Handbook on Mergers and Acquisitions by DreamLegal

Contents
1. INTRODUCTION TO MERGERS & ACQUISITIONS ................................................................................................................................. 3
1.1 What is M&A? ................................................................................................................................................................. 3
1.2 Goals of M&A .................................................................................................................................................................. 3
1.3 Terminology of M&A ....................................................................................................................................................... 3
1.3.1 Accretion ................................................................................................................................................................. 3
1.3.2 Acquirer ................................................................................................................................................................... 3
1.3.3 Acquisition............................................................................................................................................................... 4
1.3.4 Amalgamation/Consolidation .................................................................................................................................. 4
1.3.5 Asset Deal ................................................................................................................................................................ 4
1.3.6 Backward Integration .............................................................................................................................................. 4
1.3.7 Bootstrap Effect ....................................................................................................................................................... 4
1.3.8 Cash Consideration .................................................................................................................................................. 5
1.3.9 Compensation Manipulation ................................................................................................................................... 5
1.3.10 Conglomerate ........................................................................................................................................................ 5
1.3.11Debt Issuance Fees ................................................................................................................................................. 5
1.3.12 Dilution .................................................................................................................................................................. 5
1.3.13 Economies of Scale ................................................................................................................................................ 5
1.3.14 Economies of Scope .............................................................................................................................................. 6
1.3.15 Empire Building ..................................................................................................................................................... 6
1.3.16 Equity Issuance Fees .............................................................................................................................................. 6
1.3.17 Excess Purchase Price ............................................................................................................................................ 6
1.3.18 Fair Value Adjustments .......................................................................................................................................... 6
1.3.19 Friendly Takeover .................................................................................................................................................. 7
1.3.20 Forward Integration............................................................................................................................................... 7
1.3.21 Fully Diluted Shares Outstanding .......................................................................................................................... 7
1.3.22 Goodwill ................................................................................................................................................................ 7
1.3.23 Horizontal Integration ........................................................................................................................................... 7
1.3.24 Hostile Takeover .................................................................................................................................................... 7
1.3.25 Identifiable Assets ................................................................................................................................................. 8
1.3.26 Intrinsic Value ........................................................................................................................................................ 8
1.3.27 Merger/Statutory .................................................................................................................................................. 8
1.3.28 Net Book Value of Assets ....................................................................................................................................... 8
1.3.29 Offer Price ............................................................................................................................................................. 8
1.3.30 Other Closing Costs ............................................................................................................................................... 9
1.3.31 Pro Forma Shares Outstanding .............................................................................................................................. 9
1.3.32 Purchase Price Allocation ...................................................................................................................................... 9
1.3.33 Restructuring Charges ........................................................................................................................................... 9
1.3.34 Revenue Enhancements ........................................................................................................................................ 9
1.3.35 Sensitivity Analysis ................................................................................................................................................ 9
1.3.36 Share Exchange Ratio .......................................................................................................................................... 10
1.3.37 Share Issuance Discount ...................................................................................................................................... 10
1.3.38 Share/Stock Deal ................................................................................................................................................. 10
1.3.39 Stock Consideration ............................................................................................................................................. 10
1.3.40 Subsidiary ............................................................................................................................................................ 10
1.3.41 Synergies ............................................................................................................................................................. 11
1.3.42 Takeover Premium ............................................................................................................................................... 11
1.3.43 Target................................................................................................................................................................... 11
1.3.45 Timing of Synergies ............................................................................................................................................. 11
1.3.46 Transaction Close Date ........................................................................................................................................ 11
1.3.47 Vertical Integration .............................................................................................................................................. 11
1.3.48 VWAP................................................................................................................................................................... 12
2. M&A STRATEGIES .................................................................................................................................................................... 13

