Merger & Acquisition Assignment

Merger & Acquisition Assignment

QUESTION 1) EXPLAIN THE FOLLOWING IN DETAILSa) BEAR HUG

When the friendly approach of a takeover through a negotiated settlement is ot successful then the acquirer may sometimes try to limit the options available to the management of the target by forcing them to take immediate decision before initiating a tender offer. This is done by contacting the board of directors and making a formal acquisition proposal with an expression of interest in acquiring the target. The letter also contains an implied intentions to go directly to the stockholders with a tender offer if they do not receive a positive response. It may also be accompanied by a public announcement of the bidders intent to make a tender offer. This strategy is called bear hug. The bear hug is mainly intended to move the board to a riduciary responsibility to the shareholders. Some target shareholders may file lawsuits against directors who vote against the said acquisition proposal (mainly when the offer price is at a substantial premium to the targets share price).

b) POISON PILL Often referred to as shareholder rights plans, poison pills are a new class of securities that a company issues to its current shareholders. Because pills are issued as a dividend and the board has the exclusive authority to issue dividends, a pill can often be adopted without a shareholder vote (unless the firms bylaws limit such action). Consequently, poison pills and be adopted not only before but also after the onset of a hostile bid, which means that even a company that does not have a poison pill in place can be regarded as having a shadow poison pill that could be used in the event of a hostile bid.Such pills could be issued as rights offerings to the firms current shareholders, other than the bidder, which if exercised would substantially dilute the bidders ownership position.Poison pill securities have no value unless an investor acquires a specific percentage (sometimes as low as 10%) of the target firms voting stock. If this threshold percentage is exceeded and the pill is a so-called flip-in pill, the poison pill securities are activated and typically allow existing target shareholders to purchase additional shares of the target firms common stock at a discount from the current market price. Alternatively, if the pill is a flip-over pill, existing shareholders may purchase additional shares of the acquirer or surviving firms common shares (i.e., the shares of the combined companies), also at a discount.There are different types poison pillsA. Preferred Stock Plans: this is the typicalpreferred stock, which is registered with the SEC, and is paid as adividend to common shareholders. This preferred stock has an important feature: it is convertible to common stock only after the takeover is completed. This strategy both dilutes the ownership of the acquiring company (which is highly undesirable for the acquirer) as well as increases the cost of the merger.B. Flip-Over Plans: this allows shareholders to purchase shares ofcommon stockin the new company at a substantial discount after the merger. While this approach is simpler to implement than a preferred stock plan, it does not prevent a company from purchasing a controlling share of the target.C. Flip-In Plans: this strategy provides shareholders of the target company with the right to purchase additional stock in the target company at substantial discounts. The right to purchase stock occurs before the merger is finalized, and the provision is usually triggered when the acquirer owns greater than a 20% share of the target's stock.D. Back-End Plans: this approach provides shareholders of the target company with the right tocashordebt securitiesat a price established by the company's Board of Directors. By doing so, the target company has essentially established an above-market selling price for the company.E. Poison Puts: this is a bond that allows investors to cash in the security before it matures, if the target company is engaged in a hostile takeover attempt. The poison put places pressure on the acquiring company to raise substantial sums of money to pay off the owners of the puts.

c) GOLDEN PARACHUTEAgolden parachuteis an agreement between a company and an employee (usually upper executive) specifying that the employee will receive certain significant benefits if employment is terminated. Most definitions specify the employment termination is as a result of a merger or takeover, also known as "Change-in-control benefits", but more recently the term has been used to describe perceived excessive CEO (and other executives)severance packagesunrelated to change in ownership (also known as agolden handshake).The benefits may includeseverance pay, cash bonuses,stock options, or other benefits.Golden parachute is designed for the corporations most senior management teams, say the top 10 to 30 managers. Under this type of plan, a substantial lump sum payment (may be multiples of the managers annual salary and bonus) is paid to a manager who is terminated following an acquisition. This agreement is usually effective if termination occurs within one year but is automatically extended for an additional year if there is no change in control during a given year. Funds to back- up golden parachutes are sometimes put aside in separate accounts referred to as rabbit trusts. Rabbit trusts offer assurance to the employees that the money will be there for the payment of the parachute. Proponents of golden parachutes argue that they provide three main benefits:1) Golden parachutes make it easier to hire and retain executives, especially in industries more prone to mergers.2) They help an executive to remain objective about the company during the takeover process3) They dissuade takeover attempts by increasing the cost of a takeover, often part of a poison pill strategy.ExampleOne of the most famous golden parachutes was received by Stan ONeal, the chairman and chief executive of Merrill Lynch at the time of the financial crisis of late 2007. When he was ousted in October of that year, he received a severance payment of approximately $160 million.

