Valuation and Mergers &

Acquisitions

OVERVIEW

1
2
M&As Generally:
 Complex deals,
 Large sums involved,
 Transactions can transform local and international
economies, inter-country relations

M&A Parties Involved:

 Buyer, Seller, 3rd Parties: Employees, Creditors,
Suppliers, Customers, Local Community, Government,
Advisors
 M&A activity can affect everyone via its effect on
industry concentration, productivity, technology transfer
across industries/ countries, international competitiveness,
etc. 3
Corporate Takeovers – Definition
A takeover can refer to any situation where there is a change in control of the firm
from one group of shareholders to another. A change in control, refers to any group
that has newly gained a majority vote on the (taken-over) firm’s board of directors.
Takeovers can take place via acquisition (and much less commonly, via proxy
contests).

Merger (or Consolidation)

Acquisition Acquisition of Stock

Takeovers
Acquisition of Assets
Proxy Contest
Mergers
Mergers: The combination of two or more corporations in which one of the
corporations survives and the other corporations cease to exist. The surviving
firm retains its name and identity, and it retains all of the assets and liabilities
of the firm or firms that have ceased to exist. Under a consolidation, two firms
terminate their legal existence and become part of a new firm. Under both
Merger or Consolidation, target firms are completely absorbed.

 Mergers are negotiated among the senior managers of the combining

firms. Post merger management often includes managers from both firms.
 Mergers and consolidations must be approved by the Board of Directors
and a vote of the stockholders of each firm. Corporations law in the
relevant jurisdiction usually specifies the required shareholder vote and/or
is specified in firms’ corporate charter.
Acquisitions of Stock:
2. Acquisition of Stock: Under a complete acquisition, one firm buys another firm's
voting stock in exchange for cash, shares of stock, or other securities. Effectively
acquires control of all of the assets and in practical terms, assumes all the liabilities
of the target. No change is made in the assets or liabilities of the acquired business
as a direct/necessary result of the acquisition.
• May or may not start as a private offer from acquiring firm’s management to
target management. In a general tender offer, the stock is purchased through a
public offer, made directly by the acquiring firm to the shareholders of the target.
Thus no need for shareholder vote of the acquired firm’s shareholders.
• There may be a negotiated transaction with a large shareholder – this may trigger
issues on minimum offer price to remaining shareholders.

 Hostile Takeover: Target firm’s management opposes the bid. May recommend
non-tender of shares. May invite more friendly acquirers (white knights) or (white
squires). Usually net effect cost of the acquisition to the acquirer goes up.
Acquisition of Assets:
3. Acquisition of Assets: One firm acquires another firm by buying all or
selected assets of the target and assumes all, a portion, or none of the
liabilities of the target, pursuant to an asset purchase agreement.
▪ This requires voting approval by the target company’s shareholders when
it involves a sale of “all or substantially all” of the assets of the target.
▪ The legal process of transferring assets via detailed purchase agreement
can be expensive. (For example: an airline acquiring routes, gates, planes
and other assets of another bankrupt airline).
▪ There are a number of reasons why a deal may be structured as an asset
purchase: (i) tax, (ii) there is no issue left with minority shareholders as
may exist under an acquisition of stock, and/or (iii) may be the only
practical method when buying only a division or a product line from a
multi-division and/or product line firm.
Common Foundations of Acquisitions
Whether an acquisition is completed via:
• Merger “$$$”
• Stock purchase and/or Firm A
BUYER
Firm B
SELLER
• Asset purchase. Assets

In each of these cases, the purchase price may be paid via (i) cash,
(ii) the buyer’s stock or other equity securities, (iii) the buyer’s debt
instruments, or (iv) any combination.
In some circumstances, a portion of the price is paid on a deferred
basis tied to the subsequent performance of the acquired business –
called an “earnout” – we will discuss this in greater detail later.
Despite the commonalities, the structure of the acquisition (stock
purchase, asset purchase, etc.) will have legal (bid, ownership,
liabilities, etc) and tax effects 8
Asset Acquisition
Cash or other
Consideration

Acquirer
Target

The agreed upon

assets (and potentially
liabilities) transferred

9
Asset Acquisition
Cash or other
Consideration

Acquirer
Target

The agreed
Owned A/L
Subsidiary transferred
Company

10
Stock Acquisitions
Post-Closing

Acquirer Acquirer

Cash or other
Target
Consideration
Target
Shares Transferred
Usually, post-acquisition
the Target ceases to exist
post-closing. If public, is
Target de-facto de-listed, and
Shareholders the two companies
become a single entity
under the Acquirer
11
Stock Acquisition Alternative
Post-Closing

