Mergers & Acquisitions XII

Mergers & Acquisitions (M&As)
I N Wisnu Wardhana-M&As-IMTelkom
Mergers & Acquisitions (M&As)
Modul XII – Last Lecture

Modul XII
M&As Valuation and Defenses

M&As’ Process
M&As’ Valuation
M&As Defenses from bidding
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M&As’ Valuation
Rank Name Headquarters Primary industry
Market value
(USD million)
1 Petrochina China Oil and gas 723,952
2 Exxon Mobil United States Oil and gas 511,887
3 General Electric United States Conglomerate 374,637
4 China Mobile Hong Kong Telecommunications 354,120
Top 10 - Market Capitalization Companies end of 2007
2
5 Industrial and Commercial Bank of China China Banking 338,989
6 Microsoft United States Software industry 333,054
7 Gazprom Russia Oil and gas 329,591
8 Royal Dutch Shell United Kingdom Oil and gas 269,544
9 AT&T United States Telecommunications 252,051
10 Sinopec China Oil and gas 249,645
Source: This Financial Times Global 500 based list

M&As’ Valuation – cont’
Market value
(USD million)
1 Exxon Mobil (2) United States Oil and gas 406,067
2 Petrochina (1) China Oil and gas 259,836
3 Wal-Mart (new) United States Retail 219,898
4 China Mobile (4) Hong Kong Telecommunications 201,291
3
5 Procter & Gamble (new) United States Consumer goods 184,576
6 Industrial and Commercial Bank of China China Banking 173,930
7 Microsoft (6) United States Software 172,929
8 AT&T (9) United States Telecommunications 167,950
9 Johnson & Johnson (new) United States Health care 166,002
10 General Electric (new) United States Conglomerate 161,278

Market value
(USD million)
1 Petrochina (2) China Oil and gas 353,140.1
2 Exxon Mobil (1) United States Oil and gas 323,717.1
3 Microsoft (7) United States Software 270,635.4
4 Industrial and Commercial Bank of China China Banking 268,956.2
4
5 Wall Mart (3) United States Retail 203,653.6
6 China Construction Bank (new) China Banking 201,436.1
7 BHP Billiton (new) Australia(UK) Mining 201,248
8 HSBC (new) UK Banking 199,254.9
9 Petrobras (new) Brazil Oil and gas 199,107.9
10 Apple Inc.(new) United States Software & IT 189,801.7

Market value
(USD million)
3 Apple Inc.(10) United States Software & IT 295,886.3
4 BHP Billiton (7) Australia(UK) Mining 243,540.3
5
7 Petrobras (9) Brazil Oil and gas 229,066.6
8 China Construction Bank (new) China Banking 222,245.1
9 Royal Dutch Shell (new) United Kingdom Oil and gas 208,593.7
10 Nestlé (new) Switzerland Nutrition & Health 203,534.3

Top 10 - Market Capitalization Companies Q2 - 2011
Market value
(USD million)
2 Apple Inc.(3) United States Software & IT 310,412.3
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5 BHP Billiton (4) Australia(UK) Mining 233,626.5
6 Royal Dutch Shell (9) United Kingdom Oil and gas 225,122.8
8 Nestlé (10) Switzerland Nutrition & Health 215,017.5
9 Petrobras (7) Brazil Oil and gas 210,111.4
10 IBM (new) United States
Computer software
& hardware
207,781.4

However, many state owned companies that are far larger in size than even the largest
public corporation listed above.
Rank 2006
Market value (USD million)
Estimated
1 Saudi Aramco 781,000
2 Pemex 415,000
3 Petróleos de Venezuela 388,000
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4 Kuwait Petroleum Corporation 378,000
5 Petronas 232,000
6 Sonatrach 224,000
7 National Iranian Oil Company 220,000
8 Japan Post (priv. 2007) 156,000
9 Pertamina 140,000
10 Nigerian National Petroleum Corporation 120,000