d) SILVER PARACHUTEA form of severance paid to the employees of a company that is taken over by another company. Silver parachutes include severance pay, stock options and bonuses. Silver parachutes are generally extended to a large number of employees and often appear as clauses in hiring contracts that call for lucrative severance packages if an employee leaves the company, or, in particular, after a merger, acquisition or other change in corporate controlSilver parachutes are similar to golden parachutes, which are received by the top executives in the corporation. A silver parachute is typically smaller, but more employees are eligible to receive one. Golden and silver parachutes are named such because they are intended to provide a "soft landing" for employees who lose their jobs either through corporate restructuring, mergers or other reasons. In certain cases, a silver parachute clause specifies that the benefits go into effect only if the company is taken over by another company, resulting in the employee losing his or her job.E) GREEN MAIL Greenmail (introduced earlier) is the practice of paying a potential acquirer to leave you alone. It consists of a payment to buy back shares at a premium price in exchange for the acquirers agreement not to commence a hostile takeover. In exchange for the payment, the potential acquirer is required to sign a standstill agreement, which typically specifies the amount of stock, if any, the investor can own, the circumstances under which the raider can sell stock currently owned, and the terms of the agreement. Courts view greenmail as discriminatory because not all shareholders are offered the opportunity to sell their stock back to the target firm at an above-market price. Nevertheless, courts in some states (e.g., Delaware) have found it to be an appropriate response if done for valid business reasons. Courts in other states (e.g., California) have favored shareholder lawsuits, contending that greenmail breaches fiduciary responsibility.

F) WHITE KNIGHTA white knight is a friendly savior in the business world who helps a company by purchasing it when it is either in the midst of an attemptedhostile takeover, or when the business is either nearbankruptcyor bankrupt due to unpaid debts. The term needs to be contrasted withblack knight: a person, group orcorporationthat initiates a hostile takeover. Another related term isgray knight: a person, group or corporation that initiates a takeover, which is not what the business in trouble wants, but is perceived as a better alternative than being taken over by a black knight. The gray knight might take over the company with some concessions to retaining employees or staff, while the black knight ruthlessly replaces staff and management with its own people from its own corporation. A white knight, conversely, generally will try to maintain the same employees but funnel money into the company to help restore it.Awhite knightis a company (the "good guy") that gallops in to make a friendly takeover offer to a target company that is facing a hostile takeover from another party (a "black knight").The white knight offersthe target firm a way out with a friendly takeoverA target company seeking to avoid being taken over by a specific bidder may try to be acquired by a white knight: another firm that is considered a more appropriate suitor. To complete such a transaction, the white knight must be willing to acquire the target on terms more favorable than those of other bidders. Fearing that a bidding war might ensue, the white knight often demands some protection in the form of a lockup. This may involve giving the white knight options to buy stock in the target that has not yet been issued at a fixed price, or the option to acquire specific target assets at a fair price. Such lockups usually make the target less attractive to other bidders. If a bidding war does ensue, the knight may exercise the stock options and sell the shares at a profit to the acquiring company. German drug and chemical firm Bayer AGs white knight bid for Schering AG in 2006 (which was recommended by the Schering board) was designed to trump a hostile offer from a German rival, Merck KGaSand it succeeded in repelling Merck.

