This article is written by Monika Saini.

Introduction

Mergers and acquisitions (Hereinafter will be referred as M&A) are used to describe amalgamation of two companies. It can be done through various including mergers, acquisitions, consolidation, etc. M&A is a process through which 2 companies combine to form a new and bigger company.

The words mergers and acquisitions are slightly different from each other. Through a merger, two companies of approximately same size, join hands to form a single new entity. They are owned and operated as a single entity. The stocks of both the companies are surrendered and the stocks of new company are issued in the market. For example, Daimler-Benz and Chrysler were two separate entities which came to an end when Daimler Chrysler was created. In 2000, AOL Inc. merged with Time Warner Inc. It is considered as the biggest merger in history. Mergers are voluntary in nature and its terms are mutually agreed by both the companies. There are different types of mergers like conglomerate, congeneric, market extension, horizontal and vertical.

On the other hand, acquisition is one company taking over another. The buyer acquires 50% or more of the target company to establish itself as the new single owner of the company. In the eyes of law, the company acquired (i.e. the target company) ceases to exist. The stocks of the target company cease to exist whereas the stocks of the buyer continue to be traded in the market. There are various types of acquisition such as horizontal acquisition, vertical acquisition, congeneric acquisition and conglomerate acquisition. For example, Myntra was acquired by Flipkart in 2014.

There are various benefits of M&A as it brings efficiency and capability of both the companies. Some of the benefits include improvement in the economies of scale as it enables the new company to purchase raw materials in bulk. It increases the market share of the company as M&A brings the resources of both the companies together. Companies can increase their distribution network by expanding geographically. It expands the labour pool which aids in growth and development of the company. It enhances the financial capabilities of the company.

There are certain drawbacks of M&A. Some of them include cost associated with buying a company especially if the company is opposing the acquisition. There is a possibility that the company gets negative reaction to a merger or acquisition which can lead to lower stock price of the company.

Companies often go for M&A for several reasons like to increase its size, resource pool, labour and most importantly its customer base. One of the important reasons for M&A is synergies i.e. overall performance of the company increases when two companies combine into each other. The supply of the company increases with M&A and companies can reduce the cost of supply chain if they merge or acquire one of its distributors or suppliers.

Takeovers & its different types

Takeover is a form of acquisition wherein one company takes over the management of another company. The takeover is different from acquisition as a company may acquire another without its consent. There are four types of takeovers i.e. friendly takeover, hostile takeover, reverse takeover & backflip takeover.

In a friendly takeover, the takeover is with mutual consent and management of both the companies have enough time to discuss the terms of the takeover. The company is informed in advance about the offer of takeover.

In a hostile takeover, direct offer is made to the shareholders without prior permission from the management.

In a reverse takeover, a listed public company is acquired by an unlisted private company. This is done by private company to get the status of a listed company. This merger can either be friendly or hostile. This way of listing is better for small enterprises as it saves the costs of listing which might be significant for small enterprises.

In a backflip takeover, the bidding company becomes the subsidiary of the taken over company. This is done to get benefit from the goodwill of the taken over company. For example, SBC took over AT&T but continued working under the name of AT&T as it was a established brand. These takeovers usually happen when the established company is running out of resources to run its business and the company which is taking over has goof cash flow and is searching for investment opportunities.

Hostile takeovers & ways to prevent it 

A takeover is hostile when one company tries to take over another company without the consent of board of directors of the target company. The main idea of hostile takeover is that the management of the target company is against the acquisition. It can be done through either a tender offer or a proxy fight. 

The company may make tender offer for the purchase of shares of the target company at a premium above the current market value. The board of directors have the option to reject the offer in that case, the purchasing team can take the offer to the shareholders directly. The shareholders have full liberty either to accept or reject the offer. The shares are sold to the purchasing company if majority of stockholders accept the offer. On the other hand, in a proxy fight, opposing groups of stockholders try to convince other stockholders to agree on allowing them to use of proxy votes of their shares.

There are certain defence strategies which can be used to deter hostile takeovers. They are: 

Poison Pill Defense: It is also known as shareholder rights plan. It can be executed by diluting the shares of the target company in such a way that it becomes difficult for the purchasing company to obtain a controlling share without incurring massive expenses. It is one of the strongest defences against a hostile takeover. 