Suppose it might happen,
If you are a grand-son of your grand-father who have enough money to buy wal-
mart shares at the time its sold on IPOs:
IPO in 1970 at a price of US$ 16.5 per share
Suppose your grand-parents would have bought 1000 shares as a future
birthday gift for you ($16,500)
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birthday gift for you ($16,500)
How rich (poor) would you be ?
A 35 year investment of $16,500 at 5% would yield $900,000
Key lesson: if you wanna get success (read: rich),
you have to know the basic principles of valuation

4,906
5,289
6,141
6,779
6,450
8,268
7,938
5000
6000
7000
8000
9000
Walmart Stock Count 1962 - 2010
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1 24 38 125
276
882
1,198
1,528
2,148
2,943
3,592
4,172
0
1000
2000
3000
4000
1962 1967 1970 1975 1979 1985 1987 1990 1993 1995 1999 2001 2004 2005 2006 2007 2008 2009 2010
WAL-MART STORES, INC.
Source: JP Morgan and Walmart SEC filings

M&As’ Valuation – Methods for valuing a firm
Multiples or Comparable Method
Comparable Companies
Comparable Transactions
Spreadsheet Approach
Capital budgeting
Spreadsheet projections
Why is it important to
understand how firms and
their stocks are valued?
Mergers and acquisitions
Stock price maximization and value
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Spreadsheet projections
Formula Approach
Sensitivity analysis
Cost of Capital Measurement
Cost of equity
Cost of Debt
Weighted cost of capital
Option based valuation models
Stock price maximization and value
based management (VBM)
Stock repurchases
New common stock issue
Resolving disputes and tax issues
Estimating the cost of equity
Understanding the financial media

Comparable Companies
Group of companies comparable with respect to:
Size
Products
Recent trends and future prospects
M&As’ Valuation – Multiples or Comparable Method
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Recent trends and future prospects
Key ratios are calculated for each company
Key ratios are averaged for group
Average ratios applied to absolute data for company of interest
Indicated market values obtained from each ratio
Valuation judgments are made

M&As’ Valuation – Multiples or Comparable Method – cont’
Comparable Transactions
Valuation based on companies involved in the same kind of merger transactions
Market value refers to transactions in a completed deal, Key ratios are calculated
for each comparable deal based on actual transaction prices. For example:
a. Total paid to target’s sales
b. Total paid to target’s book value
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c. Total paid to target’s net income
d. Premium to target’s pre-merger market value
e. Premium to combined firm pre-merger market value
Key ratios are averaged for group and applied to merger transaction of interest to
obtain its value.
More directly applicable than company comparisons
May be difficult to find truly similar transactions within a relevant time frame

Example of comparable method:
We are seeking to place a value on PT. Bakrie Telecom, and we find three companies
that are comparable:
PT. XL-Axiata, Tbk.
PT. Indosat, Tbk
PT. Hutchison CP Telecommunications
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Calculate the ratio of the market value of shareholders’ Revenue, EBITDA, and
Free Cash Flow then averaged!
Ratio PT. XL PT. Isat PT. Hutc Average
Enterprise value/Revenues 1.4 1.2 1.0 1.2
Enterprise value/EBITDA 15 14 22 17.0
Enterprise value/free cash flows 25 20 27 24.0

Next, postulate that for a relevant recent time period, PT. Bakrie Telecom had
Revenue IDR 100 Billions, EBITDA IDR 7 Billions, and Free Cash Flow IDR 5 Billions.
Actual Recent Data for Company W Average Ratio Indicated Enterprise Market Value
Revenues = IDR100 1.2 IDR120
EBITDA = IDR7 17.0 IDR119
Free Cash Flows = IDR5 24.0 IDR120
Average = ~ IDR120
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We obtain IDR 120 Billons for the indicated market value of equity for PT. Bakrie
Telecom.
Advantages
Average = ~ IDR120
Common sense approach
Marketplace transactions are used
Widely used in legal cases, fairness
evaluation, and opinions
Used to value a company not
publicly traded
Limitations
May be difficult to find companies that are
actually comparable by key criteria
Ratios may differ widely for comparable
companies
Different ratios may give widely different results