Acquirer
Acquirer
Target
Owned
Subsidiary
Company
Cash or other
Owned Consideration
Target
Subsidiary Shareholders
Company Shares Target
transferred
12
Merger Structure
There are several times of merger structures:
(i) Two Step Merger (Tender Offer + Merger) – vs Stock Acquisition Tender Offer. Helpful
when there is an issue with minority shareholders (applicable to public companies)
(ii) Forward (or Direct) Merger – Acquirer directly transfers shares (or cash) to target
shareholders and target company merges into Acquirer, ceasing to exist as an entity.
(iii) Reverse Merger – used by private company to go public
(iv) Triangular Mergers – Acquirer shielded from unexpected liabilities. Acquirer able to
keep target as separate entity. No need for acquirer shareholder approval. Limits
integration of assets and thus synergies.
• Reverse Triangular Merger – most common M&A structure in U.S.. Acquirer’s
subsidiary is merged into the target. The target company survives without need to
assign its contracts (no violation of anti-assignment clause), subsidiary does not
survive. Acquirer’s subsidiary stock becomes stock of the combined company, thus
acquirer owns the combined merged company. Target shareholders receive deal
consideration.
• Forward Triangular Merger – the target’s assets and liabilities are merged into the
acquirer’s subsidiary
13
Forward (Direct) Merger Post-Merger

Target
Target Acquirer Shareholders
Shareholders Shareholders
Acquirer
Shares = Shareholders

Target Acquirer
A&L

Acquirer
(Combined
Company)

14
Reverse Merger Post-Merger

Target
Target Acquirer Shareholders
Shareholders Shareholders
Acquirer
Shares = Shareholders

Target Acquirer
A&L

Target
(Combined
Company)

15
Forward Triangular Merger Post-Merger

Target Acquirer (+ Target

Acquirer if shares offered)
Shareholders
Shareholders Shareholders

Cash, =
Shares or
Other
Acquirer Acquirer

Acquirer Acquirer
Target Owned
Owned
Subsidiary
A&L Subsidiary (Combined Company)

16
Reverse Triangular Merger Post-Merger

Target Acquirer (+ Target

Shareholders Acquirer if shares offered)
Shareholders Shareholders

Cash, =
Shares or
Other
Acquirer Acquirer

Acquirer
Target Owned Target
(Combined Company)
A&L Subsidiary
17
 Number of Transactions

0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994

Source: imaa-institute.org, 08/2024

1995
1996
1997
1998
1999
2000
M&As Worldwide

2001
2002
2003
2004
2005
2006
Number of Deals

2007
2008
2009
2010
Value

2011
2012
2013
2014
Mergers & Acquisitions Worldwide

2015
2016
2017
2018
2019
2020
2021
2022
2023
2024 (July 31)
2024 e
0.00
1,000.00
2,000.00
3,000.00
4,000.00
5,000.00
6,000.00

Value of Transactions (in bil. USD)

18
 Number of Transactions

5,000

0
10,000
15,000
20,000
25,000
30,000
35,000
1985
1986
1987
1988
1989
1990
M&As US

1991
1992

Source: imma-institute.org, 08/2024

1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Number of Deals

2007
2008
2009
2010
Value

2011
2012
2013
2014
2015
Mergers & Acquisitions North America

2016
2017
2018
2019
2020
2021
2022
2023
2024 (Jul 31)
2024 e
0.00
500.00
1,000.00
1,500.00
2,000.00
2,500.00
3,000.00
3,500.00
4,000.00
4,500.00

Value of Transactions (in bil. USD)

19
 Number of Transactions

10000
20000
25000

15000

0
5000
1985
1986
1987
1988
1989
1990
1991
1992

Source: imma-institute.org, 08/2024

1993
1994
1995
1996
M&As Europe

1997
1998
1999
2000
2001
2002
2003
2004
2005
Number

2006
2007
2008
2009
Value

2010
2011
2012
2013
Mergers & Acquisitions Europe

2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024 (Jul 31)
2024 e
0.00
500.00
1,000.00
1,500.00
2,000.00
2,500.00
3,000.00

Value of Transactions (in bil. EUR)