G) WHITE SQUAREThis strategy entails the target company issuing a large block of shares or convertible preference shares to a friendly party. This is done to dilute the stake of the hostile acquirer in the company by increasing the number of shares. Typically the white squire is a portfolio investor and is not interested in gaining control of the target company. The deal can be structured to ensure that the white squire cannot tender his/her shares to a hostile raider. White squire differs from the white knight in the sense that a white knight is bought in to make a counter-offer and ensure a friendly-takeover of the firm. White squire on the other hand is not interested in acquiring control of the target company.Warren Buffett has been the most renowned white squire for the last two decades. He has invested as white squire in companies such as coco-cola, US air, Champion international, etc. In 1987, he prevented Ronald Perelman from acquiring Salomon Bros, a leading investment bank. In September 1987, he was approached by John Gutfreund, the CEO of Salomon to act as a white squire. Minerals and Resources Corporation was a major shareholder in Salomon with a stake of 14 percent. Minorca was unhappy with its investments and had approached Felix Rohatyn to find a buyer. Rohatyn retrenched pressure on Gutfreund by negotiating a tentative deal with Ronald Perelman. Gutfreund was concerned. Salomon could not afford to repurchase Minorca shares at $38,the price offered by Perelman, which was at 20% premium to its prevailing market price. Warren Buffett entered the scene and agreed Berkshire Hathaway would invest $700 million in Salomon in the form of convertible preferred stock. The securities would carry 9 percent guaranteed yield at $38 per share. In structuring the deal, Buffett estimated that the 9 % coupon along the estimated appreciation of the underlying stock would give Hathaway a return of 15%. The capital infusion facilitated Salomon to buy out Minarcos and obviated the takeover threat by Perelman.

H) PACMAN DEFENCEA defensive tactic used by a targeted firm in a hostile takeover situation. In a Pac-Man defense, the target firm turns around and tries to acquire the other company that has made the hostile takeover attempt. This term has been accredited to Bruce Wasserstein, chairman of Wasserstein & Co.This term comes from the Pac-Man video game. In the game, once Pac-Man eats a power pellet he is able to turn around and eat the ghosts that are chasing after him in the maze.When one company makes an unsolicited and aggressive bid on another publicly traded company, the takeover attempt may not be welcomed by the targeted firm. In an attempt to scare off the would-be acquirers, the takeover target may use any method in an attempt to acquire the other company, including dipping into its war chest for cash to purchase the other company's stock.I. CROWN JEWELIn business, when acompanyis threatened withtakeover, thecrown jewel defenseis a strategy in which the target company sells off its most attractive assetsto a friendly third party or spin off the valuable assets in a separate entity. Consequently, the unfriendly bidder is less attracted to the company assets. Other effects include dilution of holdings of the acquirer, making the takeover uneconomical to third parties, and adverse influence of currentshare prices.Crown jewels refer to the most valuable assets and parts of the company. According to this strategy, the target company has the right to sell its best and most profitable assets and valuable parts of the business to another party if a hostile takeover occurs. This discourages hostile takeovers as it makes the target company less attractiveFor example, a telecommunications company might have a highly-regarded research and development (R&D) division. This division is the company's "crown jewels." It might respond to a hostile bid by selling off the R&D division to another company, or spinning it off into a separate corporation.

J) LEVERAGE BUYOUTA leveraged buyout (LBO) is an acquisition of a company or a segment of a company funded mostly with debt. A financial buyer (e.g. private equity fund) invests a small amount of equity (relative to the total purchase price) and uses leverage (debt or other non-equity sources of financing) to fund the remainder of the consideration paid to the seller. The LBO analysis generally provides a "floor" valuation for the company, and is useful in determining what a financial sponsor can afford to pay for the target and still realize an adequate return on its investment.Transaction StructureBelow is a simple diagram of an LBO structure. The new investors (e.g. and LBO firm or management of the target) form a new corporation for the purpose of acquiring the target. The target becomes a subsidiary of NewCo, or NewCo and the target can merge.

