environmental liabilities be avoided through an asset sale?
Because the liability stays with the asset (e.g., a polluting factory), not the shareholder, to prevent firms from escaping responsibility for legitimate claims by reorganizing.
53
Why do acquisition deals often fall through?
Due to fundamental disagreements concerning the target's value. Often the target's managers or founders are optimistic about the future prospects of the firm and value it based on a scenario in which everything goes right
In contrast, the acquirer may have experience with acquisitions that didn’t go so well and may approach this one with a more cautious attitude
54
What is an “earn-out” in the context of a small acquisition?
A deal structure where the acquirer pays an upfront amount and agrees to additional future payments based on the target’s future performance.
55
What are earn-out payments usually based on?
Future payments are usually based on divisional sales or other reasonably objective data that both parties agree on
56
Do all friendly acquisitions follow the same process?
No, some legal experts tell their clients not to sign a letter of intent
57
Why do some legal experts advise against signing a letter of intent?
Because it can be interpreted as a preliminary sale agreement, potentially exposing the acquirer to liability if they later back out.
58
What is a hostile takeover?
A takeover in which the target has no desire to be acquired, actively rebuffs the acquirer, and refuses to provide any confidential information
59
What typically signals that a hostile takeover is underway?
The acquirer has already built a toehold—usually around 20% ownership—prompting the target to prepare for a defensive fight.
60
What kind of offer is there usually in hostile bids?
Tender offer, in which the acquiring firm makes a public offer to purchase shares of the target firm from its existing shareholders
61
What is a tender offer?
A public offer in which the acquiring firm offers to purchase shares of the target firm from its existing shareholders
62
What condition is usually attached to a hostile tender offer?
Provision that the offer is only good subject to the bidder being able to obtain a certain minimum percentage of the outstanding voting shares
63
What is the advantage of a tender offer for the bidder in a hostile takeover?
Formal vote by the target shareholders is not required, since they merely decide on their own whether or not they want to sell their shares to the acquiring firm
64
What most obvious clue do external parties look for when a hostile tender offer is launched?
The most obvious is the behaviour of the market price relative to the offer price. If the market price immediately jumps above the offer price, the market is saying that a competing offer is likely or that the bid is too low, and the bidder will have to increase the offer price
65
What does it usually mean if a target company’s stock price jumps above the hostile offer price?
It suggests that the market expects a competing offer or that the current offer is too low and will need to be raised.
66
What does it indicate if the target’s market price stays close to the offer price?
That the offer is likely fair and the deal is expected to go through without a competing bid.
67
Why is low trading volume in the target’s shares a bad sign for the acquirer in a hostile bid?
It suggests that shareholders are holding onto their shares and are reluctant to sell at the offer price.
68
What does large amounts of trading activity in a target’s shares after a hostile offer typically indicate?
That shares are cycling from regular investors into the hands of specialists (arbs): people who specialize in predicting what happens in takeovers
69
What are arbs?
Short for arbitrageurs, specialists who predict what will happen in takeovers and buy and sell shares in target companies, with the possibility of earning a premium
70
Why can the presence of arbs be a good sign for the acquirer?
Since arbs are only interested in selling as long as the price is right.
71
What is the motivation of arbs?
To extract the highest possible price. The arbs buy the shares after the announcement, so they pay a premium and then expect to get a bigger premium when they sell.
72
Why was the $18 offer in the Sears Canada takeover attempt rejected?
Because it was below what the arbitrageurs (arbs) who had bought shares after the announcement were expecting, and they pressured Sears, Roebuck to raise the offer.
73
What was the strategy of the arbs in the Sears Canada takeover attempt?
They bought shares after the initial offer expecting a higher bid, and when it didn’t materialize, they pushed for a better price.
74
Who owned 14.1% of Sears Canada’s shares during the takeover battle?
Three New York hedge funds, which are professionally managed and highly skilled in maximizing value in takeover situations.
75
What did the ownership shift in Sears Canada shares lead to during the takeover attempt?
A high-stakes negotiation dominated by professional investors and legal experts, rather than regular retail shareholders.
76
How does shareholder behavior in the Sears Canada case differ from that in a typical hostile bid?
In the Sears case, arbitrageurs were willing to sell—it was only a question of price. In hostile bids, the target resists being taken over at any price and may deploy anti-takeover tactics.
77
Why are defensive tactics in hostile takeovers limited in Canada?
Because what the target can do is restricted by securities laws, since the securities commissions in Ontario and elsewhere will take a dim view of any action on the part of the target firm that interferes with the fundamental right of shareholders to dispose of their shares at full market value
78
Why might takeover defences used in the U.S. not work in Canada?
Canadian securities commissions are more restrictive and emphasize shareholder rights, making many U.S.-style defenses unacceptable.
79
What is one of the most common defensive tactics used by some BODs?
To implement a shareholder rights plan, also known as a poison pill
80
What is a defensive tactic?