Procedure
Historical data for each element of balance sheet, income statement, and cash flow
statement are presented — 7 to 10 years
Detailed financial analysis is performed to discover financial patterns
Additional analysis
o Business economics of industry in which company
operates
M&As’ Valuation – Spreadsheet Approach - Discounted Cash Flow (DCF)
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operates
o Company's competitive position
o Assessments of financial patterns, strategies, and actions
of competitors
Based on analysis, relevant cash flows are projected
Procedures similar to capital budgeting analysis
Why Cash Flow, instead of Earning?(Bonus Question)

M&As’ Valuation – Spreadsheet Approach – capital budgeting
Capital budgeting decisions
Process of planning expenditures whose returns extend over
a period of time
An acquisition is fundamentally a capital budgeting problem:
Mergers do not make sense if buyer pays too much resulting
in negative NPVs (Net Present Value).
∑
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NPV - Present value of all future cash flows discounted at the cost of capital
minus the cost of investments made over time compounded at the
opportunity cost of funds
NPV0 = -
t=1
n
(1+k)t
∑ CFt
t=1
n
(1+k)t
It
NPV0
CFt
k
n
It
= net present value at period 0
= cash flows in period t
= cost of capital
= number of periods
= investment outlays in period t

M&As’ Valuation – Spreadsheet Approach – capital budgeting – cont’
Example of Spreadsheet Approach – capital budgeting:
PT. Telkom Indonesia, Tbk. (Telkom) has an opportunity to buy a target company
named PT. Exelcom Axiata, Tbk. (XL). The target company (XL) can be purchased
for IDR 18 Trillions. Yet, we can consider that XL’relevant net cash flow will be
at IDR 4 Trillions for the next 10 years (after which there will be no cash flow
forthcoming), If the relevant cost of capital for analysing the purchase of the target
is 14%, does it represents a positive NPV?
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is 14%, does it represents a positive NPV?
∑
t=1
n
(1+k)t
∑ CFt
t=1
n
(1+k)t
It
NPV0 = -
(1.14)t
∑
t=1
10
18 T
NPV0 = -
4 T
NPV0 = 4T (5.2161) – 18T
NPV0 = 20.86 T – 18 T NPV0 = 2.86 T (Positive)
NPV0
CFt
k
n
It
= (+ or -)
= IDR 4 Trillions
= 14%l
= 10 years
= IDR 18 Trillions

Provide great flexibility in projections
Important to understand underlying growth patterns
NPV of acquisition obtained from sum of free cash flows
discounted at applicable cost of capital
M&As’ Valuation – Spreadsheet Approach – Spreadsheet projections
FCFt
Xt
= Free Cash Flows in period t = Xt (1-T) - It
= Before tax cash flows in period t
FCFt
t=1
n
(1+k)t
∑NPV =
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Xt
T
k
It
= Before tax cash flows in period t
= tax rate
= Cost of Capital
= investment outlays in period t
t=1 (1+k)t
Free cash flows, can be calculated as:
Net Revenues – Operating Expenses
Net Operating Income (NOI) – Income Taxes
Net Operating Profits after Taxes (NOPAT or NOI(1-T)) + Depreciation
Gross Cash Flows – Investments
Free Cash Flows
Change in working capital
Capital expenditures Investments
Change in other assets net

Advantages of spreadsheet approach
Expressed in financial statements
Any desired detail of individual balance sheet or income
statement accounts
Flexibility and judgment in formulating projections
Disadvantages of spreadsheet approach
M&As’ Valuation – Spreadsheet Approach
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Disadvantages of spreadsheet approach
Numbers used in projections may create illusion that they
are actual or correct numbers
May lack link between projected numbers and business
logic
May become highly complex
Details may obscure important driving factors

M&As’ Valuation – Formula Approach
No real distinction between spreadsheet approach and formula approach
Both use discounted cash flow analysis
Spreadsheet approach expressed in form of financial statements over period of time
Spreadsheet approach allows flexibility in making projections on a year-by-year basis
Formula approach summarizes same data in compact form
Formula approach helps focus on underlying drivers of valuation
Development of compact valuation formulas
Valuation necessarily requires forecasts
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Valuation necessarily requires forecasts
Usually assumes systematic relations between time periods, variables
Key variables and relationships
Revenues (Rt)
Growth rate (g)
Net operating income margin (m)
Actual tax rate (T)
Investment (I)
Number of periods of supernormal growth (n)
Marginal weighted cost of capital (k)
Value drivers for net operating income margin (m) and investment (I)