Applications of the LBO AnalysisDetermine the maximum purchase price for a business that can be paid based on certain leverage (debt) levels and equity return parameters.Develop a view of the leverage and equity characteristics of a leveraged transaction at a given price.Calculate the minimum valuation for a company since, in the absence of strategic buyers, an LBO firm should be a willing buyer at a price that delivers an expected equity return that meets the firm'shurdle rate.Steps in the LBO AnalysisDevelop operating assumptions and projections for the standalone company to arrive at EBITDA and cash flow available for debt repayment over the investment horizon (typically 3 to 7 years).Determine key leverage levels and capital structure (senior and subordinated debt, mezzanine financing, etc.) that result in realistic financial coverage and credit statistics.Estimate the multiple at which the sponsor is expected to exit the investment (should generally be similar to the entry multiple).Calculate equity returns (IRRs) to the financial sponsor and sensitize the results to a range of leverage and exit multiples, as well as investment horizons.Solve for the price that can be paid to meet the above parameters (alternatively, if the price is fixed, solve for achievable returns)

QUESTION2) EXPLAIN THE REASONS FOR FAILURE OF MERGER1. IGNORANCE-While the parties to a merger or acquisition cannot exchange commercially sensitive information prior to being under common ownership, there is enough crucially important and legally permissible preparation work to keep an integration team busy for several months before day one. Most chief executives dont know this and they waste the time that could be put to good use while they await clearance from the regulatory authorities. Good preparation means the integration can kick off on day one. Speed matters.2. NO COMMON VISION-In the absence of a clear statement of what the merged company will stand for, how the organisation will operate, what it will feel like, and what will be different compared to how things are today, there is no point of the convergence on the horizon and the organisations will never blend.3. NASTY SURPRISES RESULTING FROM POOR DUE DILIGENCE-This sounds basic, but happens so often.4. TEAM RESOURCING-Resource requirements are very often underestimated. It can take two or three months to release the best players from daily business to join the integration team(s), find a backfill for them, sign up contractors to fill the gaps and set up the teams infrastructure. Most companies start too late and are not ready on once the deal is completed.5. POOR GOVERNANCE-Lack of clarity as to who decides what, and no clear issue resolution process. Integrating organisations brings up a myriad of issues that need fast resolution or else the project comes to a stand-still. Again: speed matters, but with a sound decision-making process.6. POOR COMMUNICATION -Messages too frequently lack relevance to their audience and often hover at the strategic level when what employees want to know is why the organisation is merging, why a merger is the best course action it could take, in what way the company will be better after the merger, how it will feel, how the merger will affect their work and what support they will receive if they are adversely impacted.7. POOR PROGRAMME MANAGEMENT-Insufficiently detailed implementation plans and failure to identify key interdependencies between the many workstreams brings the project to a halt, or requires costly rework, extends the integration timeline and causes frustration.8. LACK OF COURAGE-Delaying some of the tough decisions that are required to integrate two organisations can only result in a disappointing outcome. Making those decisions will not please everyone, but it has the advantage of clarity and honesty, and allows those who do not find the journey and destination appealing to step off before the train gathers too much speed.9. WEAK LEADERSHIP-Integrating two organisations is like sailing through a storm: you need a strong captain, someone whom everyone can trust to bring the ship to its destination, someone who projects energy, enthusiasm, clarity, and who communicates that energy to everyone. If senior managers do not walk the talk, if their behaviours and ways of working do not match the vision and values the company aspires to, all credibility is lost and the mergers mission is reduced to meaningless words.

