Once a target company is selected the investment

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Unformatted text preview: security issues (described in Chapter 7), can be hired by acquirers to find suitable target companies and assist in negotiations. Once a target company is selected, the investment banker negotiates with its management or investment banker. Likewise, when management wishes to sell the firm or an operating unit of the firm, it will hire an investment banker to seek out potential buyers. If attempts to negotiate with the management of the target company break down, the acquiring firm, often with the aid of its investment banker, can make a direct appeal to shareholders by using tender offers (as explained below). The investment banker is typically compensated with a fixed fee, a commission tied to the transaction price, or a combination of fees and commissions. Management Negotiations To initiate negotiations, the acquiring firm must make an offer either in cash or based on a stock swap with a specified ratio of exchange. The target company then reviews the offer and, in light of alternative offers, accepts or rejects the terms presented. A desirable merger candidate usually receives more than a single offer. Normally, it is necessary to resolve certain nonfinancial issues related to the existing management, product line policies, financing policies, and the independence of the target firm. The key factor, of course, is the per-share price offered in cash or reflected in the ratio of exchange. Sometimes negotiations break down. Tender Offers two-tier offer A tender offer in which the terms offered are more attractive to those who tender shares early. When negotiations for an acquisition break down, tender offers may be used to negotiate a “hostile merger” directly with the firm’s stockholders. As noted in Chapter 13, a tender offer is a formal offer to purchase a given number of shares of a firm’s stock at a specified price. The offer is made to all the stockholders at a premium above the market price. Occasionally, the acquirer will make a two-tier offer, in which the terms offered are more attractive to those who tender shares early. For example, the acquirer offers to pay $25 per share for the first 60 percent of the outstanding shares tendered and only $23 per share for the remaining shares. The stockholders are advised of a tender offer through announcements in 730 PART 6 Special Topics in Managerial Finance financial newspapers or through direct communications from the offering firm. Sometimes a tender offer is made to add pressure to existing merger negotiations. In other cases, the tender offer may be made without warning as an attempt at an abrupt corporate takeover. Fighting Hostile Takeovers takeover defenses Strategies for fighting hostile takeovers. white knight A takeover defense in which the target firm finds an acquirer more to its liking than the initial hostile acquirer and prompts the two to compete to take over the firm. poison pill A takeover defense in which a firm issues securities that give their holders certain rights that become effective when a takeover is attempted; these rights make the target firm less desirable to a hostile acquirer. greenmail A takeover defense under which a target firm repurchases, through private ne...
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This document was uploaded on 01/19/2014.

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