Formulas for Free Cash Flow Valuation of a Firm
No growth:
Constant growth:
M&As’ Valuation – Formula Approach – cont’
where:
R0 = initial revenues
m = net operating income margin
T = actual tax rate
I = investment as a ratio of revenues
g = growth rate of revenues
n = number of periods of supernormal growth
k = applicable marginal weighted cost of capital
Subscript s is for the supernormal growth period;
the subscript c is for the period of constant growth.
Temporary supernormal growth, then no growth:
Temporary supernormal growth, then constant growth:
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the subscript c is for the period of constant growth.

M&As’ Valuation – Formula Approach – Sensitivity analysis
Sensitivity analysis
Purpose
Check impact of a range of alternative possibilities
Provide framework for planning and control
Sensitivity analysis of model variables:
Decrease in revenues growth rate (g) lowers valuation
Increase in investment requirement percentage (I) lowers valuation
Operating profit margin (m) is a powerful value driver — when m is increased,
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Operating profit margin (m) is a powerful value driver — when m is increased,
valuation increases
Valuation is very sensitive to the cost of capital (k) used in analysis — when
cost of capital is increased, valuation falls
Sensitivity to n and T predictable in direction and magnitude
When period of supernormal growth is reduced, valuation is reduced
When tax rate is reduced, valuation is increased
In many practical cases, second term in valuation model represents a higher
proportion of valuation than first term — must be careful as to assumptions about
factors affecting exit or terminal value

M&As’ Valuation – Formula Approach – Sensitivity analysis – cont’
Sensitivity analysis of model variables:
Increase in:
Revenue growth rate (g)..................................................
Operating profit margin (m)............................................
Cost of capital (k).............................................................
Investments (I).................................................................
Number of periods of supernormal growth (n)…………….
Tax rate (T).......................................................................
Effect on Valuation:
+
+
–
–
+
–
Tax rate (T).......................................................................
Limitations of the formula approach
Less flexibility in reflecting forecasts for individual years
Calculations use financial statement data not directly
shown in the formulas
–
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M&As’ Valuation – Cost of Capital Measurement
Steps involved in calculation of cost of capital
Calculate cost of equity capital
Calculate cost of debt
Formulate applicable financial structure or financial proportions
Apply applicable financial proportions to cost of equity and cost of debt
Final result is weighted cost of capital
Cost of equity
Capital Asset Pricing Model (CAPM)
Capital Asset Pricing Model (CAPM)
ks = Rf + [RM - Rf] βj
Risk-free rate (Rf)
Related to returns on U.S. government bonds
Rates on relatively long-term bonds should be used since discount factor is used in valuation involving
long periods
Market price of risk (RM - Rf)
For many years, estimated to be in range of 6.5 to 7.5%
For new economic paradigm since mid 1990s, estimated to be in the range 4% to 5%
Beta (βj )
Measures how returns on the firm's common stock vary with returns on the market as a whole
High beta stocks exhibit higher volatility than low beta stocks in response to changes in market returns
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M&As’ Valuation – Cost of Capital Measurement – cont’
Dividend growth model
Cost of equity based on the constant-growth dividend valuation model
Required return on equity is expected dividend yield (D1/S0) plus expected growth rate of
dividends in perpetuity (g)
Bond yield plus equity risk premium
Cost of equity = Average yield to maturity of bonds for the industry with same rating as
the firm's debt + historical average firm's equity risk premium over its bond yield
S
D
k g
k
D
S
go
s
s
o
=
−
⇒ = +
1 1
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the firm's debt + historical average firm's equity risk premium over its bond yield
For the industry, analyze historical yield on equity as compared with average yield to
maturity on bonds for the industry
Estimating the cost of equity capital
Use information generated by financial markets
Estimate cost of equity using multiple methods
Consider general equity market uncertainty
Consider estimates for other companies in same industry
Use judgment to arrive at an estimate