The pill can be of 4 types i.e. flip-in, flip-over, dead hand, and slow/no hand. Flip in pill allows the target company to issue preferred shares which can be bought only by existing shareholders. Flip-over pill allows the existing shareholders to buy the shares of the purchasing company at a discounted rate which makes the takeover expensive. Dead hand pill allows the current shareholders the exclusive right to redeem the pill when there is a threat of acquisition. Slow/no hand pill prohibits the pill’s redemption within a particular period of time. 

Staggered Board Defense: in this, the company divides its board of directors into various groups. Only a few can stand for re-election at one meeting. This board changes over time and makes it very time consuming for the entire board to be voted out. 

Stock repurchase: also known as self-tender offer. Here, the target company buys the its self-issued shares from its shareholders. 

Shark repellents: these are certain provisions in the bylaws of the target company. They provisions deter the purchasing company from a hostile takeover. These bylaws provide that a supermajority vote is required regarding a merger. 

Golden parachutes: it says that the top management of the target company will get additional compensation if they are terminated in case of a successful hostile takeover. It is detrimental for the purchasing company as it decreases the assets of the target company. This defence may harm the shareholders. However, it is an effective way to deter a hostile takeover. 

Greenmail: it’s a buyout of shares of the target company by their own management from the hostile acquirer on a premium above over the market price. This defence results in the acquirer’s agreement not to pursue the hostile takeover in the near future. The statute may require a shareholder’s approval for repurchasing the shares at a premium. The defence is costly as the target company pays a substantial premium over the current market price to repurchase their own share. 

Standstill agreement: it’s an agreement wherein the acquirer agrees not to buy any more shares of the target company for a certain period of time. 

Leveraged recapitalization: (also known as corporate restructuring) it is a series of transactions which are made to affect company’s equity and debt structure. These transactions involve sale assets, distribution of dividends, etc. 

Leveraged buyout: it is purchase of the management of the target company through debt financing which increases the debt burden of the purchasing company. In this defence, the management of the target company becomes a bidder and competes with the hostile acquirer for control of the target company. 

Crown jewel: this defence involves sell of the target company’s assets to a third party or spinning off the company’s assets into an independent and separate entity. The third party may buy it at the price lower than its market value. The objective of this defence is to make the target company less attractive so that the buyer does not pursue the takeover further. 

Pac-Man: under this defence, as a response to the hostile takeover, the target company starts attempting to acquire its potential acquirer. Under Pac Man defence, both the acquiring firm and target firm attempts to buy each other’s shares to obtain a controlling interest in the other party’s company. However, this defence is possible only if the target company has enough financial power and stability to purchase the shares in the acquiring company. 

White knight: If the target company realises that it cannot reasonably prevent a hostile takeover then it may sell its assets to a friendlier firm. It does not involve a change of control & management of the company. Classical examples of this defence are the purchase of National City Corporation in 2008 by PNC Financial Services’ (PNC). This was to help NCC during the subprime mortgage lending crisis. Another example is takeover of Chrysler by Fiat’s (FCAU) in 2009 to save the company from liquidation. 

Conclusion

M&A can be path changing opportunity for any business. There are various benefits of M&A which can be help in growth & development of any business. However, there can be certain situations in which the target company is not ready for the takeover and hence, it becomes very important for businesses to make policy decisions keeping in mind the strategies to deter a hostile takeover. 