Page 1 of 33
 2.1 Types of Acquisition Strategies...................................................................................................................................... 13
2.2 From Strategy to Success .............................................................................................................................................. 13
3. TAKEOVER STRATEGIES ............................................................................................................................................................... 14
3.1 Black Knight ................................................................................................................................................................... 14
3.2 Creeping Takeover ......................................................................................................................................................... 14
3.3 Dawn Raid ..................................................................................................................................................................... 14
3.4 Godfather Offer ............................................................................................................................................................. 15
3.5 Tender Offer .................................................................................................................................................................. 15
3.6 Toehold Position ............................................................................................................................................................ 15
4. HOSTILE TAKEOVER DEFENSES ..................................................................................................................................................... 17
4.1 Crown Jewels Defense ................................................................................................................................................... 17
4.2 Dead Hand Provision ..................................................................................................................................................... 17
4.3 Flip-in ............................................................................................................................................................................ 17
4.4 Flip-over ........................................................................................................................................................................ 18
4.5 Golden Parachute .......................................................................................................................................................... 18
4.6 Greenmail...................................................................................................................................................................... 18
4.7 Killer Bees...................................................................................................................................................................... 19
4.8 Lobster Trap .................................................................................................................................................................. 19
4.9 Pac Man Defense........................................................................................................................................................... 19
4.10 Poison Pill .................................................................................................................................................................... 19
4.11 Poison Put ................................................................................................................................................................... 20
4.12 Sandbagging ................................................................................................................................................................ 20
4.13 Scorched Earth Policy .................................................................................................................................................. 20
4.14 Show-stopper .............................................................................................................................................................. 21
4.15 Supermajority Amendment......................................................................................................................................... 21
4.16 White Knight Defense ................................................................................................................................................. 21
4.17 White Squire Defense.................................................................................................................................................. 22
5. ACQUIRING PRIVATE COMPANIES ................................................................................................................................................. 23
5.1 Private Company Acquisitions: A Process Overview ..................................................................................................... 23
5.1.1 Target Analysis and Evaluation .............................................................................................................................. 23
5.1.2 Reaching Agreement ............................................................................................................................................. 23
5.1.3 Due Diligence ........................................................................................................................................................ 24
5.1.4 Sale and Purchase Agreement ............................................................................................................................... 24
5.1.5 Completion and Post-Completion ......................................................................................................................... 24
6. SELLING PRIVATE COMPANIES...................................................................................................................................................... 25
6.1 Private Company Disposals: A Process Overview .......................................................................................................... 25
6.1.1 Preparation for Sale ............................................................................................................................................... 25
6.1.2 Auction Process ..................................................................................................................................................... 25
6.1.3 Alternative Methods of Disposal ........................................................................................................................... 26
7. PUBLIC COMPANY TAKEOVERS ..................................................................................................................................................... 27
7.1 Introduction to Public Takeovers ................................................................................................................................... 27
7.2 Friendly vs. Hostile Takeovers ....................................................................................................................................... 27
7.3 The Takeover Process .................................................................................................................................................... 27
7.4 Defence Tactics in Hostile Bids ...................................................................................................................................... 27
8. DEAL STRUCTURES .................................................................................................................................................................... 28
8.1 Structuring the Deal ...................................................................................................................................................... 28
8.2 Forms of Consideration ................................................................................................................................................. 28
8.3 Asset vs. Share Purchases ............................................................................................................................................. 28
8.4 Funding the Acquisition ................................................................................................................................................ 28
8.5 Success and Failure in Acquisitions ............................................................................................................................... 28
8.6 Integration Planning ...................................................................................................................................................... 28
8.7 Managing Cultural Integration ...................................................................................................................................... 29
9. POST-DEAL INTEGRATION ........................................................................................................................................................... 30
9.1 Success and Failure in Acquisitions ............................................................................................................................... 30
9.1.1 Case Study: The AOL-Time Warner Merger ........................................................................................................... 30
9.2 Integration Planning ...................................................................................................................................................... 31
9.2.1 Case Study: Disney’s Acquisition of Pixar .............................................................................................................. 31
9.3 Managing Cultural Integration ...................................................................................................................................... 32
9.3.1 Case Study: Amazon’s Acquisition of Whole Foods ............................................................................................... 32

Page 2 of 33
 1. INTRODUCTION TO MERGERS & ACQUISITIONS

1.1 What is M&A?

Mergers and Acquisitions (M&A) refer to the consolidation of companies or assets through
various types of financial transactions. A merger occurs when two companies combine to form
a new entity, while an acquisition is the purchase of one company by another. These
transactions can vary in complexity and scale, involving everything from small local businesses
to large multinational corporations.

1.2 Goals of M&A

The primary goal of M&A is to enhance shareholder value by creating synergies that make the
combined company worth more than the sum of its parts. Other objectives include expanding
market reach, acquiring new technology or products, achieving economies of scale,
diversifying risk, and removing competition.

1.3 Terminology of M&A

1.3.1 Accretion
Accretion refers to the improvement in financial metrics such as earnings per share (EPS)
following a merger or acquisition. For instance, if Company A acquires Company B, and the
combined entity generates higher EPS than Company A did on its own, this improvement is
known as accretion. This typically happens when the acquired company's earnings add more
value than the cost of the acquisition.
Example: If Company A's EPS was $1.00 and after acquiring Company B, it becomes $1.20,
the transaction is considered accretive by $0.20 per share.

1.3.2 Acquirer
The acquirer is the company that purchases another firm. The acquirer takes control of the
acquired company and integrates its operations, assets, and sometimes its liabilities.

Page 3 of 33
Example: When Disney acquired 21st Century Fox, Disney was the acquirer, taking over
Fox's assets including its film and TV studios.

1.3.3 Acquisition
An acquisition occurs when a purchasing company buys more than 50% of another
company's shares, gaining control. Both companies continue to exist, but the acquired
company operates under the control of the acquirer.
Example: When Google acquired YouTube, Google did not dissolve YouTube but instead
incorporated it into its broader business structure.

1.3.4 Amalgamation/Consolidation
Amalgamation or consolidation is when two or more companies merge to form a completely
new entity, and the original companies cease to exist.
Example: The merger of Daimler-Benz and Chrysler to form DaimlerChrysler is an example
of amalgamation, where a new entity was created from the combining companies.

1.3.5 Asset Deal

In an asset deal, the acquirer purchases specific assets of the target company, such as
machinery, patents, or customer lists, instead of buying shares.
Example: IBM's purchase of Red Hat was primarily an asset deal where IBM acquired Red
Hat’s software assets to bolster its cloud computing capabilities.

1.3.6 Backward Integration

Backward integration happens when a company acquires another company that supplies raw
materials or components it needs for production.
Example: Starbucks acquiring a coffee farm is an example of backward integration, ensuring
control over its coffee supply chain.

