Colorful Vocabulary in M&A – Part I

mergers and acquisition
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Mergers, acquisitions, and takeovers are a normal part of the business world and have been for centuries.  In theory, a company can develop a competitive advantage and increase shareholder value through mergers and acquisitions.   There are a number of ways that two or more companies can combine their operations.  However, there are also unfriendly takeovers:  there is a very colorful vocabulary associated with unfriendly takeovers.   Following is a list of these phrases and what they mean: 

Hostile Takeover

This is an adverse takeover attempt by a company or raider that the target firm’s board of directors and management strongly resist.  These types of takeovers affect employee morale at the targeted firm and create animosity toward the acquiring firm.  Even though some hostile takeovers have worked, they are typically harder to pull off than friendly mergers. 

Dawn Raid

Even though this is a more common action in the United Kingdom, it has happened in the US.  A dawn raid is when a firm or investor attempts to buy substantial holdings in the takeover-target company’s equity.  This is done by instructing brokers to buy shares as soon as the stock market opens.   The investor is able to mask his identity and his intent by having a broker by the shares in the target company.   The investor continues to buy shares in the morning gradually until a majority share is owned.  However, The Williams Act in the US restricts any acquisition of 5 percent or more of equity to be disclosed to the Securities Exchange Commission. 

Saturday Night Special

This happens when a public tender offer is made by a company attempting to take over another.  This movement used to be done over the weekends and that’s where the name came from. This has also been restricted by the Williams Act in the US.  

Strategies to Prevent Takeovers

Companies attempt to takeover companies fairly regularly.  However, the target company doesn’t always want to be taken over.  Management has many strategies available to them during Merger and Acquisition talks to protect themselves from the predator.  Following are the strategies referred to as shark-repellants: 

Golden Parachute

This will usually discourage any unwanted takeovers as it would end up causing the acquiring company a lot of money.  This is accomplished by offering generous benefits to top executives which include stock options, bonuses, and liberal severance pay.  Typically, golden parachutes are worth millions of dollars and thereby are a great deterrent to any takeovers. 

Greenmail

This term is an offspring to the term blackmail.  In order to destroy a takeover attempt, the target company has to purchase a large stake at a substantially higher premium from a raider.  Other words for this are “bon voyage bonus” or “good bye kiss”. 

Macaroni Defense

In this strategy the target company issues a large number of bonds that are guaranteed to be redeemed at a higher price at the time of a takeover.  It’s called a macaroni defense because the redemption price of bonds expands just like macaroni in boiling water.  The target company, however, has to be careful it doesn’t issue so much debt that it can’t make its interest payments. 

In our next blog we’ll discuss more colorful vocabulary terms for target company “defense strategies”. 

Source: www.investopedia.com

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