QUESTION3 ) WHAT IS THE IMPACT OF M&A ON EMPLOYEES AND WORKING CONDITION?Merger & Acquisition helps a Company to grow in a better way but it has a great impact on the employees working in a company & on working conditions. The employees of the companies merging and acquiring are mostly affected by M&A. Due to this reason, there is mostly failure of M&A. To break the mind set of people working in companies undergoing M&A and to convince them that merger is for common good & will help them in their growth is normally an uphill task. 1. When 2 companies who have different style of functioning merge, there is a clash between the companies which pulls them together into different direction apart from their aims & objectives and in the process endanger the advantages envisaged both in the real life as well as in the scheme of amalgamation. Thus M& A had a great impact on the individual or group working in company & on work culture. 2. Company enters into M& A activity without recognizing the impact on the organization and the overall effect on the human element within the two merging company. When M&A activity do not meet corporate objectives it results in Lost revenue, Customer dissatisfaction, Employers attrition issues.3. Many personnel issues such as salaries, benefits, pension of employees are also affected due to M&A. Since the organizational structures are different, differences in compensation packages and designation can take place normally. 4. There are ego clashes between the top management and subsequently lack of co-ordination among them may lead to collapse of company after merger. This problem is more prominent in cases of mergers between equals. 5. There is also a separation anxiety among the employees because they think some of their co-workers will be leaving the company. The atmosphere of apprehensions leads to companywide rumours. The employees loose faith in their organization and tend to become demotivated. 6. Employees are the main victims when M & A takes place. They may be hurting themselves by trying to cope with new changes. When they realize that their potential for future growth within the organization dwindles, they often become withdrawn and frustrated which can affect productivity of the company severely. 7. M&A affects the CEOs of the company because they are the most creative and talented people within the organization. The resultant loss of control devastates these individuals. The stress level experienced by these executives often travels through the chain of command, affecting subordinates as well. 8. Employees of the company are mostly scared by M&A that they will be given step motherly treatment. This question is always in the minds of employees of the transferor company. This fear of transfer and retrenchment, the loss of position in the hierarchical level are some of the thoughts which always remain in the minds of employees of both the company. 9. There is also lot of reorganization & restructuring in the company during the days when M&A process is going on .The process of M&A by which company is bought or sold can prove difficult, slow and expensive. This M&A transaction typically require six to nine months and involve many steps. Locating parties with whom to conduct transaction forms one step in the overall process and perhaps it is the most difficult step in the transaction. This process of M&A has a great impact on the work culture during those days as it disturbs whole organization of the company. 10. In an acquisition the buyer assumes the dominant parent role and the acquired company assumes the subordinate role, acting in the role of stepchild. Just as step parents may deny stepchildren certain family resources acquired company may also experience similar after an acquisition takes place. This situation is caused due to lack of fit between the two organizations. Such lack of fit is an issue and it has a great impact on the acquired company as it affects its work culture, organization and mainly on the employees working in the company. 11. The uncertainties of M&As shift the focus of employees from productive work to issues related to interpersonal conflicts, layoffs, career growth with the acquirer company, compensation etc .Moreover, employees are worried about how they will adjust with new colleagues. The merger involves downsizing, hence the first thing that comes to the mind of employees is related to their job security. Merger also leads to change in the well defined career paths of employees. Due to these reasons employees find themselves in completely different situation with change in job profiles and work teams. This may have negative impact on the performance of the employees. 12. Each company has its own set of values which may conflict with those of acquired company. The employees may not be able to accommodate themselves in new culture and thus may lead to cultural shock. Inability to adapt to new culture increases stress level among employees and results in low job performance. The need therefore is tofollow structured approach in dealing with cultural differences.13. The employees face great uncertainty which in turn produces stress .Such stress ultimately affects their perception and judgments. Due to stress among employees by M&A ,the most common reactions displaced by them are as follows: Loss of identity. Lack of information & anxiety. Talent is lost. Family repercussions WAYS TO OVERCOME IMPACT OF M&A ON EMPLOYEES & WORKING CONDITIONS 1.Firstly organization must effectively develop and implement assistance program for displaced employees. Such program should include advance notification, severance pay extended benefits, retaining program and outplacement activities. 2. Strong emphasis needs to be placed in determining whether the acquired firms personnel is a good fit for the acquiring organization and to whether the mass lay off can be avoided. Moreover communication from the executive team with employees in the pre-acquisition phase needs to be consistent so that anxiety levels among the personnel can be kept at low level.3.Moreover a company not only needs to select a right target, but also must have culture in place that accepts the acquisition as quickly as possible.4.There is need for developing and executing effective employee communication, particularly conveying the employees that how the transaction will impact organizational members. Communication between the members of transferor and transferee Company should be open, honest and strategic. Any information regarding the progress of the deal or integration should always be shared among the members because communication is very important throughout M&A process. 5. Finance and the Legal departments are essential for the successful implementation of the integration plan. Therefore, the inputs from these departments should be taken into consideration while working on the plan.

