Page 43 - FINAL CFA II SLIDES JUNE 2019 DAY 6

LOS 25.e: Contrast merger transaction characteristics by form
of acquisition, method of payment, and attitude of target READING 25: MERGERS AND ACQUISITIONS
management.
MODULE 25.1: MERGER MOTIVATIONS
Method of Payment

Securities offering – share for share exchange (based on ratio of share prices). The total compensation ultimately paid is based on 3 factors:
• the exchange ratio,
• the number of shares outstanding of the target company, and
• the value of the acquirer’s stock on the day the deal is completed.

Cash offers:
1. Distribution between risk and reward for the acquirer and target shareholders: As all the risks is borne by the acquirer, when acquirer is highly confident
in the synergies, it is more inclined to push for a cash offering.
2. Relative valuations: If acquirer’s shares are considered overvalued, it is likely to want to use its overpriced shares as currency in the merger
transaction. In fact, investors sometimes interpret a stock offering as a signal that the acquirer’s shares may be overvalued.
3. Changes in capital structure: If the acquirer borrows money to raise cash for a cash offering, the associated debt will increase the acquirer’s financial
leverage and risk. Issuing new stock for a securities offering can dilute the ownership interest for the acquirer’s existing shareholders.

Attitude of Target Management

Friendly merger offers usually begin with the acquirer directly approaching the target’s management. If both parties agree, they negotiate the method of
payment and the terms. At this point, each will conduct due diligence. Do acquires assets truly exist? Can acquirer pay? Attorneys draft a definitive merger
agreement, then shareholder approvals and then go public!

Hostile merger offers. If the target does not support deal, the acquirer submits a merger proposal directly to the target’s board of directors in a process
called a bear hug. If the bear hug is unsuccessful, the next step is to appeal directly to the target’s shareholders using:

• Tender offer, the acquirer offers to buy the shares directly from the target shareholders, and each individual shareholder either accepts or rejects!
• Proxy battle, Have a proxy solicitation approved by regulators and then sent to the target’s shareholders seeking to approve preferred board. If elected,
the new board may replace the target’s management and the merger offer may become friendly.