20
 Number of Transactions

10000
14000
16000
18000

12000
20000

2000
4000
6000
8000

0
1990
1991
1992
1993
1994
1995
1996
1997
1998

Source: imaa-institute.org, 08/2024

1999
2000
2001
2002
2003
M&As Asia Pacific

2004
2005
2006
2007
2008
Number of Deals

2009
2010
2011
2012
Value

2013
2014
2015
Mergers & Acquisitions Asia-Pacific

2016
2017
2018
2019
2020
2021
2022
2023
2024 (Jul 31)
2024 e
0.00
500.00
1,000.00
1,500.00
2,000.00
2,500.00
3,000.00

21

Value of Transactions (in bil. USD)

 Number of Transactions

1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000

0
1991
1992
1993
1994
1995
1996
1997
1998
1999
M&As China

Source: imma-institute.org, 08/2024

2000
2001
2002
2003
2004
2005
2006
2007
Number of Deals

2008
2009
2010
2011
2012
2013
2014
2015
Value (in bil. USD)
Mergers & Acquisitions China

2016
2017
2018
2019
2020
2021
2022
2023
2024 (Jul 31)
2024 e
0.00
200.00
400.00
600.00
800.00
1,000.00
1,200.00

Value of Transactions (in bil. USD)

22
M&As South East Asia
Mergers & Acquisitions South East Asia / ASEAN
Number of Deals Value
5,000 1,600.00

4,500
1,400.00
4,000

Value of Transactions (in bil. USD)

1,200.00
3,500
Number of Transactions

1,000.00
3,000

2,500 800.00

2,000
600.00
1,500
400.00
1,000
200.00
500

0 0.00

2024 e
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024 (Jul 31)
Source: imma-institute.org, 08/2024
23
 Number of Transactions

1,000
1,200

0
200
400
600
800
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994

Source: imma-institute.org, 08/2024

1995
1996
1997
1998
M&As Singapore

1999
2000
2001
2002
2003
2004
2005
Number of Deals

2006
2007
2008
2009
2010
2011
2012
2013
2014
Value (in bil. USD)

2015
2016
Mergers and Acquisitions Singapore

2017
2018
2019
2020
2021
2022
2023
2024 (Jul 31)
2024 e
0.00
50.00
100.00
150.00
200.00
250.00
300.00
350.00

Value in bil. USD

24
 Number of Transactions Number of Transactions

50

0
100
200
250

150
300

50

0
100
150
200
250
1991 1991
1992 1992
1993 1993
1994 1994
1995 1995

Source: imma-institute.org, 08/2024

1996 1996
1997 1997
1998 1998
1999 1999
2000 2000
2001 2001
2002 2002
2003 2003
2004 2004
M&As: US & China

2005 2005
Number

2006 2006
2007 2007
2008 2008
2009 2009
2010 2010
2011 2011
2012 2012
Value (in bil. USD)

2013 2013
2014 2014
2015 2015
2016 2016
2017 2017
2018 2018
M&A from China & Hong Kong into the United States

2019 2019
M&A from the United States to China and Hong Kong

2020 2020
2021 2021
2022 2022
2023 (Aug 31) 2023 (Aug 31)
0.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0

10.0
20.0
0.00
5.00

100.0
10.00
15.00
20.00
25.00
30.00

Value of Transactions (in bil. USD) Value of Transactions (in bil. USD)
25
 Number of Transactions

1,000
1,500
2,500
3,000

0
2,000

500
1990
1991
1992
1993
1994
1995
1996
1997
1998

Source: imma-institute.org, 08/2024

1999
2000
2001
2002
2003
2004
2005
2006
M&As South America

2007
2008
Number of Deals

2009
2010
2010
2012
Value

2013
2014
2015
2016
2017
Mergers & Acquisitions South America

2018
2019
2020
2021
2022
2023
2024 (Jul 31)
2024 e
0.00
400.00
600.00

200.00
800.00
1,000.00
1,200.00

Value of Transactions (in bil. USD)

26
 Number of Transactions

1,000
1,500
2,000
2,500
3,000

0
500
1990
1991
1992
1993
1994
1995
1996
1997
1998

Source: imma-institute.org, 08/2024

1999
2000
2001
2002
2003
2004
M&As Middle East

2005
2006
2007
2008
Number of Deals

2009
2010
2011
2012
Value

2013
2014
2015
2016
2017
2018
2019
2020
Mergers & Acquisitions Middle East & North Africa (MENA)

2021
2022
2023
2024 (Jul 31)
2024 e
0.00
200.00
400.00
600.00
800.00
1,000.00
1,200.00

27

Value of Transactions (in bil. USD)

M&As India
Mergers & Acquisitions India
Number of Deals Value (in bil. USD)
1,800 160.00