A strategy used by a target company to stave off a takeover or to try to get the best deal for its shareholders
81
What is a shareholder rights plan or poison pill?
A plan by a target company that allows its shareholders to buy 50% more shares at a discounted price in the event of a takeover, which makes the target company less attractive
82
How does a poison pill pressure a hostile acquirer to negotiate a friendly offer?
Increase in the number of shares makes the acquisition much more expensive and, if everything else is constant, forces the acquirer to negotiate with the target company and make a friendly offer, since the BOD can then remove the poison pill through a vote
83
What happened when Moore Corporation attempted a hostile takeover of Wallace Computer Services in the U.S.?
Wallace had a poison pill in place, and although 78% of shareholders voted to nullify it, the board refused. The U.S. court upheld the board’s decision, citing the business judgment rule.
84
What legal principle allowed the Wallace BOD to keep its poison pill despite shareholder opposition?
The U.S. business judgment rule, which gives the board discretion over such decisions.
85
How do Canadian securities commissions approach poison pills differently than U.S. courts?
In Canada, the acquirer can appeal directly to the securities commission, which evaluates whether the poison pill should be nullified based on specific criteria.
86
What are the three main criteria Canadian securities commissions consider when evaluating a poison pill?
1. Is there a likelihood of another offer?
2. Can the current offer be withdrawn?
3. Are shareholders lobbying for removal of the poison pill?
87
Under what circumstances have Canadian commissions struck down poison pills when shareholders lobbied for their removal?
In Alberta, Saskatchewan, and Ontario, poison pills have been struck down because they produced very little chance of a counter bid and a good chance that the existing bid would be withdrawn
88
What happened in the 1994 MDC-Regal takeover attempt regarding the poison pill?
The Ontario Securities Commission (OSC) allowed the poison pill to remain for three weeks because the target was actively searching for another bidder.
89
What is the primary difference in how poison pills function in Canada versus the U.S.?
In Canada, poison pills can only be used as a delaying tactic, while in the U.S. they can be used to fully block a bid—though recent U.S. cases have subjected them to greater scrutiny.
90
What is the purpose of defensive tactics like “selling the crown jewels”?
To make the target company less attractive to the hostile acquirer by selling off the key asset the acquirer wants.
91
What does selling the crown jewels mean?
The sale of a target company's key assets, which the acquiring company is most interested in, to make the target company less attractive for takeover
92
What historical example illustrates the “selling the crown jewels” tactic?
In 1979, after Edper Equities made a hostile partial bid for Brascan Ltd., Brascan responded by launching a hostile bid for F.W. Woolworth Co. to divert its resources and protect its $500 million in cash.
93
Why was Edper’s bid for Brascan considered a partial bid?
Because Edper only needed 50.1% of shares to gain control of all of Brascan’s $500 million in cash.
94
How is finding a white knight a major defence tactic?
Find white knight to rescue the company and make a counter bid
95
What is a white knight?
An entity that rescues a target company from a hostile takeover by making a counter bid
96
How many unsolicited bids were made in Canada between 2005 and 2014?
143 unsolicited bids.
97
What percentage of initial unsolicited bidders were successful in their takeovers?
Nearly 55%.
98
What was the total acquisition rate when combining successful hostile bids and white knight rescues in Canada (2005–2014)?
Over 70% of targets were eventually acquired once they were put in play.
99
What hostile bid did Indigo make for Chapters in December 2000?
A $13-per-share hostile offer aimed at consolidating the Canadian bookselling industry against potential U.S. competition.
100
101
What was Chapters’ first defensive tactic in response to Indigo’s hostile bid?
Selling the “crown jewels” by offering to buy back minority interest in its failing online bookstore (Chapters Online) at $3.40 per share, above the market price of $2.00.
102
What was the strategic effect of Chapters buying back Chapters Online shares?
It used up cash and increased ownership in an asset Indigo did not want, making the company less attractive to the acquirer.
103
What was Gerry Schwartz’s criticism of Chapters' buyback of its online bookstore shares?
He stated it made Chapters “virtually the only company in North America to offer cash to bail out the shareholders of a failing e-tailer.”
104
What did Chapters do after its first defense tactic failed?
It paid a break fee to Future Shop to step in as a white knight with a $16.80-per-share counteroffer.
105
How did Indigo respond to the white knight counteroffer?
It raised its bid to $17.00 per share, which was ultimately successful.
106
Why did Indigo not need extensive due diligence in its bid for Chapters?
Because it already understood the business well and faced little uncertainty about Chapters’ value.
107
Why was Future Shop’s white knight bid seen as lacking strategic value?
Because combining a bookstore with an electronics retailer made little retail sense—it was simply used to increase Indigo’s bid.
108
How did Indigo’s ability to sustain a long takeover battle help its success?
The value of Chapters was not diminished during the prolonged process, unlike some targets that lose contracts or personnel in drawn-out bids.