Cost of debt
Cost of debt calculated on an after-tax basis because interest payments
are tax deductible
After-tax cost of debt = kb(1 - T )
Before-tax cost of debt, kb
Can be obtained from a weighted average of the yields to maturity of all the firm's
outstanding publicly held bonds
Can be obtained from published promised yields to maturity based on bond rating
category
category
Weighted cost of capital
Cost of capital, k, is weighted average of marginal cost of equity and cost of debt
k = kb(1-T)(B/V)+ks(S/V)
Or
k = ku(1-TL)
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where:
Kb= cost of debt
Ks= cost of equity
T= tax rate
B= value of debt
S= value of equity
V= total value of firm = B + S
where:
ku= cost of capital of an unlevered firm
L= B/V

Features:
Methodology focuses on current market opportunity costs, not
book or historical costs
May use book or market values to provide guidelines
Use judgment to estimate target financial proportions
The most comprehensive valuation approach
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Pitfall:
It uses the company’s own projections for the future. Many
investors in Enron and Worldcom relied on the same kind of
information They fail to provide clear information to investors.

M&As’ Valuation – Options/real options
One of the fundamental insights of modern finance theory is that options
have value.
The phrase “We are out of options” is surely a sign of trouble.
Because corporations make decisions in a dynamic environment, they have
options that should be considered in company valuation.
The Option to Expand
The Option to Expand
Has value if demand turns out to be higher than expected.
The Option to Abandon
Has value if demand turns out to be lower than expected.
The Option to Delay
Has value if the underlying variables are changing with a
favorable trend.
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M&As’ Valuation – Options/real options – cont’
Discounted Cash Flows and Options
We can calculate the market value of a firm as the sum of the NPV of the firm
without options (assets-in-place) and the value of the managerial options
implicit in the firm (growth opportunities).
Example of real options:
OptNPVM +=
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Example of real options:
PT. Telekomunikasi Indonesia, Tbk. (Telkom) has enough capital to pay its investment during
2010-2011 time period, for instance; to buy its CDMA division Telkom Flexi with standard data
communication EVDO (Evolution-Data Optimized) for amount IDR 700 Billions.
That amount also significantly sufficient to provide Telkom with the other options, such as a big
weapon (with the hand of bank or private equity) to acquire another company (based on CDMA
comunication, i.e. PT. STI, PT. Bakrie Telecom, etc.)
It thus forces decision makers to be explicit about the assumptions underlying their projections,
and for this reason Real Options are increasingly employed as a tool in business strategy
formulation.

M&As’ Valuation – Summary
All valuation methods have strengths and weaknesses
Employ multiple methods of valuation in takeover analysis
Valuation should be guided by a business economics outlook
for the firms
Ultimately judgments are required for valuations
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Ultimately judgments are required for valuations
Role of valuation
a. Valuable planning framework for sound strategies and improved efficiencies
b. Valuable framework to help identify value drivers important to the future
value of the firm
c. Sensitivity studies identify critical factors for the future
d. Valuable as a tool to develop a business model with an effective information
feedback system
e. Valuable tool for flexible long range planning processes
f. Critical in M&As — major cause of acquisition failure is that bidder overpays

