MERGERS WAYS TO REBUFF THE UNWANTED SUITORS

As we read the financial and business publications, we respond somewhat like the little girl in Poltergeist II, "They're baaaack!"
Suddenly, we're seeing buyers, sellers and intermediaries around every corner. No one – regardless of their size – seems immune to friendly, hostile or acquiescent takeover.
Black Monday a number of years ago didn't help the situation.
It stopped a lot of firms in their tracks--firms that had spent a bundle preparing to go public in order to refill their corporate coffers. It left both corporate managers and investors dazed and puzzled.
What bothered business managers most back then was the fact that the business climate wasn't just fine ... it was excellent. Computer hardware and software and even semiconductor sales were recovering. But, in its wisdom, the financial community (which barely understands the meaning of words and acronyms like software hook, LAN, UPS, Winchester, ASIC, MIPS, subsystems, e-commerce, Intranets/Extranets and peripherals) reacted by depressing everyone's stock and by making IPOs difficult, if not impossible.
In the final analysis, the technology-based stocks took the worst beating.

Sharks on the Prowl
Just when management teams were getting their companies back on-line after a "disappointing" 18-month sales period, sharks, smelling blood, began to circle. Hungry for growth and with an eye for severely undervalued companies, these firms began quietly buying up pieces of the action. The acquisition activity quickly turned into a feeding frenzy.
For the past 12 months, cash and stock rich communications and Internet companies have been acquiring product lines--and entire organizations--in unprecedented numbers.
Suddenly, investment bankers are spending their time advising clients about the mergers and acquisitions environment and what steps they might consider taking in the face of a takeover attempt. Events of the last few months indicate that the once peaceful world of the technology-based industries is far from being immune to attack.
Technology-based firms (especially Web-based and software organizations) were previously thought to be far above the radar screens for takeovers because they lacked a lot of fixed assets that could be quickly and easily sold. Instead, their assets walked out the door every evening at 5:00, 7:00, 9:00 or 11:00 p.m.

Black Monday

Black Monday showed that these firms were very desirable. For the first time in recent history, technology-based organizations (especially software and Internet firms) are either trading far above book value or have multiples astronomically beyond that of their book value.

In some instances, consenting adults go willingly down the aisle. But most of the organizations spend considerable time, money and effort fighting off the unwanted advances. In fact, it is the rare management team that isn't concerned about the possibility of a hostile tender offer or proxy fight.

Unfortunately, in the majority of these situations, people rely on defensive measures rather than offensive and preparatory measures. These are generally very expensive and disruptive to the company. However, if companies are more positive at the beginning, before the suitors start to call, they can avoid the situation and generally pick the marriage partner that is best suited--if, in fact, a marriage would be beneficial.

Defensive Action

When companies begin making unfriendly or undesirable overtures toward your organization, the most common approach is to call in the investment banker and corporate lawyer and put together a defensive plan. This generally includes the incorporation of provisions that require super majority shareholder approval of mergers and liquidations as well as acquisition of properties that can create regulatory and general antitrust barriers to potential raiders. It also includes the preparation of "black books" with a host of contingency defense plans, the elimination of cumulative voting and classification of the board of directors.

All of these steps are effective and should be considered and used. Unfortunately, they are all defensive moves. Your company became a target because it was dynamic and aggressive. Why rely on defensive moves now?


Strategic Plan

Instead, management should be looking for offensive or strategic methods of avoiding the unwanted takeover. Defensive moves don't address the critical questions that arise in a takeover situation: what are the maximum capital and earnings values of the company's assets, who can best manage them and who can provide the best return to the investors?

Whether or not you're a public company, you should produce an annual report and posture your firm in a public manner. This adds credibility and viability to the organization. It provides you with an excellent tool for selling the company and its total product offering to your industry's prospects and suspects. Most important, it provides an outstanding platform for management to control and present its messages.

If you're fortunate, and no contests are on the immediate horizon, the theme of how well management is managing the company's assets can become a secondary theme to the annual report. If, however, you're in the swamp, up to your neck in alligators, then addressing this theme should be of primary importance.
Directly addressing such issues as asset values and asset management is the most effective, positive anti-takeover technique you can use. It encourages investors (owners) to reevaluate their stock upward, making a tender offer very expensive and proxy fight less likely. By showing the true value of assets and management's plans for those assets, you add credibility to your position.

Replacement Value Merits Emphasis
Another effective approach is to emphasize the replacement value of your organization's current production equipment and facilities. Most firms operate in a reasonably conservative manner in this area. However, if you wanted to duplicate the plant today, the costs would be double or triple your original investment.
By pressing home the concept of undervalued assets, you provide the less sophisticated investor with a better understanding of the true value of the company. For the sophisticated investor, it provides a framework for projecting earnings and return on investment. Finally, it provides a sound platform at the outset for showing that a proposed offer is inadequate, without having to indicate what an adequate offer might be.

Positive PR
In too many instances, management views and uses public relations and publicity activities only as another marketing tool. They care less about such activities as positioning and corporate image development. Instead they want "nice" product stories that sell something to someone.
Often, that means they hype their technology. Unfortunately, technology can be bought by the bushel.

Technology is not the value or worth of a company. The people are. The people, the management and senior individuals, should be aggressively used to promote the strengths of the company, their market position and the benefits they provide to their customers/prospects.

Not only do they add that magic ingredient that can't be translated into dollars and cents on the balance sheet, but they also add credibility and viability to the company's total reason for existence. Emphasizing this not only forces suitor organizations to focus on people rather than assets, but it also significantly enhances the reasons people want to buy products, support and service from you rather than your competition.

Just like the annual report we mentioned earlier, they become valuable selling tools.


Battle Lines
Someone recently told me that a corporate takeover struggle is the executive's equivalent to war. In a war, no one in his or her right mind would rely solely on defensive weapons.
Instead, he would use his strongest weapons, which are aggressive and strategic--the weapons that management can use to truly advance its case and position while controlling the issues.
This type of positive effort can keep suitors at arm's length until the right partner comes along. Or, if you prefer, the company can more easily remain single.
. At least you'll have a choice and a say in the matter.


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MERGERS WAYS TO REBUFF THE UNWANTED SUITORS - To learn more about this author, visit Andy Marken's Website.

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