Part II:

Mergers and Acquisitions

TABLE OF CONTENTS

[PART ~I: MERGERS AND ACQUISITIONS •... ~ ....•••.•.••.. II.ll

CHAPTER 1: DEFINITIONS ..•.....•.........•...•. 0 • • • • • • • • • • • • • •• II.1

A. MERGER II. 1

B. ACQUISITION............................................ II.1

CHAPTER 2: TYPES OF MERGERS OR ACQUISITIONS •..••...•.•.•.••••.• II.2

A. HORIZONTAL MERGER ••..•••..•................................ II. 2

B. VERTICAL MERGER. . • • . . . . . . . . . • . . • . . . . . . . . . . . • . • . . . . . . . .. II. 2

C. CONGLOMERATE MERGER. • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • •• II. 2

CHA.PTER 3: MOTIVATION......................................... II. 3

A. REDUCTION OF COSTS..................................... II. 3

1. ECONOMIES OF SCALE II. 3

2. ADVANTAGES OF VERTICAL INTEGRATION 11.3

3. COMPLEMENTARY RESOURCES II. 3

B.. ACQUIRE MAR.KET POWER.... . • . . . • • • . • • . • . • . • • • • • • . • . • • • • .• I I . 4

C. UNUSED TAX ADVANTAGES •••••••••••••••••••••••••••••••••• II.4

D. CORRECTION OF MANAGERIAL FAILURE ••••••••••••••••••••••• II.4

E. QUESTIONABLE MOTIVES. • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • •• II. 4

1. PERSONAL REASONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I I . 4

2. DIVERSIFICATION II. 4

3. BUY FOR "GROWTH" 11.5

4. USE OF SURPLUS FUNDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. 5

CHAPTER 4: MANAGEMENT BUY OUTS (MBO'S) AND LEVERAGED BUY OUTS (LBO'S)II.7

A. SITUATION: •..........•.......•...................•..... II. 7

B • STEPS:........................................... II • • • •• I I . 7

1. RAISE THE CASH 11.7

2. BUYING AND RESHAPING II. 7

3. MAKING IT WORK 11.8

CHAPTER 5: SOME STRATEGIC ELEMENTS WHEN DETERMINING THE ACQUISITION PRICE IN A TAKE OVER BID OFFER OR IN A MERGER. . • . • •. II. 9

"------------------_--

A. THE 'FREE RIDER' PROBLEM AND A PUBLIC OFFER •••••••••••• II. 9

B. MERGER AND THE "FREE RIDER" PROBLEM................... I I. 12

C. FREE RIDING AND SUCCESSFUL OFFER FOLLOWED BY MERGER: •. II. 12

CHAPTER 6: DEFENSE MECHANISMS II.14

A. MOTIVES................................................................................... II .. 14

B. MECHANISMS................................................................................ II.15

1. STANDSTILL AGREEMENTS II .15

2. PRIVATIZATION (BUY OUT) II .15

3. SALE OF CROWN JEWELS II .15

4. POISON PILLS 11.15

5. WHITE KNIGHT 11.15

6. PACK-MAN DEFENSE II .15

CHAPTER 7: EMPIRICAL RESULTS II.16

A. THE DISTRIBUTION OF GAINS ••..•••..•••..•••.•••••••••.. II.16

1. THE UNITED STATES II .16

2. BELGIUM 11.18

B. REASONS FOR MERGER AND TAKEOVER •••••.•..••.•.••••.•••. II.22

II.1

PART II: MERGERS AND ACQUISITIONS ~

MERGERS AND ACQUISITIONS ARE PART OF THE BROADER TOPIC OF CORPORATE GOVERNANCE; IT IS ACADEMICALLY THE MOST STUDIED PART OF THIS SUBJECT.