1.3.7 Bootstrap Effect

The bootstrap effect occurs when an acquiring company with a higher P/E ratio buys a
company with a lower P/E ratio, leading to an increase in the acquirer's EPS purely due to
accounting changes.
Example: If Company A with a P/E ratio of 20 acquires Company B with a P/E ratio of 10,
Company A's EPS might increase post-acquisition, although no real value has been created.

Page 4 of 33
1.3.8 Cash Consideration
Cash consideration refers to the part of the purchase price paid in cash during an acquisition.
Example: When Facebook acquired Instagram, it paid $1 billion in cash and stock, with a
significant portion being cash consideration.

1.3.9 Compensation Manipulation

Compensation manipulation involves management pursuing mergers to increase the
company's size and thus justify higher salaries based on comparative benchmarks with larger
companies.
Example: If a CEO receives a bonus based on the size of the company, they might push for
acquisitions to grow the company’s size and, in turn, their compensation.

1.3.10 Conglomerate
A conglomerate merger involves companies from different industries combining their
operations. This can diversify business risks across unrelated sectors.
Example: Berkshire Hathaway, a conglomerate, owns businesses in various industries
including insurance, railroads, and consumer goods.

1.3.11Debt Issuance Fees

Debt issuance fees are the costs associated with issuing debt to finance an acquisition, usually
charged by investment banks.
Example: If Company X raises $500 million in debt to acquire Company Y, it might pay
several million in debt issuance fees to the underwriting bank.

1.3.12 Dilution
Dilution happens when a company issues additional shares to finance an acquisition, leading
to a reduction in earnings per share (EPS) for existing shareholders.
Example: If Company A has 1 million shares outstanding and issues another 1 million shares
to buy Company B, the EPS might decrease, diluting existing shareholders' value.

1.3.13 Economies of Scale

Economies of scale refer to cost savings achieved when two companies merge and eliminate
redundant departments or functions, reducing fixed costs.

Page 5 of 33
Example: The merger between Kraft Foods and Heinz led to significant economies of scale
by consolidating operations and reducing overhead costs.

1.3.14 Economies of Scope

Economies of scope occur when a merger allows the combined entity to gain specialized
skills or technologies that enhance its product offerings.
Example: Amazon’s acquisition of Whole Foods allowed it to leverage its logistics expertise
and technology to innovate in the grocery sector.

1.3.15 Empire Building

Empire building is when management pursues mergers to increase the company's size for
personal prestige rather than strategic business benefits.
Example: If a CEO pushes for a merger that does not make strategic sense but increases the
company's size, it might be considered empire building.

1.3.16 Equity Issuance Fees

Equity issuance fees are the costs associated with issuing new shares to finance an
acquisition, typically charged by investment banks.
Example: If a company issues $1 billion in new equity to fund an acquisition, it might incur
equity issuance fees amounting to a percentage of the total raised.

1.3.17 Excess Purchase Price

The excess purchase price is the amount by which the purchase price of a target company
exceeds its net book value, often attributed to intangible assets like goodwill.
Example: If Company A buys Company B for $1 billion and Company B’s net book value is
$800 million, the $200 million difference is the excess purchase price.

1.3.18 Fair Value Adjustments

Fair value adjustments involve changing the book value of a target company’s assets to
reflect their current market value during an acquisition.
Example: If a target company's real estate is valued higher in the market than on its books, a
fair value adjustment is made to reflect the current market value.

Page 6 of 33
1.3.19 Friendly Takeover
A friendly takeover is an acquisition where the target company’s board of directors and
management approve the deal and recommend shareholders accept the offer.
Example: Microsoft’s acquisition of LinkedIn was a friendly takeover, with LinkedIn’s
board and management supporting the deal.

1.3.20 Forward Integration

Forward integration occurs when a company acquires a business that uses its products to
produce finished goods or serves as a distribution outlet.
Example: A car manufacturer buying a chain of dealerships is an example of forward
integration, gaining control over the retail side of its business.

1.3.21 Fully Diluted Shares Outstanding

Fully diluted shares outstanding are the total number of shares a company would have if all
convertible securities, options, and warrants were exercised.
Example: If a company has 1 million shares outstanding and another 200,000 shares
potentially issuable through options, the fully diluted shares outstanding would be 1.2
million.

1.3.22 Goodwill
Goodwill represents the excess purchase price over the fair value of a target company’s net
identifiable assets, often attributed to brand reputation or customer relationships.
Example: If Company A buys Company B for $1 billion and the net identifiable assets are
valued at $700 million, the $300 million difference is recorded as goodwill.

1.3.23 Horizontal Integration

Horizontal integration is the merger of companies within the same industry, aimed at
achieving synergies such as cost savings or increased market share.
Example: The merger of two large beer companies, Anheuser-Busch and InBev, to form
Anheuser-Busch InBev, is an example of horizontal integration.

1.3.24 Hostile Takeover

A hostile takeover occurs when the target company’s board and management oppose the
acquisition, but the acquirer pursues it directly with shareholders.

Page 7 of 33
Example: The attempted takeover of Yahoo! by Microsoft in 2008 was a hostile takeover, as
Yahoo!’s board opposed the bid.

1.3.25 Identifiable Assets

Identifiable assets are assets that can be individually valued and assigned a fair market value
during an acquisition, including both tangible and intangible assets.
Example: In a tech acquisition, identifiable assets might include patents, trademarks, and
proprietary software.