References

1.  Adam Hayes, Mergers and Acquisitions – M&A, Investopedia, (June 1, 2020, 11:30 PM, IST), https://www.investopedia.com/terms/m/mergersandacquisitions.asp
2. Marshall Hargrave, Merger, Investopedia, (June 1, 2020, 11:30 PM, IST), https://www.investopedia.com/terms/m/merger.asp
3. What is Mergers and Acquisitions (M&A) – Definition & meaning, Educba, (June 1, 2020, 11:30 PM, IST), https://www.educba.com/what-is-mergers-and-acquisitions/
4. Stephen Grocer, What Happened to AOL Time Warner?, The New York Times, (June 1, 2020, 11:30 PM, IST), https://www.nytimes.com/2018/06/15/business/dealbook/aol-time-warner.html#:~:text=2000%3A%20America%20Online%20agrees%20to,Thanks%20for%20reading%20The%20Times.
5. Merger, Wall Street Mojo, (June 1, 2020, 11:30 PM, IST), https://www.wallstreetmojo.com/merger/
6. Mergers and Acquisitions, (June 1, 2020, 11:30 PM, IST), https://efinancemanagement.com/mergers-and-acquisitions
7. Will Kenton, Acquisition, Investopedia, (June 1, 2020, 11:30 PM, IST), https://www.investopedia.com/terms/a/acquisition.asp
8. Types of acquisition, Wall Street Mojo, (June 1, 2020, 11:30 PM, IST), https://www.wallstreetmojo.com/types-of-acquisition/
9. Flipkart acquires Myntra, The Times of India, (June 1, 2020, 11:30 PM, IST), https://timesofindia.indiatimes.com/tech-news/Flipkart-acquires-Myntra/articleshow/35472797.cms
10. Mergers and Acquisitions (M&A), Shopify, Business encyclopedia, (June 1, 2020, 11:30 PM, IST), https://www.shopify.in/encyclopedia/mergers-and-acquisitions-m-a 
11. Driving Business Growth Through Mergers and Acquisitions (M&A), InCorp, (June 1, 2020, 11:30 PM, IST), https://www.incorp.asia/blog/driving-business-growth-through-mergers-and-acquisitions/
12. Andrew Bloomenthal, How Company Stocks Move During an Acquisition, Investopedia, (June 1, 2020, 11:30 PM, IST), https://www.investopedia.com/ask/answers/203.asp
13. Barclay Palmer, Why Do Companies Merge With or Acquire Other Companies?, Investopedia, (June 1, 2020, 11:30 PM, IST), https://www.investopedia.com/ask/answers/why-do-companies-merge-or-acquire-other-companies/#:~:text=Reasons%20for%20M%26A,of%20the%20other%20company’s%20strengths.
14. Harpal Singh, When supply chains merge: 5 mistakes to avoid, Supply Chains, (June 1, 2020, 11:30 PM, IST), https://www.supplychainquarterly.com/articles/256-when-supply-chains-merge-5-mistakes-to-avoid
15. Takeovers, (June 1, 2020, 11:30 PM, IST), https://efinancemanagement.com/mergers-and-acquisitions/takeovers
16. Hostile Takeovers vs. Friendly Takeovers: What’s the Difference?, Investopedia, (June 1, 2020, 11:30 PM, IST), https://www.investopedia.com/ask/answers/042215/what-difference-between-hostile-takeover-and-friendly-takeover.asp#:~:text=If%20a%20company’s%20shareholders%20and,by%20appealing%20directly%20to%20shareholders.
17. What are Friendly Takeovers vs Hostile Takeovers?, CFI, (June 1, 2020, 11:30 PM, IST), https://corporatefinanceinstitute.com/resources/knowledge/deals/friendly-takeovers-vs-hostile-takeovers/
18. What is Reverse Takeover (RTO)?, CFI, (June 1, 2020, 11:30 PM, IST), https://corporatefinanceinstitute.com/resources/knowledge/deals/reverse-takeover-rto/
19. Backflip Takeover – Definition, The Business Professor, (June 1, 2020, 11:30 PM, IST), https://thebusinessprofessor.com/lesson/backflip-takeover-definition/#:~:text=A%20backflip%20takeover%20is%20an,the%20acquired%20company%20is%20retained.
20. Hostile Takeover, Cornell Law School Legal Information Institute, (June 1, 2020, 11:30 PM, IST), https://www.law.cornell.edu/wex/hostile_takeover
21. James Chen, Hostile Takeover, Investopedia, (June 1, 2020, 11:30 PM, IST), https://www.investopedia.com/terms/h/hostiletakeover.asp#:~:text=A%20hostile%20takeover%20is%20the,to%20get%20the%20acquisition%20approved.