CHAPTER 1: DEFINITIONS

A. MERGER

- THE MANAGEMENTS OF BOTH COMPANIES NEGOTIATE

- FRIENDLY

- 1 COMPANY DISAPPEARS

E.G.: SIEMENS AND NIXDORF, CITICORP AND TRAVELLERS GROUP

B. ACQUISITION

- SHARES ARE BOUGHT DIRECTLY FROM SHAREHOLDERS

- OFTEN HOSTILE

- TARGET FIRM CAN STILL CONTINUE TO EXIST AS LEGAL ENTITY

- PAYMENT: MOSTLY CASH

E.G. SAAB ACQUIRED BY GENERAL MOTORS, PARIBAS BY BACOB

II.2

CHAPTER 2: TYPES OF MERGERS OR ACQUISITIONS

A. HORIZONTAL MERGER

= MERGER OF TWO FIRMS FROM THE SAME SECTOR

E.G.: MERGERS IN BANKING, CAR MAKING MEDIA: PEARSON AND CLT/UFA

B. VERTICAL MERGER

= BUYER EXPANDS IN THE DIRECTION OF THE ULTIMATE CONSUMER (DOWNSTREAM) OR IN THE DIRECTION OF THE PRODUCER OF RAW MATERIALS (UPSTREAM) --> INTEGRATED COMPANIES

PAY TV SECTOR:

MCI AND BRITISH TELECOM (1997) AT&T AND MEDIAONE (PLANNED 2000) SKY TV AND MAN.UNITED (1999)

E.G.: TELECOM SECTOR:

C. CONGLOMERATE MERGER

= MERGER OF TWO FIRMS WHICH HAVE NOTHING IN COMMON

E.G.: ITT: FROM TELECOMMUNICATIONS TO SERVICE SECTOR AMERICA ONLINE AND TIME WARNER

II.3

CHAPTER 3:: MOTIVATION

3.1. THEORETICAL MOTIVES

A. REDUCTION OF COSTS

1. ECONOMIES OF SCALE

THE SHARING OF CENTRAL SERVICES (ADVERTISING, ACCOUNTING, ••. ) LOWERS THE AVERAGE PRODUCTION COST AS PRODUCTION INCREASES

NATURAL OBJECTIVE OF HORIZONTAL MERGERS POSSIBLY AN OBJECTIVE FOR CONGLOMERATE MERGERS:

CONDITION: SUCCESSFUL INTEGRATION

2 • ADVANTAGES OF VERTICAL INTEGRATION

CONTROL OF PRODUCTION PROCESS INCREASES EASIER COORDINATION OF PRODUCTION STEPS ADMINISTRATION SIMPLIFIES

TECHNOLOGY OF A CERTAIN PRODUCTION METHOD CAN BE SUCCESSFULLY APPLIED IN OTHER AREAS.

3. COMPLEMENTARY RESOURCES

ONE FIRM OWNS WHAT THE OTHER ONE NEEDS HAPPENS MOSTLY WHEN A LARGE FIRM TAKES OVER A SMALL FIRM

E.G.: SMALL FIRM: UNIQUE PRODUCT LARGE FIRM: SALES FORCE

-> MERGER MAY BE FASTER AND CHEAPER THAN THE DO-IT-YOURSELF ALTERNATIVE

II.4

B. ACQUIRE MARKET POWER

ULTIMATE OBJECTIVE: ACQUIRE A MONOPOLY POSITION AND EARN MONOPOLISTIC PROFITS

C. UNUSED TAX ADVANTAGES

UNUSED TAX ADVANTAGES (E.G. LACK OF TAXABLE INCOME) CAN BE MOBILIZED BY A MERGER

D. CORRECTION OF MANAGERIAL FAILURE

THE TRADITIONAL VIEW SUGGESTS THAT MANAGERS MAXIMIZE SHAREHOLDER WEALTH BECAUSE A NUMBER OF CONTROL MECHANISMS STEER MANAGEMENT IN THE RIGHT DIRECTION

E. QUESTIONABLE MOTIVES

1. PERSONAL REASONS

PRESTIGE OF MANAGERS

2. DIVERSIFICATION

CAN BE REALIZED EASIER AND CHEAPER BY THE SHAREHOLDERS THEMSELVES (CFR. DO-IT-YOURSELF ALTERNATIVE)

II.S

IN REALITY MOST SUCH ACTIONS HAVE FAILED

E.G.:

PANAM: BASE ACTIVITY: AVIATION INDUSTRY DIVERSIFICATION IN THE DIRECTION OF HOTELS (INTERCONTINENTAL) FAILED

-> BASE ACTIVITY HAD TO BE SOLD

3 • BUY FOR .. GROWTH"

BUY A FAST GROWING FIRM TO INCREASE THE GROWTH RATE OF THE CONSOLIDATED COMPANY

4. USE OF SURPLUS FUNDS

FIRMS WITH A LOT OF CASH BUT WITH LITTLE INTERESTING

INVESTMENT POSSIBILITIES

-> TAKE OVER BID: A POSSIBLE USE OF CASH (I.E. JENSEN'S FREE CASH FLOW THEORY)

BUT: SURPLUS FUNDS CAN BE EITHER THE MOTIVE TO A TAKE OVER OR THE MOTIVE TO BEING TAKEN OVER

3.2. EMPIRICAL EVIDENCE: MERGER WAVE OCCUR TO SOLVE SECTOR SPECIFIC PROBLEMS

MERGER WAVES OCCUR IN SECTORS WITH OVER CAPACITY

-7 ORDERLY WAY TO REDUCE CAPACITY (ANDRADE & STRATFORD (1997»

MERGER WAVES OCCUR WHEN NEW TECHNOLOGIES DEVELOP QUICKLY

-7 FIRMS HAVE NO TIME TO ENGAGE IN HOME-DEVELOPMENT OTHERWISE FIRMS SEEM TO HAVE PREFERENCE FOR ENDOGENOUS GROWTH

II.6

CONCLUSION: 4 KINDS OF FIRMS ARE INTERESTING TAKE OVER CANDIDATES

THEORY

PRACTICE

1. CASH RICH FIRMS

2. DIVERSIFIED FIRMS

3. FIRMS WITH UNUSED TAX SHIELDS

4. BADLY MANAGED FIRMS

5. SOLVE SECTOR-SPECIFIC PROBLEMS

II.?

CHAPTER 4: MANAGEMENT BUY OUTS (MBO' S) AND LEVERAGED BUY OUTS (LBO'S)

A. SITUATION:

OCCUR IN REALITY MOSTLY TOGETHER:

THE MANAGEMENT BUYS OUT THE OTHER SHAREHOLDERS USING MUCH DEBT FINANCING

THE PROCESS PROCEEDS IN THREE STEPS:

B. STEPS:

1. RAISE THE CASH

AN INVESTOR GROUP HEADED BY TOP MANAGERS AND/OR BUY OUT SPECIALISTS PUTS UP ABOUT 10% OF THE BID PRICE IN

CASH

BORROWING AGAINST THE COMPANY'S ASSETS, MAY RAISE 50- 70% IN SECURED BANK LOANS

20 TO 40% FROM JUNK BONDS SOLD TO INSURANCE COMPANIES AND PENSION FUNDS, AMONG OTHERS

2 • BUYING AND RESHAPING

THE GROUP BUYS ALL THE OUTSTANDING SHARES, TAKING THE COMPANY PRIVATE

IT IMMEDIATELY BEGINS SELLING OFF PARTS OF THE CORPORATION TO REDUCE THE DEBT

II.8

3. MAKING IT WORK

CUTTING COSTS TO INCREASE PROFITABILITY AND ENSURE THAT THE COMPANY CAN MEET PAYMENT ON ITS SWOLLEN DEBT THEY MAY LAY OFF EMPLOYEES, CLOSE MONEY-LOSING DIVISIONS AND EVEN CUT SPENDING ON RESEARCH, NEW PLANTS AND EQUIPMENT

IF THE COMPANY EMERGES STRONGER, ITS OWNERS CAN REAP HUGE RETURNS TAKING THE COMPANY PUBLIC AGAIN

II.9

CHAPTER 5: SOME STRATEGIC ELEMENTS WHEN DETERMINING THE ACQUISITION PRICE IN A TAKE OVER BID OFFER OR IN A MERGER

A. THE 'FREE RIDER' PROBLEM AND A PUBLIC OFFER

INITIAL SITUATION

TARGET COMPANY IS HEADED BY "INCUMBENT" MANAGEMENT C; C OWNS 30% OF THE TARGET SHARES;

BIDDER COMPANY IS HEADED BY THE "BIDDER" MANAGEMENT B; B OWNS 10% OF THE TARGET SHARES;

REMAINDER OF THE SHARES (60%) IS HELD BY THE PUBLIC AT

LARGE;

NUMBER OF SHARES OUTSTANDING = 100.