1,600 140.00

1,400

Value of Transactions (in bil. USD)

120.00
Number of Transactions

1,200
100.00
1,000
80.00
800
60.00
600

40.00
400

200 20.00

0 0.00

2024 e
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024 (Jul 31)
Source: imma-institute.org, 08/2024
28
Merger “Waves”:
➔ SIMILARITIES: M&A activity is always present, but when
observing patterns over time, we see there are indeed times where we
see more transactions and/or larger deals than other times. These waves
also appear to coincide with rising stock markets, low and/or falling
interest rates (with the related heavy use of debt), and expanding
economic activity. Capital liquidity was a necessary condition for each
of the past ‘waves’. As well, within each period, there appear to be
industries undergoing deep changes.

➔ DIFFERENCES: Some of the past ‘merger waves’ appeared to have

differed by industry concentration (for example: oil, banking, utilities,
Internet, conglomerate, strategic or financial) and the type of transaction
(horizontal, vertical, conglomerate, strategic or financial), and at times
depending on individual country circumstances (including reg. changes) 29
M&A: Advisory Roles
“$$$”
Board & Firm A Firm B Board &
Management BUYER SELLER Management
Assets

Examples of Buy-Side Players: Examples of Sell-Side Players:

• M&A Financial Advisors • M&A Financial Advisors
• Legal Advisors • Legal Advisors
• Accounting Advisors • …
• Tax Advisors
• Business Consultants
• IT Consultants
Hear more about a career role in M&A below:
• HR Consultants
https://www.youtube.com/watch?v=_q4ShwsLdTY
• Financing Lenders
• …
30
M&A: Advisory Roles
In general the purpose of M&A advisory is to help coordination of the overall
M&A project and to help clients (buyers or sellers) to make better decisions
Examples of Scope of Work: Examples of Types of Fees:
• Suggesting Targets/Mergers • Retainer Fee
• Advice on Transaction Scheduling
• Monthly Fee
• Coordination of Due Diligence
• Milestone Fee
• Advice on Transaction Structuring and Deal Terms
and Conditions • Success Fee
• Review of Financial Information and Valuation
• Incentive Fee
Analysis (may or may not include a Fairness
Opinion and/or Valuation Report) • Discretionary Fee
• Support in Strategic Negotiation with Stakeholders • …
Involved in/ Affected by the Deal
• Assistance with Preparation of Required
Documentation
For another perspective: Financial Times (03/02/2022): “Junior lawyer burnout: M&A boom accelerates exit
from elite firms” https://www.ft.com/content/f4006248-eb05-49d2-a938-d70118c4ce1b
31
Why Merge or Acquire?

Firm A
+ Firm B =

2+2=6?
Firm A
+ Firm B
Synergies
=6?
32
M&A Buyer Motives  Efficiency Gains:
1. Operational Synergies:

A. Economies of Scale
B. Economies of Vertical Integration
C. Complementary Resources
D. Revenue Enhancement / Operational Efficiency
E. Better Access to Resources, Superior Management
➡ Choosing to Buy instead of Build (organic growth too slow or infeasible)

2. Financial Synergies

3. Reduction in Agency Costs

33
M&A Buyer Motives  Expropriation Gains:
Potential expropriation gains from other stakeholders (i.e., affected
parties other than the seller or buyer’s shareholders):
1. Tax Advantages:
2. Revenue Enhancement / Increased Market Power:
3. Bondholders:
4. Employee Downsizing:

Additional ‘rational’ motives for M&A activity:

1. Domino/Multiplier Effect of Previous Acquisitions:
2. Response to Industry Shocks:

**Keep in Mind: Strategic Buyer or Financial Buyer?

34
M&A Seller Motives:
• Not Performing Well/ Non Core Business
• Financially Distressed
• Regulatory Requirement
• Succession Problems
• Shareholder Pressure
• Received an Excellent Offer Price for Shareholders

Seller to address the question of what is its next best alternative

– is selling the firm offering a greater value to owners than not
selling? 35
INAPPROPRIATE Motives for M&As:

1. Pure Diversification:

2. Managerial Hubris:

3. Market Mania:

2 + 2 = 3 ??
What & Who is articulating
the strategy/motivation behind
the acquisition?
36
Motives for M&As  +NPV 
ULTIMATELY IT’S ABOUT $$
Whatever their source, SYNERGIES get their value by ultimately
affecting CASH FLOW

Increase Decrease
Revenue COSTS
= =
Increase Increase
CASH CASH
FLOW FLOW

37
What Offer Price? + NPV  Net Synergies > Premium &
Costs:
Value of
Acquirer A +
Acquirer A + Target B + = Target B
Synergies

∆V
DV = Expected Value of Synergies (including net of costs associated with realizing
synergies, including net of any cannibalization of Acquirer sales to Target or vice versa)
DP = Premium Paid = Price Paid for Target – Target Price before Offer
C = Costs to Complete Deal (Paid to Lawyers, Investment Bankers, Due Diligence, etc.)