M&As’ Valuation
M&As Defenses from bidding

M&As’ Defenses from Bidding (Takeover Defences)-Article
According to Article 126 Law No. 40/2007
(1) Merger, Consolidation, Acquisition, or Separation, shall in the observance to the
interests of :
a. Company, minority shareholders, employees of the Company;
b. Creditors, other business partners of the Company; and
c. Community and fair competition in performing business.
c. Community and fair competition in performing business.
(2) The shareholders who are disagree with the resolution of GMS regarding the Merger,
Consolidation, Acquisition, or Separation as referred to in paragraph (1), shall only use
their rights as referred to in Article 62.
Article 62: Each shareholder shall have the right to request the
Company to purchase its shares with a reasonable price if the
shareholder concerned does not agree with the action of the Company which harm
the shareholders or the Company
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M&As’ Defenses from Bidding (Takeover Defences)-Article-cont’
European’ articles, as stated on 13th DIRECTIVE 2004/25/EC OF THE EUROPEAN
PARLIAMENT AND OF THE COUNCIL of 21 April 2004 on takeover bids
“to provide the management board (and supervisory board) in case of a
(hostile) takeover with the opportunity to carefully consider the interests of
the company and its business, and those of its stakeholders”
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The Purposes:
Defence against hostile bids: to get a better price, management believes company
will perform better on its own
Preservation of position of directors
In case of ‘Pre-bid takeover: to prevent a sudden unexpected (hostile) bid before
management has time to assess their options properly
In case of Post-bid takeover: if pre-bid defenses work, the post-bid defenses give the
management more time to delay the bid for reasons i.e. absence during GM, etc.

M&As’ Defenses from Bidding (Takeover Defences)-Usages & Permissibility
Usages:
Private company with limited liability?
(Closed) public company? (can be made as
private)
(Open) public company? (listed by its owned
discretion, usually spread owned)
Listed company? (cannot be made as private)
Permissibility:
In principle allowed unless:
Violation of the law
(in violation of the) Character of the
company
Violation of reasonableness and
fairness
Corporate Governance Codes and 13th
Directive
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M&As’ Defense Breaking News:
Suez to ask shareholders to approve a poison pill
Wall Street Journal 6 April 2006
“French water-and-energy conglomerate Suez SA will seek shareholders approval in May
for adding a poison-pill takeover defense to its bylaws. The company wants the poison
pill, recently authorized by France’s Parliament, in case Italy’s Enel SpA launches a
hostile bid before Suez has time to complete its EUR 70 billion merger with Gaz de
France. France’s government has been lining up regulatory weapons to ensure that the
country’s corporations can defend themselves.”
Directive

M&As’ Defenses from Bidding (Takeover Defences)- various
Preventive/Pre-Bid Defenses (“Pandora” constructions)
Poison Pills
Shark Repellents
o a.k.a. charter amendments
Golden Parachutes
Crown-Jewel
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Crown-Jewel
Reactive/Post-Bid Defenses
Greenmail
Standstill Agreements
White Knight or White Squire
Litigation
Pac-Man defense
Holding Constructions
Large Companies Regime

M&As’ Defenses from Bidding (Takeover Defences) - Poison Pills
A poison pill represents the creation of special rights to
receive extra payments, similar to call options, issued to
existing shareholders.
Early pills – shareholders get new shares which, if takeover succeeds,
are convertible to acquirer’s stock at preferred ratio.
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Flip-over rights – rights offering that allow shareholders to buy stock in
acquirer at a low price; rights exercisable when bidder gets 100%
Flip-in pills – rights to buy stocks in target (thus diluting stock); against
bidder who does not want to buy 200% of the target.
Pre-Bid

M&As’ Defenses from Bidding (Takeover Defences) - Shark Repellents
Charter Amendments, a company will make special amendments to its charter or
bylaws that become active only when a takeover attempt is announced or presented to
shareholders with the goal of making the takeover less attractive or profitable to the
acquisitive firm.
Staggered board of directors
Only a % of directors can be replaced each year
Supermajority provisions
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Supermajority provisions
A merger has been approved by substantially more than 50% of votes
Fair price provisions
Acquirer has to pay minority shares a fair price (precludes two-tiered
offers)
Dual-class share recapitalization
Issue two classes of shares with different voting rights.
or much higher
Pre-Bid

M&As’ Defenses from Bidding (Takeover Defences) - Golden Parachutes
Golden Parachutes, is generous lump-sum compensation/benefits to target
managers (Boards) in case they are replaced after a takeover, can be used as a measure
to discourage an unwanted takeover attempt. certain significant benefits, such as
stock options, bonuses, severance pay, etc.
Proponents:
Make it easier to hire and retain executives, especially in industries more prone to
mergers.
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Help an executive to remain objective about the company during the takeover process.
Dissuade takeover attempts by increasing the cost of a takeover, often part of a Poison Pill
strategy
Contras:
Dismissal is a risk in any occupation, and executives are already well compensated.
Executives already have a fiduciary responsibility to the company, and should not need
additional incentives to stay objective.
Golden parachute costs are a very small percentage of a takeover's costs and do not affect
the outcome.
Pre-Bid