VALUE TARGET UNDER C:

SC = 800 = NUMBER OF SHARES * PRICE PER SHARE WHEN C CONTROLS.

ZC = 600 = VALUE STRATEGIC IMPORTANCE OF TARGET FIRM FOR C WHEN C CONTROLS

=> C RECEIVES: 0.3 * 800 + 600 = 840 B RECEIVES: 0.1 * 800 = 80

II.l0

WHEN B TAKES OVER CONTROL IN TARGET:

SC -> SB = 1 300 ZC -> ZB = 700

ASSUME: A II ONCE IN A LIFE TIME" CONDITIONAL OFFER OF B

ON ALL SHARES WHICH B DOESN'T OWN: 10 PER SHARE

800

=>

10 > ----- = 8 (WHEN TARGET IS UNDER CIS CONTROL)

100

1 300

BUT

10 <

= 13 (POST BID VALUE)

100

DECISION OF SMALL SHAREHOLDER:

r--~
STRATEGY B SUCCEEDS (=ACQUIRES B DOESN'T SUCCEED
> 50% OF THE SHARES)
TENDER 10 8
NOT TENDER 13 8 => IINOT TENDER" IS MORE PROFITABLE FOR THE SMALL

INDIVIDUAL SHAREHOLDER BECAUSE OFFER PRICE <

VALUE SHARE OF TARGET UNDER

CONTROL OF B => B DOESN'T WIN

=> BUT FOR ALL SMALL SHAREHOLDERS IT IS BETTER THAT B WINS.

II.ll

FOR AN UNCONDITIONAL OFFER, THE PAYOFF MATRIX FOR THE SMALL SHAREHOLDER IS:

STRATEGY B SUCCEEDS B DOESN'T SUCCEED
TENDER 10 10
NOT TENDER 13 8 => "NOT TENDER" DOESN'T DOMINATE .A.NYMORE IN A STRICT WAY; BUT THE CHANCES THAT B WINS REMAIN PRECARIOUS. IF B LOOSES, THE OPERATION COULD BE VERY EXPENSIVE FOR B (B IS THEN OBLIGED TO BUY THE OFFERED SHARES AT 10 WITHOUT ACQUIRING CONTROL OVER THE TARGET).

II.12

B. MERGER AND THE "FREE RIDER" PROBLEM

IN A MERGER THE FREE RIDER PROBLEM DOESN'T REALLY OCCUR:

* AS SOON AS B OBTAINS A SUFFICIENT NUMBER OF VOTES AT THE GENERAL MEETING THE OPERATION IS IMPLEMENTED. (-> ABSENTEEISM SMALL SHAREHOLDERS)

=> AFTER THE VOTING THE OPERATION IS IMPLEMENTED VIA EXCHANGE OF SHARES AND THE "TENDER-NOT TENDER" DECISION PROBLEM DOESN'T OCCUR ANYMORE.

*

MOREOVER, THE PAYOFF MATRIX OF THE SMALL SHAREHOLDER OF VOTING PRO OR CONTRA MERGERS IS DIFFERENT (COMPARED TO A PUBLIC OFFER): E.G. B PROPOSES MERGER OF TARGET AND SUBSIDIARY OF B. EXCHANGE RATE IMPLIES TAKEOVER PRICE AT 10 FOR SHARES TARGET

DECISION SMALL SHAREHOLDER:

"RESULTS VOTING GENERAL MEETING"

-
VOTING B SUCCEEDS B DOESN'T SUCCEED
YES 10 8
NO 10 8
-- EACH INDIVIDUAL SMALL SHAREHOLDER, IS INDIFFERENT BETWEEN VOTING YES OR NO; BUT FOR ALL SMALL SHAREHOLDERS IT IS BETTER THAT B WINS.