1.3.26 Intrinsic Value

Intrinsic value is the estimated true value of a business based on discounted cash flow
analysis, often used to determine if a company's stock is undervalued or overvalued.
Example: If an analyst calculates that a company's intrinsic value is $50 per share using DCF
analysis, but the stock is trading at $40, it might be considered undervalued.

1.3.27 Merger/Statutory
A statutory merger is when one company acquires all the shares or assets of another, resulting
in the target company ceasing to exist, with the acquirer surviving.
Example: When AT&T acquired Time Warner, Time Warner ceased to exist as a separate
entity, and its assets became part of AT&T.

1.3.28 Net Book Value of Assets

Net book value of assets is the value of a company’s assets minus its liabilities as recorded on
the balance sheet.
Example: If a company has $1 million in assets and $400,000 in liabilities, its net book value
of assets is $600,000.

1.3.29 Offer Price

The offer price is the amount per share that the acquiring company proposes to pay the target
company’s shareholders in an acquisition.
Example: If Company A offers to buy Company B at $30 per share, and Company B's
current stock price is $25, the offer price is $30.

Page 8 of 33
1.3.30 Other Closing Costs
Other closing costs include various fees related to completing the transaction, such as due
diligence, legal, and accounting fees.
Example: If an acquisition involves significant legal review and accounting work, these costs
are included in other closing costs.

1.3.31 Pro Forma Shares Outstanding

Pro forma shares outstanding are the number of shares a company will have after the
transaction is completed, including any new shares issued as part of the deal.
Example: If Company A has 1 million shares and issues 500,000 new shares to acquire
Company B, the pro forma shares outstanding will be 1.5 million.

1.3.32 Purchase Price Allocation

Purchase price allocation involves dividing the total purchase price among the target’s net
identifiable assets and goodwill.
Example: In a $1 billion acquisition, if $700 million is allocated to tangible and identifiable
intangible assets, the remaining $300 million might be allocated to goodwill.

1.3.33 Restructuring Charges

Restructuring charges are costs related to changes in the company’s structure, such as closing
facilities or layoffs, that may occur post-acquisition.
Example: If a company lays off 1,000 employees after an acquisition, the associated
severance payments and facility closure costs are restructuring charges.

1.3.34 Revenue Enhancements

Revenue enhancements refer to increases in revenue anticipated from cross-selling, up-
selling, or improved pricing following a merger.
Example: If a software company acquires a cybersecurity firm, it might enhance revenue by
offering bundled solutions to existing customers.

1.3.35 Sensitivity Analysis

Sensitivity analysis involves testing how changes in key assumptions affect the outcome of a
financial model, helping assess risks and potential impacts.

Page 9 of 33
Example: If an acquisition model assumes a certain growth rate, sensitivity analysis might
test how changes in this rate affect the projected return on investment.

1.3.36 Share Exchange Ratio

The share exchange ratio is the rate at which shares of the target company will be exchanged
for shares of the acquiring company during an acquisition.
Example: If Company A offers 2 shares of its stock for every 1 share of Company B, the
share exchange ratio is 2:1.

1.3.37 Share Issuance Discount

Share issuance discount is any reduction from the current market price used to determine the
number of shares the target receives during an acquisition.
Example: If Company A’s stock is trading at $50 but offers shares at $45 to target Company
B, the $5 difference is the share issuance discount.

1.3.38 Share/Stock Deal

In a share/stock deal, the acquirer buys all the shares of the target company, assuming control
of all its assets and liabilities.
Example: When Facebook acquired WhatsApp, it was a share/stock deal where Facebook
exchanged its shares for WhatsApp’s shares.

1.3.39 Stock Consideration

Stock consideration refers to the portion of the purchase price paid in the form of the
acquirer’s shares rather than cash.
Example: When Amazon acquired Whole Foods, part of the purchase price was paid in
Amazon shares, constituting stock consideration.

1.3.40 Subsidiary
A subsidiary is formed when the acquirer takes over the target company but maintains its
brand and operations as a separate legal entity.
Example: Instagram operates as a subsidiary of Facebook, maintaining its own brand while
benefiting from Facebook’s resources.

Page 10 of 33
1.3.41 Synergies
Synergies are cost savings and revenue enhancements expected from combining the
operations of two companies.
Example: The merger between Exxon and Mobil was expected to create synergies through
combined research and development, resulting in significant cost savings.

1.3.42 Takeover Premium

The takeover premium is the percentage above the target company’s current share price that
the offer price represents, intended to incentivize shareholders to sell.
Example: If a target’s stock is trading at $20 per share and the acquirer offers $25 per share,
the $5 difference is the takeover premium.

1.3.43 Target
The target is the company being acquired in a transaction, also referred to as the seller.
Example: When Amazon acquired Zappos, Zappos was the target company.

1.3.45 Timing of Synergies

Timing of synergies refers to how quickly the cost savings and revenue enhancements from a
merger are expected to materialize.
Example: If a company expects to achieve full synergy benefits within three years post-
merger, this timeframe is the timing of synergies.

1.3.46 Transaction Close Date

The transaction close date is when the acquisition is officially completed, and control of the
target company is transferred to the acquirer.
Example: If Company A and Company B agree on an acquisition on January 1st, and the
transaction is completed on March 31st, March 31st is the transaction close date.

1.3.47 Vertical Integration

Vertical integration involves merging with companies within the same supply chain, either
forward or backward, to enhance control over the production process.
Example: A smartphone manufacturer buying a chip supplier (backward integration) or a
retail store (forward integration) is engaging in vertical integration.