M&As’ Defenses from Bidding (Takeover Defences) – Crown Jewel
The crown jewel defense is, much like the white knight defense, a method of
selling a part of the company or just the most valuable assets
to a suitor (or to a friendly third party) that management has higher
regard for than for the hostile acquirer, or to spin off the valuable assets
in a separate entity.
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Therefore, the unfriendly (the hostile) bidder is less attracted to the company
assets, in another word, it says that the target company become less attractive for
the bidder.
The defense therefore also has disadvantages, which means that the company
must agree to sell of one or more of its valuable assets, and
thus regard the possibility of keeping the target company intact as impossible.
Pre-Bid

M&As’ Defenses from Bidding (Takeover Defences) – Green Mail
Green-mail, It refers to the payment of a substantial premium for a
significant shareholder’s stock in return for the stockholder’s agreement
that he or she will not initiate a bid for control of the company
In exchange for the payment, the potential acquirer is required to sign a
standstill agreement (leave me alone!), which typically specifies the
amount of stock, if any, that the investor can own, the circumstances under
which the raider can sell stock currently owned, and the term of the
agreement
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Post-Bid
agreement
Despite their discriminatory nature, courts in certain states/countries, have
found greenmail an appropriate response as long as it is made for
valid business reasons
New Career avenue was born “Corporate Raider”
Green mail has mostly decreased due to Capital gain tax imposed on
the gains derived from such stakes

M&As’ Defenses from Bidding (Takeover Defences) – White Knight
A target company seeking to avoid being taken over by a specific bidder may try to be
acquired by another firm, a white knight, that is viewed as a more appropriate suitor.
To complete such a transaction, the white knight must be willing to acquire the
target on more favorable terms (i.e. higher price, lets incumbent to control, etc.)
than those of other bidders.
It is the company that is more favorable compared to the Hostile company (Dark
Knight)
Grey Knight is an acquiring company that enters a bid for a hostile takeover in addition
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Grey Knight is an acquiring company that enters a bid for a hostile takeover in addition
to the target firm and first bidder, perceived as more favorable than the black knight
(unfriendly bidder), but less favorable than the white knight (friendly bidder).
Yellow Knight: A company that was once making a takeover attempt but ends up
discussing a merger with the target company.
Lady Macbeth Strategy, A corporate-takeover strategy with which a third party poses
as a white knight to gain trust, but then turns around and joins with unfriendly
bidders.
Post-Bid

M&As’ Defenses from Bidding (Takeover Defences) – Litigation
Takeover litigation often includes antitrust concerns, alleged
violations of federal securities laws, inadequate disclosure by
the bidder as required (i.e. by the Williams Act, Law No.40/2007, PP
Np.57/2010, etc.), and alleged fraudulent behavior (Competition
Law against Public Policy)
Targets often try to get a court injunction temporarily stopping the
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Targets often try to get a court injunction temporarily stopping the
takeover attempt until the court has decided that the target’s allegations are
groundless
By preventing the potential acquirer from buying more stock, the target firm buys
time to erect additional takeover defenses
Post-Bid

M&As’ Defenses from Bidding (Takeover Defences) – Pac-Man
“Best Defense is a Good Offence”, another takeover defense is for the target
company to retaliate by making a tender offer for the company making the
takeover attempt
It occurs when the Target makes an offer to buy the Hostile company in response to
Hostile bid for the Target
The drawbacks:
It requires a great many unsecured assets or a large amount of free cash on
hand or easily accessible
A counteroffer waives the target's assertion of antitrust violation created by
40
A counteroffer waives the target's assertion of antitrust violation created by
the merger, and implicitly signifies desirability by the target company’s board
to merge, whether or not that was actually the case
The defense does not prevent an acquisition from happening, but rather
prevents the target company management from losing their jobs and control
over the company
The defense may not even attain that goal because the target company will
only prevail if it can get control of the hostile acquirer faster than the hostile
acquirer can gain control of the target company
Post-Bid