+NPV for the Acquirer when A + B + DV > A + B + DP + C

Which occurs if and only if DV > DP + C
Synergies > Premium Paid + Costs to Complete Deal
38
M&A: Motivations vs. Realizations
E.g.: STRATEGIC MOTIVATION E.g.: HINDRANCE TO + RESULT

Overcome
Entry Barriers Integration/Culture Obstacles

Inadequate Evaluation –
Cost of New Underestimate Costs
Product Development Revenue Dis-Synergies.
Bidding: Overpay
Increased Speed Negative Signal About Industry:
to Market Acquisition Only External Growth

Lower Risk Acquirer Too Large –

Compared to Developing Overall Target Impact
New Products Small in Comparison
Market Power/ Stock Purchases:
Avoid Competition Negative Signal
39
“M&A Failure Rates” – random study quotes
“83% Fail to create a sustainable competitive advantage”

“66% Fail to add shareholder value”

“60% Destroy company value”

“Corporate Mergers Fail More than Marriages in North America”

• But how is success defined?

• How is it measured?
• When is it measured?
• What was the firm/industry’s alternative scenarios at the
time of acquisition?
40
HOW MUCH TO PAY: Splitting Synergy Value E.g.
Example:

Pre-Merger:
Firm A
– The Acquirer has 50 million shares outstanding, each currently
selling for $100/share ($5 B market value).
– The Target has 40 million shares outstanding, each currently
Firm B
selling for $70/share ($2.8 B market value).

Post-Merger:
Synergies
− The Net Present Value of the synergies (DV) is = $1.7 B

Example: Cash or Share PMT

41
HOW MUCH TO PAY: Splitting Synergy Value E.g.

Synergy “Expected”
by Acquirer? 30%
Expected $12.5/sh
Total
100% Synergies Target Synergy Value
Offer “Captured” by 70%
$42.5/sh Price
Target?
$30/sh
40 Million Target
$100 Shares outstanding *
per $30/share premium =
Target - on its target $1.2 Billion Total
own, share Premium
Price/Share in cash
$70/sh or ➡Later we will see, HOW we pay
stock affects HOW MUCH we pay, as
or … well as incentives for LT success
42
Why Do Targets Resist?
If bids (M&A) are above market value, why would management
oppose an acquisition offer?
 Management feels that the target firm is undervalued by the market and in fact
has a higher intrinsic value and/or value to bidder.
 The bid includes a stock exchange offer and management feels that the acquirer’s
stock is overvalued.
 Management is acting in its own self interest – keep position.

• Almost half of all US public firms were the target of a hostile takeover bid
during the 1980s.
• By the 1990s the vast majority of public firms had one or more takeover
defence mechanisms in place.

43
Takeover Defenses:
• Capital Structure Choices: (i) Increase Leverage & Increase Dividend: Less
cash inside firm & Removes recapitalization/LBO incentive. (ii) Repurchase
Equity: Reduces cash and increases ownership concentration
• Creation of Dual-Class Shares with Different Voting Rights
• Staggered Board: Board members elected for more than one year. Usually only
a third up for election each year.
• Fair Price Charter Amendments: Restricts sale/merger to shareholder owning
certain percentage of shares, unless a pre-specified fair price is paid (can be
very high).
• Poison Pill: Triggered by a control-related event, usually enable firm’s
shareholders to buy additional shares at a substantial discount. Has a dilutive
effect.
• Poison Put: Bondholders can call repayment in the event of takeover
44
Takeover Defenses:
• Golden Parachutes: Large severance for top management. However,
according to Jensen, if parachutes are somehow tied to the premium
earned by the stockholders, it can align management’s interests with
shareholders
• Asset Restructuring: Become less attractive by buying an asset that raises
antitrust concerns or selling ‘crown jewel’
• White Knight: Seeking alternative friendly bidder.
• Greenmail: Repurchase bidder’s block at premium.
• Litigation: Raise anti-trust concerns for post-acquisition firm.
• Affecting Perceptions: Communications with media, stockholders.
Revise profit forecasts upwards that suggest bid under-priced.
45
Example: Yahoo
• On February 1st, 2008, Microsoft announced a combined cash and
stock unsolicited bid of $44.6 Billion for the purchase of Yahoo. At
$31/share, it was a 62% premium over Yahoo’s pre-announcement
stock price of $19.18. Yahoo’s board rejected the bid February 11th,
explaining that it undervalued the firm. Wanted $35-$37/share.
• What defensive actions did Yahoo take?
• April 7th, 2008, Yahoo stated:
"We are not opposed to a transaction with Microsoft if it is in the
best interests of our stockholders. Our position is simply that any
transaction must be at a value that fully reflects the value of Yahoo,
including any strategic benefits to Microsoft, and on terms that
provide certainty to our stockholders." What are they saying here?
46
Example: Yahoo –
Microsoft’s 2008 Bid
– Later Withdrawn