Page 11 of 33
1.3.48 VWAP
VWAP stands for Volume Weighted Average Price, which measures the average price of a
target company’s shares weighted by trading volume over a specified period.
Example: If an acquirer uses the VWAP over the past 30 days to set an offer price, this
reflects the average price weighted by trading volume during that period.

Page 12 of 33
 2. M&A STRATEGIES

2.1 Types of Acquisition Strategies

• Scale Acquisitions: Aim to increase market share by acquiring competitors.

• Scope Acquisitions: Focus on acquiring businesses that complement the existing
business, offering new products or services.
• Diversification: Involves acquiring businesses in different industries to spread risk.
• Disposal Strategies: Selling off parts of the business to focus on core activities or raise
capital.

2.2 From Strategy to Success

Successful M&A strategies require careful planning and execution. This includes identifying
suitable targets, conducting thorough due diligence, negotiating favourable terms, and
effectively integrating the acquired company.

Page 13 of 33
 3. TAKEOVER STRATEGIES

3.1 Black Knight

A black knight refers to an unwelcome or hostile bidder attempting to take over a company
against the wishes of its management and board of directors.

Example: In 2011, Valeant Pharmaceuticals was considered a black knight when it made an
unsolicited bid to acquire Cephalon, a move that was strongly opposed by Cephalon's board.

3.2 Creeping Takeover

A creeping takeover involves an acquirer gradually purchasing shares of the target company
on the open market over an extended period. By slowly accumulating shares, the acquirer can
eventually gain a controlling interest without triggering immediate alarms or regulatory
scrutiny.

Example: If Company A wants to take over Company B, it might start buying Company B's
shares in small increments over months or years. This strategy allows Company A to build a
substantial stake without causing sudden spikes in the stock price or alerting Company B to the
takeover attempt.

3.3 Dawn Raid

A dawn raid is a takeover strategy where the acquirer buys up as many shares of the target
company as possible as soon as the stock market opens. This aggressive move aims to secure
a significant position quickly before the target company can react.

Example: If Company X plans a dawn raid on Company Y, it will place multiple buy orders

Page 14 of 33
for Company Y's shares right at the market's opening. By the time Company Y's management
realizes what's happening, Company X could already own a significant portion of the shares.

3.4 Godfather Offer

A godfather offer is an extremely attractive takeover bid presented by the acquirer that is
difficult for the target company's shareholders to refuse. This offer is typically at a significant
premium over the market price and lacks the negative implications usually associated with
hostile takeovers, such as management overhaul or asset stripping.

Example: If Company A offers to buy Company B at a 50% premium over its current stock
price and promises to keep the current management and operations intact, this would be
considered a godfather offer. The attractiveness of the offer makes it nearly impossible for
Company B’s shareholders to decline.

3.5 Tender Offer

A tender offer involves the acquirer making a public offer to purchase shares from the target
company's shareholders at a specified price, typically above the current market price. This
direct appeal to shareholders often bypasses the target company's management and board.

Example: Company A announces a tender offer to buy Company B’s shares at $40 per share
when the current market price is $30. Shareholders of Company B might be inclined to sell
their shares to Company A due to the premium offered.

3.6 Toehold Position

A toehold position refers to the strategy of acquiring a small, less than 5% stake in a target
company. This allows the acquirer to gain a significant equity position without triggering
mandatory disclosure requirements, which might alert the target company to a potential
takeover attempt.

Page 15 of 33
Example: If an investor buys 4.9% of Company Z's shares, they can quietly accumulate a
meaningful stake. Over time, the investor might use this toehold to influence the company or
prepare for a larger takeover bid.

Page 16 of 33
 4. HOSTILE TAKEOVER DEFENSES

4.1 Crown Jewels Defense

The Crown Jewels Defense is a strategy where a target company sells or threatens to sell its
most valuable assets, known as "crown jewels," if faced with a hostile takeover. By divesting
these key assets, the company becomes less attractive to the acquirer, thereby deterring the
takeover attempt.
Example: If Company A tries to take over Company B, and Company B owns a highly
profitable subsidiary, Company B might sell this subsidiary to make itself less appealing to
Company A. The loss of the subsidiary's value could discourage Company A from pursuing
the takeover.

4.2 Dead Hand Provision

A Dead Hand Provision is a clause that requires anti-takeover defenses to be canceled only by
a vote of the incumbent board of directors. This means that even if the board is replaced during
a takeover attempt, the new directors cannot easily dismantle the defenses.
Example: If an acquirer attempts to take over Company C, but Company C has a Dead Hand
Provision, the acquirer would need the approval of the existing board to move forward. This
makes it significantly harder for the acquirer to succeed without board cooperation.

4.3 Flip-in

The Flip-in strategy allows the target company's shareholders to purchase additional shares at
a discount, diluting the ownership interest of the acquirer. This tactic makes it more expensive
and difficult for the acquirer to gain a controlling interest in the company.
Example: If Company D is under a hostile takeover attempt by Company E, and Company D

Page 17 of 33
implements a Flip-in, its shareholders might be able to buy additional shares at a significant
discount. This increases the number of shares Company E needs to purchase, raising the overall
cost of the takeover.

