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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
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
Strategies for fighting hostile
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
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.
A takeover defense under which
a target firm repurchases,
through private ne...
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