QUESTION4 ) STEPS TO HANDLE HR ISSUE DURING M &AThe need for involvement of HR managers starts from the beginning of M&A process i.e at the audit or due-diligence stage. When the acquirers has the maturity and experience ,it can have a greater impact on the integration phase than if HR is brought after the merger has take place. If HR is valued by the acquiring companys management , it made it imperative to think them that people can be greatest asset, challenge and liability. Before the finalisation of the merger deal the acquiring companys HR examine the different areas, evaluates different courses of action, in order to have a smooth transition. The HR manager has to minimise the uncertainty prevaling during the merger process and must strengthen the communication channel to deal with the issues like morale and productivity.Further , after the merger being implemented the role of HR manager becomes that of consultant to reduce interpersonal conflicts, role ambiguity and confusing procedure. HR manager must create a smooth transition process and review the process with newly formed teams ,manager and supervisors. The role of HR manager is also crucial when it comes to compensation related issues. This is problematic when the 2 companies have desperate systems. Another issues the HR manager has to deal, is redundancies. In any merger there be termination which almost create hard feelings and among senior managers, crushed egos. The HR manager has to give stress is on the examination of policies, practices and past actions of the acquired company and find some commonalities upon which the entity can be build. Thus, in general the HR manager play a truth teller, coordinator, administrator , councellor , coach and agent of change for the leaders and organization.

HR plays important role at every phase in the process of international M&A PRE-COMBINATION: HR is closely involved with each of these steps- initial target screening and pre-bid courtship of the potential target firm, the due-diligence review of the target company , the pricing and negotiation of the approach the partners will take to the combination and the agreement on the contract wording of the deal. COMBINATION PLANNING AND SIGNING OF THE AGREEMENT: HR plays a major role in providing advice on how to implement the deal and anticipated problems that will occur during the implementation. PRE-COMBINATION AND IMPLEMENTATION OF THE DEAL: One critical aspect of HRs role is in creating and providing employee communication about the nature of the merger and about the vision for the business that will result after the merger has been consummated. In addition HR will perform a critical role in training employees to accept and to fit into new situation , in developing the new compensation and benefits system etc. Company Culture Human resources helps determine if the cultures of the two companies that are becoming one through a merger or acquisition are compatible. Human resources must have a firm grasp on the culture of the company for which they work and must study the culture of the other organization to make such a determination. Cultural differences may include how the two organizations define and measure success within the organization; benefits employees enjoy, such as personal time and insurance; how problems within the organization are handled; the management styles of the two organizations; and the overall attitude of the employees and managers toward business functions and the industry in which they work. Benefits Problems During the due diligence portion of a merger or acquisition, which comes after the purchasing company makes its initial offer to purchase the other company, management from the purchasing company assess whether the deal makes strategic and financial sense. Human resources from the purchasing company specifically assess the benefits structure of the other company to uncover any potential problems, such as a pension plan that is running low on funds or a health insurance package that will cost a significant amount for the company to continue offering. Employee Concerns People often fear change, and a merger or acquisition creates uncertainty and change for employees both of the purchasing company and the purchased company. Human resources in both companies help smooth out the transition for employees, helping calm any fears as well as answering questions about how the merger or acquisition affects each employee individually. If the employees of both companies do not have as much fear over the change, productivity is more likely to stay at previous levels. Human resources can detect and address any rumors about layoffs, office relocation or other changes employees fear, giving feedback to management about employee concerns. Changing Roles and Structure When one company merges with or acquires another, some changes to both organizations may occur, such as eliminating redundant positions or combining teams and departments. The process of altering the two organizations so they work together as one can take months to complete, and human resources plays a vital role in the changes. Human resources communicates to employees changes in who they report to within the company, what team or work group employees are assigned to as well as any changes to different positions roles in the organization. Human resources may work with management and employees to alter the job descriptions of various positions, ensuring everyone understands his role in the newly altered organization.Human Resources can add value to the M&A life cycle in the following ways:

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