M&As’ Defenses from Bidding (Takeover Defences) – Others
Large Companies Regime
still sufficient?
Holding Constructions
Heineken
Aegon
40
Post-Bid
Depository receipts for shares (DR) is a type of negotiable
(transferable) financial security that is traded on a local stock exchange
Power of attorney by foundation
Corporate governance code
New legislation

M&As’ Defenses – Recognize The Defenses
“The European steelmaker (Arcelor) has put it newly acquired
Dofasco subsidiary in a Dutch trust that blocks a new owner
from selling it. That’s a real problem for London-based Mittal
Steel, which has to sell Dofasco, or comparable assets to avoid
40
Steel, which has to sell Dofasco, or comparable assets to avoid
antitrust problems in its hostile bid for Arcelor.”
Identify the takeover defenses employed by Arcelor?

“The European steelmaker (Arcelor) has put it newly acquired
Dofasco subsidiary in a Dutch trust that
blocks a new owner from selling it. That’s a real
problem for London-based Mittal Steel, which has to sell Dofasco, or comparable assets to
M&As’ Defenses – Recognize The Defenses – cont’
problem for London-based Mittal Steel, which has to sell Dofasco, or comparable assets to
avoid antitrust problems in its hostile bid for Arcelor.”
White Knight
41

Gillette case
In 1986 Gillette was being pursued by Ronald Perelman, who
had previously taken over the Revlon Corporation. When it
appeared that he was about to make a tender offer for Gillette,
Gillette responded by paying Revlon USD 558 million in return
for Revlon agreeing not to make a USD 65 million of tender
42
for Revlon agreeing not to make a USD 65 million of tender
offer to stockholders.
Identify the takeover defenses employed by Gillete?

Gillette case
In 1986 Gillette was being pursued by Ronald Perelman, who had previously taken over the
Revlon Corporation. When it appeared that he was about to make a tender offer for Gillette,
Gillette responded by paying Revlon USD
558 million in return for Revlon agreeing not to make a
558 million in return for Revlon
USD 65 tender offer to stockholders.
Pac-man
43

AMP Inc.
In 1998 Allied Signal Corp. launched a USD 10 billion hostile
takeover bid for AMP Inc. In first instance AMP tried to remain
independent, but when this did not look like it was going to be
successful Credit Suisse, AMP’s investment banker approached
44
successful Credit Suisse, AMP’s investment banker approached
a number of firms concerning their possible interest in
acquiring AMP.
Identify the takeover defenses employed by AMP Inc.?

AMP Inc.
In 1998 Allied Signal Corp. launched a USD 10 billion hostile takeover bid for
AMP Inc. In first instance AMP tried to remain independent, but when this
did not look like it was going to be successful Credit Suisse, AMP’s
investment banker approached a number of firms
concerning their possible interest in acquiring AMP.
45
concerning their possible interest in acquiring AMP.
White Knight

Siebel's takeover defense
Siebel’s board, facing a challenge by hedge funds, adopted a
broad rule that would give extra benefits in the event of a
takeover not only to upper management, but also to regular
employees, who get three months' pay and health coverage
(six months for board-level employees, 12 months for vice
presidents, and 18 months for senior executives). Siebel says
presidents, and 18 months for senior executives). Siebel says
this is to deal with the “uncertainty” created by “recent
rumors concerning potential acquisitions or takeovers of the
company”.
Identify the takeover defenses employed by Siebel?
46

Siebel's takeover defense
Siebel’s board, facing a challenge by hedge funds, adopted a
broad rule that would give extra benefits in the event
of a takeover not only to upper management, but also to
regular employees, who get three months' pay and health
coverage (six months for board-level employees, 12 months for
vice presidents, and 18 months for senior executives). Siebel
47
vice presidents, and 18 months for senior executives). Siebel
says this is to deal with the “uncertainty” created by “recent
rumors concerning potential acquisitions or takeovers of the
company”.
Golden Parachute

Mergers & Acquisitions XII

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