Takeover Strategies

yedlu, Winter 2024

Offensive Takeover Strategies

Buyer-Initiated Deals

• Friendly Approach:
  • Bidder approaches the target to negotiate a deal amicably.
    
  • May involve a standstill agreement to restrict the bidder from pursuing the target unfriendly.
• Bear Hug:
  • An unsolicited formal proposal submitted to the target’s board.
    
  • Examples:
    • Elon Musk’s $54.20/share offer for Twitter (2022).
      
    • Kraft Heinz’s $143B offer for Unilever (2017).
• Hostile Tender Offer:
  • Bidder bypasses the target’s board and directly approaches shareholders.
    
  • Examples:
    • JetBlue’s bid for Spirit Airlines (2022).
      
    • Oracle’s bid for PeopleSoft (2003).

Tender Offers

• Definition: Direct purchase of shares from shareholders at specified terms.

• Key Features:

  • Often used in hostile takeovers, though they can be friendly.
    
  • All-cash offers are faster (under one month).
    
  • Stock or debt-based offers require SEC registration, prolonging the process.

• Finding Tender Offer Information:

  • Use the SEC EDGAR database:
    • Tender offer filings: SC TO-T, SC TO-T/A, TO-I.
      
    • Target responses: SC 14D9.

Structuring Tender Offers

Bidding Strategies

• Key Considerations:
  • Bid above the current market value but below the break-up value if possible.
    
  • A preemptive high bid discourages competitors from entering.
• Risks of Lowball Offers:
  • Invites competing bidders.
    
  • May reduce shareholder confidence.
• Tender Duration:
  • Longer offers increase the likelihood of competing bids.

Free-Rider Problem

• Definition: Shareholders may hold out expecting post-acquisition gains without tendering.

• Condition for Profit:
  \(P_E > P_T\), where:

  • \(P_E\) = Post-takeover value.
    
  • \(P_T\) = Tender offer price.

• Solution: Use strategies like freeze-outs or two-tiered offers.

Solving the Free-Rider Problem

Freeze-Outs

• Mechanism:
  • Tender offer followed by a second-step freeze-out merger.
    
  • Conditional on acquiring enough shares to guarantee merger approval.
• Effect:
  • Prevents non-tendering shareholders from free-riding as their shares will be compulsorily acquired.

Two-Tiered Offers

• Mechanism:
  • High price for a portion of shares in the first tier.
    
  • Lower price for remaining shares in the second tier.
• Impact:
  • Coerces shareholders to tender early to avoid the lower back-end price.
• Fair Price Provisions:
  • Many companies now adopt these provisions to prevent coercive offers.

Toehold Strategies

• Definition: Acquirer purchases a small percentage of target shares secretly before announcing a tender offer.

• Advantages:

  • Acquire shares at pre-premium prices.
    
  • Profit on toehold stake even if another bidder wins.

• Regulations:

  • Disclosure required if stake exceeds 5% (Schedule 13D).

• Example:

  • Elon Musk accumulated a 9.6% stake in Twitter before making a tender offer.

Hedge Fund Activism

Proxy Fights

• Definition: Efforts to convince shareholders to vote (by proxy) for activist proposals.

• Common Objectives:

  • Gain board representation or influence decision-making.
    
  • Push for divestitures, spin-offs, or company sales.

Examples of Activism

• ExxonMobil (2021): Engine No. 1 secured three board seats.
  
• Macy’s (2021): JANA Partners pushed for an e-commerce spin-off.
  
• Marathon Petroleum (2019): Elliott Management drove the Speedway spin-off.

M&A-Driven Activism

• Key Themes:
  • Sale of the target (e.g., Aramark by Mantle Ridge).
    
  • Divestitures of non-core assets.
    
  • Opposition to unfavorable deals (e.g., JANA blocking Zendesk-Momentive).