C. FREE RIDING AND SUCCESSFUL OFFER FOLLOWED BY MERGER:

II.13

EXAMPLE: SEE 5.1.

HOWEVER, SUPPOSE B HAS PROMISED THAT, AFTER B HAS ACQUIRED CONTROL, THE TARGET FIRM WILL BE MERGED WITH ANOTHER FIRM FROM BIS GROUP AT THE PRICE OF 6 PER SHARE.

(IN BELGIUM, THIS IMPLIES THAT B HAS TO OBTAIN MORE THAN 75% OF THE SHARES OF THE TARGET TO EXCLUDE ANY POSSIBLE OPPOSITION)

--
AT A CONDITIONAL OFFER A SMALL SHAREHOLDER'S DECISION
PROBLEM IS:
STRATEGY B SUCCEEDS B DOESN'T SUCCEED
1---
TENDER 10 8
NOT TENDER 6 8 => TENDER = BEST DECISION FOR THE SMALL SHAREHOLDER.

=> B WINS

FOR AN UNCONDITIONAL OFFER B WILL WIN ALSO
STRATEGY B SUCCEEDS B DOESN'T SUCCEED
TENDER 10 10
NOT TENDER 6 8 => TENDER = BEST DECISION FOR A SMALL SHAREHOLDER.

II.14

CHAPTER 6: DEFENSE MECHANISMS

A. MOTIVES

AFTER A TAKE-OVER TARGET MANAGERS ARE OFTEN FIRED AND THE ORIGINAL CONTROLLING SHAREHOLDERS LOOSE BENEFITS AND CONTROL. THEREFORE THEY MAY TRY TO MAKE HOSTILE TAKEOVERS MORE DIFFICULT BY USING DEFENSIVE MECHANISMS

THE TAKE-OVER PROCESS CAN BE SLOWED DOWN SO THAT MORE AND POSSIBLY BETTER BIDDERS MAY COME FORWARD AND/OR A WHITE KNIGHT MAY BE MOBILIZED.

FEND OFF A NON-SERIOUS BIDDER

II.iS

B. MECHANISMS

1. STANDSTILL AGREEMENTS

VOLUNTARY CONTRACTS IN WHICH THE BIDDER AGREES NOT TO INCREASE HIS OWNERSHIP DURING SEVERAL YEARS.

THE PUBLIC IS BOUGHT OUT BY A GROUP OF INVESTORS (OFTEN THE PRESENT SHAREHOLDERS).

3. SALE OF CROWN JEWELS

UNDER A TAKE-OVER THREAT, THE TARGET COMPANY SELLS ITS MOST VALUABLE ASSETS.

4. POISON PILLS

THE TARGET COMPANY ISSUES SECURITIES THAT AT THE TIME OF A TAKE OVER CAN BE CONVERTED INTO SHARES OR OTHER SECURITIES THAT MAKE THE TAKE-OVER COSTLY TO THE BIDDER.

-> THE TAKE-OVER BECOMES MORE DIFFICULT

5. WHITE KNIGHT

THE MANAGEMENT OF THE TARGET COMPANY, SEEKS A MERGER WITH OR A TAKE OVER BY A FRIENDLY FIRM.

6. PACK-MAN DEFENSE

THE MANAGEMENT OF THE THREATENED FIRM LAUNCHES AN OFFER ON THE SHARES OF THE BIDDER.