4.4 Flip-over

In a Flip-over strategy, the target company's shareholders are given the right to buy the
acquirer's shares at a discount after the merger. This dilutes the value of the acquirer's stock
and serves as a counterattack to make the takeover less appealing.
Example: If Company F is merging with Company G and Company G’s shareholders can
purchase Company F’s shares at a discount, it dilutes the value of Company F’s shares,
potentially discouraging the takeover.

4.5 Golden Parachute

A Golden Parachute is an agreement that provides significant benefits to executives if they are
terminated as a result of a merger or takeover. These benefits can include large cash bonuses,
stock options, and other financial rewards, making it costly for the acquirer to remove existing
management.
Example: If Company H is taken over by Company I, and Company H’s executives have
Golden Parachutes, Company I would need to pay substantial severance packages to these
executives if they are ousted, adding a financial burden to the takeover.

4.6 Greenmail

Greenmail is a strategy where the target company repurchases its own shares from the acquirer
or a potential hostile party at a premium price to prevent the takeover. This discourages the
acquirer by providing a profit and persuading them to cease their takeover efforts.
Example: Company J might buy back its shares from Company K at a higher price than the
market value to prevent Company K from gaining control, thus avoiding the hostile takeover.

Page 18 of 33
4.7 Killer Bees

Killer Bees refer to public relations firms, law firms, or investment bankers hired by the target
company to defend against a hostile takeover. These professionals use various strategies and
tactics to fend off the unwanted bid.
Example: If Company L is under a takeover threat, it might hire a top-tier law firm and an
investment bank to devise legal and financial strategies to resist the bid, leveraging their
expertise to protect the company.

4.8 Lobster Trap

A Lobster Trap is a provision that restricts individuals holding large amounts of convertible
securities from converting them into shares if it would result in them owning 10% or more of
the company’s stock. This prevents potential acquirers from accumulating a controlling interest
covertly.
Example: Company M might implement a Lobster Trap to ensure that no single investor can
convert convertible bonds into a significant ownership stake, thus deterring any stealthy
acquisition attempts.

4.9 Pac Man Defense

The Pac Man Defense is a strategy where the target company turns the tables by attempting to
acquire the hostile bidder. This counterattack can force the original acquirer to defend itself
and reconsider its takeover bid.
Example: If Company N tries to take over Company O, but Company O starts buying
Company N’s shares in response, Company N may have to shift its focus from acquiring to
defending its own company, potentially abandoning the takeover attempt.

4.10 Poison Pill

Page 19 of 33
A Poison Pill is a broad term for various strategies designed to make a hostile takeover
prohibitively expensive or unattractive for the acquirer. These can include allowing existing
shareholders to purchase additional shares at a discount or triggering significant financial
consequences if an acquirer crosses a certain ownership threshold.
Example: If Company P is facing a hostile takeover, it might implement a Poison Pill that
allows its shareholders to buy more shares at a discount if any single entity acquires more than
20% of the company. This dilutes the acquirer’s stake and makes the takeover much more
expensive.

4.11 Poison Put

A Poison Put allows bondholders to sell their bonds back to the company at a premium if a
hostile takeover occurs. This increases the financial burden on the acquirer, as they would need
to cover the cost of repurchasing the bonds at the premium price.
Example: If Company Q issues bonds with a Poison Put clause, bondholders can demand
Company Q buy back their bonds at a higher price in the event of a takeover, adding a
significant cost for any potential acquirer.

4.12 Sandbagging

Sandbagging involves the target company pretending to go along with the takeover bid while
secretly stalling for time. This delay is used to find a more favorable "white knight" bidder who
can offer a better deal or rescue the company from the hostile bid.
Example: If Company R is targeted by Company S, Company R’s management might act
cooperative while secretly negotiating with a friendly company, Company T, to come in with
a better offer.

4.13 Scorched Earth Policy

Page 20 of 33
A Scorched Earth Policy involves the target company taking drastic measures such as taking
on massive debt at high interest rates to make itself less attractive to the acquirer. While this
can prevent the takeover, it also risks severely damaging the company’s financial health.
Example: If Company U is under threat of a hostile takeover, it might borrow large sums of
money at high interest rates to fund unprofitable projects, making itself a less appealing
acquisition target to Company V, but also risking its own solvency.

4.14 Show-stopper

A Show-stopper is when the target company initiates litigation to thwart a takeover attempt.
By taking legal action, the target can delay or derail the takeover process.
Example: Company W might sue Company X on grounds of antitrust violations or breach of
fiduciary duty to prevent or delay Company X’s takeover bid.

4.15 Supermajority Amendment

A Supermajority Amendment requires that a very high percentage of shareholders must

approve significant decisions, such as mergers or acquisitions. This makes it more difficult for
an acquirer to gain enough shareholder support to proceed with a hostile takeover.
Example: If Company Y has a Supermajority Amendment requiring 80% shareholder approval
for a takeover, it would be much harder for an acquirer to meet this threshold compared to a
simple majority.

4.16 White Knight Defense

The White Knight Defense involves finding a more friendly and acceptable acquirer to outbid
the hostile bidder. This "white knight" provides a better deal or terms more favorable to the
target company’s interests.
Example: If Company Z is targeted by an aggressive bidder, it might seek out a friendly firm,

Page 21 of 33
Company AA, to offer a more generous bid, thereby rescuing Company Z from the hostile
takeover.

