Across the country, the press is giving more and more coverage to the growing number and dollar size of mergers and acquisitions.
While the big ticket buys and attempted buys capture the headlines, there are nearly 300 friendly and unfriendly mergers/
acquisitions a day. And this figure doesn't take into account the equal or greater number that are started and aborted.
Such activities can and do eat up management's time in fighting off unfriendly overtures.
Management's Dilemma Since most corporate stock is grossly undervalued, finan1 cial sharks find their feeding grounds very rich. Institu1 tional stockholders, looking for ways to improve their port1 folio performance, are happy to help feed the sharks. In addition, deregulated banks have produced a new breed of invest1 ment bankers and lawyers who have access to large sums of money from banks that are trying to improve the returns on their deposits.
It's not surprising that healthy, progressive companies sometimes feel like wounded seals in a tank of Great Whites. And it is the healthy, growing companies that fall victim since high interest rates lower the value of the dollar earnings while inflation has increased the value of the firm's assets.
The sharks buy on the basis of earnings and sell on the basis of assets.
While the great oil company deals have grabbed the headlines, the computer/electronics industry has been subject to the same problems. In the big ticket area, the industry has had the General Motors/EDS, IBM/Rolm, Exxon/Reliance, Xerox/SDS, SmithKline/Beckman, and similar mind-boggling "sales."
It's little wonder that the feeding frenzy gives company presidents fitful, sleepless nights. They have to divert more of their attention from the day-to-day operations of their firms and devise plans to protect their organizations.
New Language Along the way, boards of directors, company presidents and company officers have developed a rich addition to their vocab1 ularies. Expressions like "lead horse," "golden parachute,"
"white knight," "scorched earth," "shark repellent," "poison pill," "greenmail" and "arbs" (see box) are as well understood as microprocessor, megahertz, byte, venture capital, and burn rate.
In addition, management has added new members to their teams that include takeover lawyers, investment bankers, proxy solicitors and PR counsel.
The new language and team members have been thrust upon management because there are hungry, smart, and well-paid people across the country who do nothing all day long but dream up deals. It used to be that mergers and acquisitions were mere targets of opportunity. Today, they are an integral part of an organization's long-range growth planning strategy.
Unfortunately, few corporate heads have received any training or education in such activities as mergers, acquisi1 tions, and take-overs. Trial by fire is a difficult way to gain such expertise.
Defensive Moves Because management is so poorly trained in or doesn't think about such potential problems, it generally relies on defensive moves rather than offensive and preparatory measures. In most instances these are expensive, disruptive and fruitless.
But with some proper actions, management can either make the firm unattractive to such overtures or difficult/expensive to acquire.
Or management may determine that a merger is in the best interests of the company and stockholders, enabling the firm to meet their short- and long-term objectives. If this is the case, the merger or acquisition will be mutually beneficial.
When companies begin making unfriendly or undesirable overtures, the most common response is to run to the corporate lawyer and put together a defensive plan. This can include the incorporation of provisions requiring majority shareholder approval of mergers and liquidations, acquisition of properties that create regulatory and antitrust barriers, preparation of "black books" with a number of contingency defensive plans, the incorporation of cumulative voting and reclassification of the board of directors.
Public relations activities also play an important role in these campaigns as management carries on a strong, aggressive and effective effort to persuade shareholders to give their proxies to management.
Many equate the PR activities in these situations to those carried out in a political campaign--black hat/white hat, char1 acter assassination, and guilt by association. The fast paced campaign includes scores of news releases and position state1 ments, a myriad of phone calls, and instantaneous decisions regarding what should and should not be said.
Quality and carefully planned media activities can play a key role in advancing management's cause, in clarifying/solid1 ifying management's position and in influencing public opinion.
Offensive Moves Management should look for offensive and strategic methods to prevent themselves from getting on the defensive. Defensive moves can't address the critical questions which arise in a takeover situation, such as: What are the maximum capital and earnings values of the company's assets? Who can best manage them to provide the best return to the investors?
Few private firms do anything to posture themselves with the financial community. Even those firms that are public meet only the basic SEC requirements. They do nothing to "sell"
themselves to the investor or financial communities.
Activities that they should consider include an aggressive, prompt disclosure program on new products or services, research breakthroughs and contracts, as well as sales and earnings results.
The annual report is more than a report to investors. The report can be an important compilation of information on the company which actually serves as a year-long selling tool.
Other activities include fact files or "white paper" kits for the financial community and press; meetings with brokers, funds, and analysts; strong publicity activities aimed at the business/financial press; and pulse-taking with shareholders and industry analysts.
All of these activities add credibility and viability to the firm. They provide an excellent platform for management to control and present its messages. They provide an opportunity for management to tell how well it is performing in managing the company's assets. They allow management to address the issues of asset values and asset management.
By showing the true value of assets and management's plans for these assets, management adds credibility to its position.
This also makes tender offers more expensive and proxy fights less likely.
Battle Lines are Drawn By pressing home these results, management gives investors a much better understanding of the company. The investor also receives a framework for projecting earnings and return on investment. Management also gives investors a sound platform for showing that a proposed offer is inadequate, without indicating what an adequate offer might be.
Corporate takeover fights are management's equivalent of war. And as in war, no one can rely solely on defensive weapons.
Instead, the strongest weapons must be used--aggression and strategy--to advance management's case and position while con1 trolling the issues.
Takeovers, proxy fights, mergers, and acquisitions are wars that require a dramatic addition to management's vocabulary and planning/strategy thinking. But by taking the right actions at the outset, the war can be won ... or defeat can be accepted on favorable terms.
Words to Fight by Lead Horse -- The investment banker who calls the shots in the proxy fight, tender offer, or acquisition.
Golden Parachute -- Large payments to senior management if they lose the takeover challenge to make certain they are well paid if they are fired or lose their responsibilities.
White Knight -- A company that comes to the aid of another in the takeover fight. They rescue the firm being attacked by acquiring it on better terms.
Pac-Man Defense -- A tactic by which the company being attacked turns around and attempts to acquire the pursuer. It can succeed, or it can frighten off the initial firm.
Scorched Earth -- The company discourages takeover by making itself less attractive through the sale of divisions or assets or incurring major debts in the event of a takeover.
Shark Repellent -- Measures used to fight off the pursuing firm including changing the bylaws to make it difficult to be acquired.
Poison Pill -- An action that makes it so expensive to acquire the firm that the predator goes off to seek other game.
Greenmail -- Expensive blackmail payments to buy stock back from the predator plus payment for his "expenses."
Camomail -- Camouflaged greenmail or black-and-blue mail.
Arbs -- Arbitrators are intermediaries in the transactions who often make millions for a few days of work in putting "deals"
together.
# # #
Takeover Activities Grow - To learn more about this author, visit Andy Marken's Website.
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