II.16

CHAPTER 7:

EMPIRICAL RESULTS

A. THE DISTRIBUTION OF GAINS

1. THE UNITED STATES

(A) MERGERS

STUDY BY BRADLEY: THE ECONOMIC CONSEQUENCES OF MERGERS AND TENDER OFFERS

SCHIPPER ASQUITH ET
STUDY MANDELKER LANGETIEG ASQUITH DODD THOMPSON AL
SAMPLE 1952-1962 1929-1969 1962-1976 1971-1977 1950-1977 1963-1969
EVENT CONSUM- CONSUM- ANNOUNCE- ANNOUNCE- MERGER ANNOUNCE-
MATION MAT ION MENT/CON- MENT PROGRAM MENT
SUMMATION
ACQR'ED 7.00 11.00 18.50 21.43 - -
FIRM % CAR (-6M TO (-60D TO (-40D TO
(-3M TO - -
-1M) -1M) +60D) +40D) --
ACQR'ING 0.20 -2.80 0.40 -5.17 10.45 7.10
FIRM % CAR (-3M TO (-6M TO (-60D TO (-40D TO (-60D TO (-20D TO
+3M) -1M) +60D) +40D) +60D) 20D)
5.00 -7.00
(-24M TO (-24M TO
+24M) +24M)
- II.17

(B) TAKEOVER BIDS

THE STUDY BY BRADLEY, DESAI AND KIM SHOWS SYNERGISTIC GAINS FROM CORPORATE ACQUISITIONS AND THEIR DIVISION BETWEEN THE STOCKHOLDERS OF TARGET AND ACQUIRING FIRMS, JOURNAL OF FINANCIAL ECONOMICS, 21, 3-40.

--
SUB-PERIOD TOTAL
PROFIT 7/63-6/68 7/68-12/80 1/81-12/84 7/63-12/84
NUMBER 51 133 52 236
COMBINED
% PRICE INCREASE 7.78 7.08 8.00 7.43
INCREASE IN VALUE (IN $M) 91.08 87.45 218.51 117.11
TARGET
% PRICE INCREASE 18.92 35.29 35.34 31. 77
INCREASE IN VALUE (IN $M) 70.71 71.59 233.53 107.08
-
BIDDER
% PRICE INCREASE 4.09 1.30 -2.93 0.97
INCREASE IN VALUE (IN $M) 24.96 31.80 -27.28 17.30 CHANGES IN SHARE PRICE: FROM FIVE TRANSACTION DAYS BEFORE THE NOTICE OF THE FIRST OFFER UP TO 5 DAYS AFTER THE LAST SUCCESSFUL TENDER-OFFER.

CONCLUSIONS

1. THE SHAREHOLDERS OF THE ACQUIRED COMPANIES REALIZE A SUBSTANTIAL EXCESS RETURN AND RECEIVE ALMOST ALL THE ADVANTAGES OF THE TRANSACTION; THEIR EXCESS RETURN RISES OVER TIME.

2. THE SHAREHOLDERS OF THE ACQUIRING COMPANIES REALIZE A VERY SMALL EXCESS RETURN; IT IS DECLINING OVER TIME.

II.18

2. BELGIUM

ILLUSTRATES FUNCTIONING OF CORPORATE CONTROL MARKET IN CONTINENTAL EUROPE

VAN HULLE, VERMAELEN, AND DE WOUTERS, JOURNAL OF BANKING AND FINANCE, NOVEMBER 1991.

(A) MERGERS

PERIOD: JANUARY 1970 - DECEMBER 1985

DATA: 82 MERGERS OF WHICH 76 TRADED BIDDERS AND 48

TRADED TARGETS WERE INVOLVED.

IN 32 CASES BOTH WERE TRADED ON THE BRUSSELS STOCK EXCHANGE.

RESULTS:

TARGETS:

ABNORMAL YIELD OF 6.2% OVER A PERIOD OF 6 MONTHS FROM BEFORE THE APPROVAL OF THE MERGER AT THE GENERAL ASSEMBLY UP UNTIL THE

APPROVAL DATE.

BIDDERS:

ABNORMAL YIELD OF 0.3% OVER A PERIOD OF 6 MONTHS FROM BEFORE THE APPROVAL UP UNTIL THE APPROVAL DATA.

II.19

(B) IMPACT OF TAKEOVERS ON STOCK PRICES

PERIOD: JANUARY 1970 - DECEMBER 1985

DATA: 86 TAKEOVERS OF WHICH 63 TARGETS WERE TRADED ON THE BRUSSELS STOCK EXCHANGE AND 57 QUOTED BIDDERS WERE INVOLVED

IN ALL CASES, AT LEAST ONE OF THE FIRMS INVOLVED WAS A BELGIAN COMPANY QUOTED ON THE BRUSSELS STOCK EXCHANGE.