4.17 White Squire Defense

A White Squire Defense involves finding an ally who will purchase a significant but non-
controlling stake in the target company. This ally prevents the hostile bidder from gaining
control by blocking their ability to acquire enough shares.
Example: If Company AB is under threat, it might arrange for Company AC to buy 30% of its
shares, providing a block against the hostile bidder, Company AD, from acquiring a controlling
interest.

Page 22 of 33
 5. ACQUIRING PRIVATE COMPANIES

5.1 Private Company Acquisitions: A Process Overview

The acquisition process typically involves several stages, from identifying potential targets to
integrating the acquired company post-completion. Each stage requires careful consideration
and detailed planning to ensure a successful transaction.

Target • Information
Analysis and Gathering
• NDA
Evaluation

Reaching
Agreement

• FInancial
Due • Legal
Diligence • Operational

Sale and
Purchase
Agreement

Completion
and Post-
Completion

5.1.1 Target Analysis and Evaluation

• Information Gathering: Collect and analyze financial statements, management

accounts, and forecasts.
• Non-Disclosure Agreement (NDA): Ensure confidentiality during the information
exchange process.

5.1.2 Reaching Agreement

Page 23 of 33
Negotiation strategies play a crucial role in reaching a favorable agreement. This may involve
exclusivity agreements to prevent the target company from negotiating with other potential
buyers.

5.1.3 Due Diligence

• Financial Due Diligence: Assess the financial health of the target company.
• Legal and Regulatory Due Diligence: Identify any legal or regulatory issues that may
affect the transaction.
• Operational Due Diligence: Evaluate the operational efficiency and potential
synergies.

5.1.4 Sale and Purchase Agreement

The Sale and Purchase Agreement (SPA) outlines the terms and conditions of the acquisition,
including warranties, indemnities, and conditions precedent and subsequent.

5.1.5 Completion and Post-Completion

The completion process involves finalizing the transaction, transferring ownership, and
integrating the acquired company. Post-completion, it is essential to address any challenges
that arise and ensure the smooth integration of the new entity.

Page 24 of 33
 6. SELLING PRIVATE COMPANIES

6.1 Private Company Disposals: A Process Overview

Selling a private company can be achieved through various methods, including demergers and
controlled auctions. Each method has its own process and set of considerations.

Preparation •Documentation
for Sale •Advisor

•Initial Due
Auction Diligence
•Round 1 offer
Process •Final offer
•Contract

Alternative •'Rifleshot’ Approach

•Advertising
Methods of •Accelerated Mergers
and Acquisitions
Disposal

6.1.1 Preparation for Sale

Initial steps involve preparing the company for sale, including documentation and engaging
advisors to facilitate the process.

6.1.2 Auction Process

• Stage One: Preparation for sale, including marketing materials and initial due
diligence.
• Stage Two: Round one offers from interested parties.
• Stage Three: Final offers and selection of the preferred bidder.

Page 25 of 33
 • Stage Four: Proceeding to contract and completing the transaction.

6.1.3 Alternative Methods of Disposal

• ‘Rifleshot’ Approach: Targeting specific buyers.

• Advertising: Broadly marketing the sale to attract multiple bidders.
• Accelerated Mergers and Acquisitions: Speeding up the process due to financial
distress or other urgent factors.

Page 26 of 33
 •

7. PUBLIC COMPANY TAKEOVERS

7.1 Introduction to Public Takeovers

Public takeovers involve acquiring a publicly listed company. This process is highly regulated
and requires compliance with various legal and regulatory requirements.

7.2 Friendly vs. Hostile Takeovers

• Friendly Takeovers: Supported by the target company's management and board of

directors.
• Hostile Takeovers: Opposed by the target company's management, often involving
aggressive tactics.

7.3 The Takeover Process

The takeover process includes early-stage discussions, making and progressing the offer,
adhering to the offer timetable, and finalizing the transaction.

7.4 Defence Tactics in Hostile Bids

Common defence strategies against hostile bids include poison pills, white knight defenses,
and staggered board elections. These tactics aim to make the takeover less attractive or more
difficult for the acquirer.

Page 27 of 33
 8. DEAL STRUCTURES

8.1 Structuring the Deal

Structuring a deal involves determining the terms and conditions, including the form of
consideration and timing.

8.2 Forms of Consideration

Consideration can be in the form of cash, stock, or a combination of both. Each form has its
advantages and disadvantages, affecting the transaction's appeal to both parties.

8.3 Asset vs. Share Purchases

• Asset Purchases: Involve buying specific assets and liabilities of a company.

• Share Purchases: Involve acquiring the entire company by purchasing its shares. Each
method has different legal and financial implications.

8.4 Funding the Acquisition

Acquisitions can be funded through internal resources or external financing, including debt
financing, equity financing, and leveraged buyouts.

8.5 Success and Failure in Acquisitions

Key factors for successful acquisitions include thorough due diligence, effective integration
planning, and strong leadership. Common reasons for failure include cultural clashes,
overestimation of synergies, and poor execution.

8.6 Integration Planning

Page 28 of 33
Integration planning should begin pre-closing and continue post-closing, focusing on aligning
operations, cultures, and systems.

8.7 Managing Cultural Integration

Organizational culture plays a significant role in the success of an acquisition. Strategies for
cultural integration include clear communication, involvement of key stakeholders, and
fostering a unified corporate culture.

Page 29 of 33
 9. POST-DEAL INTEGRATION

9.1 Success and Failure in Acquisitions

Achieving success in acquisitions hinges on several critical factors, including comprehensive

due diligence, meticulous integration planning, and robust leadership. Thorough due diligence
ensures that the acquirer understands the target company’s assets, liabilities, and potential risks.
Effective integration planning involves a detailed strategy for combining the operations,
cultures, and systems of both companies. Strong leadership is essential to guide the integration
process and address any challenges that arise.

Common pitfalls leading to acquisition failures include cultural clashes, overestimation of

synergies, and poor execution. Cultural clashes occur when the organizational cultures of the
merging companies are incompatible, leading to friction and decreased employee morale.
Overestimation of synergies happens when the anticipated benefits of the merger, such as cost
savings or revenue enhancements, are not realized. Poor execution can stem from inadequate
planning, lack of clear communication, and insufficient follow-through on integration
strategies.

9.1.1 Case Study: The AOL-Time Warner Merger

One of the most notorious examples of acquisition failure is the merger between AOL and
Time Warner in 2000. This $165 billion deal was initially celebrated as a groundbreaking
combination of media and internet services. However, several factors led to its failure:

1. Cultural Clashes: AOL's aggressive, fast-paced culture clashed with Time Warner's
more traditional and bureaucratic environment. Employees struggled to adapt to
different management styles and corporate values, leading to internal conflict and
decreased productivity.
2. Overestimation of Synergies: The anticipated synergies, such as cross-promotion
opportunities and combined technological advancements, were vastly overestimated.

Page 30 of 33
 The companies failed to generate the expected growth and profitability, leading to
significant financial losses.
3. Poor Execution: The integration process was poorly executed, with inadequate
planning and coordination. Leadership struggled to align the companies' operations and
systems, resulting in inefficiencies and operational disruptions.

Ultimately, the merger was unwound in 2009, with AOL and Time Warner separating into
independent entities. The failed merger resulted in billions of dollars in losses and is often cited
as a cautionary tale in the business world.

9.2 Integration Planning

Integration planning should commence well before the closing of the deal and continue
diligently post-closing. The focus of this planning is to ensure seamless alignment of
operations, cultures, and systems between the merging companies. Pre-closing integration
planning involves identifying potential challenges and developing strategies to address them.
This includes aligning the companies' operational processes, integrating IT systems, and
harmonizing financial reporting methods.

Post-closing, the integration plan must be executed with precision. Regular progress reviews
and adjustments to the plan are crucial to address any emerging issues. Effective integration
requires clear communication of the plan to all stakeholders, including employees, customers,
and suppliers.

9.2.1 Case Study: Disney’s Acquisition of Pixar

In contrast to the AOL-Time Warner merger, Disney’s acquisition of Pixar in 2006 is an

example of a successful integration. Key factors contributing to this success included:

1. Thorough Pre-Closing Planning: Disney conducted extensive due diligence and

developed a detailed integration plan. This included strategies for integrating Pixar's
innovative culture with Disney's established processes.
2. Alignment of Operations and Systems: Disney and Pixar aligned their production
processes, marketing strategies, and distribution channels. This operational alignment
enabled the companies to leverage their combined strengths effectively.

Page 31 of 33
 3. Strong Leadership: The leadership from both companies, particularly Disney’s CEO
Bob Iger and Pixar’s leaders Ed Catmull and John Lasseter, played a crucial role in the
integration. They fostered open communication, mutual respect, and a shared vision for
the future.

The Disney-Pixar integration resulted in significant creative and financial successes, producing
blockbuster films and revitalizing Disney’s animation division.

9.3 Managing Cultural Integration

Organizational culture is a pivotal factor in the success of an acquisition. Strategies for

managing cultural integration include clear communication, involving key stakeholders, and
fostering a unified corporate culture. Clear communication involves regularly updating
employees about the integration process, addressing their concerns, and reinforcing the
combined company's vision and values. Involving key stakeholders, such as managers and
influential employees, helps ensure that the integration process is supported throughout the
organization.

Fostering a unified corporate culture involves creating opportunities for employees from both
companies to collaborate and build relationships. This can be achieved through team-building
activities, cross-functional projects, and joint training programs. Leadership must also model
the desired cultural behaviors and reinforce the importance of the unified culture in achieving
the company’s goals.

9.3.1 Case Study: Amazon’s Acquisition of Whole Foods

Amazon’s acquisition of Whole Foods in 2017 demonstrates effective cultural integration.

Despite the differences between Amazon’s tech-driven culture and Whole Foods’ customer-
centric, organic food ethos, the integration was successful due to several factors:

1. Clear Communication: Amazon communicated the integration plan clearly to Whole

Foods employees, addressing their concerns about potential changes to the company’s
culture and operations.
2. Involvement of Key Stakeholders: Amazon involved Whole Foods’ leadership in the
integration process, ensuring that their expertise and insights were leveraged.

Page 32 of 33
 3. Fostering a Unified Culture: Amazon maintained Whole Foods’ commitment to high-
quality organic products while integrating its own technological innovations, such as
implementing Amazon’s technology in Whole Foods stores to enhance customer
experience.

The successful integration resulted in improved operational efficiencies and enhanced

customer value, demonstrating the importance of cultural integration in mergers and
acquisitions.

By examining these case studies, it becomes evident that careful planning, strong leadership,
and effective cultural integration are essential components for achieving success in post-deal
integration.

Page 33 of 33