BOTH TARGETS AND BIDDERS WERE QUOTED IN ONLY 23 CASES.

MOREOVER, THE SAMPLE WAS DIVIDED IN 2 GROUPS ACCORDING TO THE TYPE OF TAKEOVER.

DIRECT TENDER OFFER: DIRECT OFFER TO THE PUBLIC.

FOLLOW UP TENDER OFFER: OFFER PRECEDED BY A PRIVATE TRANSACTION IN WHICH A CONTROLLING INTEREST WAS ACQUIRED.

RESULTS:

II.20

FOLLOW UP TENDER OFFERS:

TARGETS: -

BIDDERS: -

DIRECT TENDER:

TARGETS: -

BIDDERS: -

46% IN THE 6 MONTHS BEFORE THE OFFER UNTIL OPENING OF THE OFFER NO SIGNIFICANT ABNORMAL RETURNS AFTER THE BID

NO SIGNIFICANT ABNORMAL RETURNS (NEITHER BEFORE, NOR AFTER THE BID)

29% IN THE 6 MONTHS BEFORE THE BID UNTIL OPENING OF THE OFFER. NEGATIVE ABNORMAL RETURNS AFTER THE BIDi BUT THIN MARKETS!

A PERMANENT NEGATIVE ABNORMAL RETURN OF 4%.

THUS, A FOLLOW-UP TENDER IS MORE PROFITABLE FOR BIDDERS AS WELL AS FOR TARGETS.

II.21

EXPLANATION:

DIRECT TENDER OFFERS ARE NOT FOLLOWED BY CRUCIAL CHANGES IN TARGET CONTROL, SINCE IN THESE CASES, BIDDERS ALREADY OWN 47% OF THE SHARES OF THE TARGET FIRM 6 MONTHS BEFORE THE OFFER (<< FOLLOW UP TENDER:

THE BIDDERS OWN ONLY 15% SIX MONTHS BEFORE THE OFFER AND BEFORE THE PRIVATE TRANSACTION).

II.22

B. REASONS FOR MERGER AND TAKEOVER

OVERALL, EVIDENCE (SEE PREVIOUS SECTION) INDICATES MERGER AND TAKEOVER HAVE POSITIVE EFFECT ON AVERAGE.

HOWEVER: SIGNIFICANT FRACTION OF BIDDERS PERFORM POORLY (LOW RETURNS OR LOW TOBIN'S Q)

REASONS:

MANAGERIAL OBJECTIVES DRIVE VALUE REDUCING DIVERSIFICATION (MORCK, SHLEIFER AND VISHNY (1990»

MERGER ACTIVITY OFTEN DRIVEN BY CONSOLIDATION OF THE ASSETS WITHIN THE INDUSTRY

=> THE MERGER MAY APPEAR TO BE A POOR INVESTMENT EX POST IN TERMS OF TOBIN'S Q, BUT IS ESSENTIAL FOR THE SURVIVAL OF THE ACQUIRER (G. ANDRADE AND E. STAFFORD (1997».

OFTEN MERGERS AND TAKE-OVERS IN HIGH TECH SECTOR OCCUR TO KEEP UP WITH FAST TECHNOLOGICAL DEVELOPMENTS

II.23

READING PART II

• JENSEN (1993), THE MODERN INDUSTRIAL REVOLUTION, EXIT, AND THE FAILURE OF INTERNAL CONTROL SYSTEMS, JOURNAL OF FINANCE, VOL XLVIII NO.3, JULY 1993, 831-880

• JENSEN (1988), TAKEOVERS: THEIR CAUSES AND CONSEQUENCES, JOURNAL OF ECONOMIC PERSPECTIVES, WINTER, PP 21-48;

• MORCK, A. SHLEIFER AND R. VISHNY (1990), DO MANAGERIAL OBJECTIVES DRIVE BAD ACQUISITIONS ?, JOURNAL OF FINANCE, 45, 1, 31-48;