Note: Concept of M&A Arbitrageurs

Synergies =?

What happened in 2016?

https://www.youtube.com/watch?v=Ec_IHQWyTXY

47
Target’s Stock Price Around M&A Announcement

Source: Keown, Pinkerton (1981) using US data from 1975-1978

48
Stock Price Behavior Around M&A Announcement
Target Acquirer
Bid

Source: Asquith (1983) using US data from 1962 to 1976 49

M&As – Legal/Social Concerns:
M&A activity gives rise to a number of clear concerns to shareholders
specifically and the economy more generally. For example:

 Selling firm’s shareholders may be pressured to sell their shares to

the acquirer without full information.

 Equitable treatment among all shareholders.

 Conflicts of interest between shareholder interests and the selling

firm’s decision makers -management and Board

 Concentration of economic power, reduced competition

 National Security interests compromised

50
M&As – Legal/Social Concerns:
Could target firm shareholders be pressured into selling their shares in a deal that turns out
to compromise their interests? Could they be offered a price lower than fellow shareholders?
 Tender Offer Rules providing target shareholders with (i) time to evaluate offers
and requirements for (ii) equitable treatment among all shareholders. There is
similarity in general tender offer rules across jurisdictions, although the specific
details/requirements often vary. Details provided in the Appendix to these notes.
 Early Warning Requirement: Whether bought via open market purchase, tender offer
or private purchase, if purchase above a certain % of shares, may need to disclose. E.g.,
in US, if purchaser obtains 5% interest of public co., must disclose via filing within 10
days. Also required if a group of individuals/ investors/ corporations acting in concert
together obtain a 5% interest.
 Disclosure of Significant Sale or Purchase: may need to disclose the acquisition or
disposition of a significant amount of assets, e.g., in US, significant is defined as
anything greater than 10% of the total book value of assets of a registered company and
its subsidiaries.
 May Trigger Mandatory Offer Rules: E.g., Singapore after >30% share purchase
 May Trigger ‘Squeeze-out’ or ‘Drag-along’ Rules: E.g., Singapore after >90%
purchase 51
M&As – Legal/Social Concerns:
Could the Board of Directors, which is elected to serve shareholders’ interests,
actually act in its own interest should a conflict of interest arise? => Statutory &
common law fiduciary duties imposed, along with insider trading regulations.
Board recommendations to shareholders – considerations:
• Legal Advice: to ensure in compliance with law
• Expert Opinion: experts in law, accounting, operations, HR and valuation, etc.
to obtain a “fairness opinion” letter , to be provided to shareholders, on fairness
of bid price, form of payment, and all transactions characteristics.
• Bid has been well considered in meetings: Sufficient # and duration of board
meetings
• Independent & Private: if there is any potential conflict issue, form a
committee of independent directors. Meetings private and discreet, to avoid
leakage. Encryption of relevant data, communications.
• Comprehensive: Meeting must be thorough with reference to all relevant info. 52
M&As – Legal/Social Concerns:
Insider Trading Concerns - buying or selling securities based on non-public
information that could affect the market price of the securities.
 Preserve Confidentiality: Given the communication of sensitive and confidential
information among the companies involved, important to maintain confidentiality. (i)
Confidentiality agreements may be used to ensure that the information is not disclosed to
third parties. (ii) Setup firewalls – systems/rules designed to prevent unauthorized access
or sharing of information between different groups or departments within a company
o US Regulations: E.g. U.S., SEC Rule 10b-5: Insiders must “disclose or abstain” from
trading in the firm’s securities. Insider Trading Sanctions Act of 1984 - SEC may seek
treble damages and remedies in both civil and criminal proceedings. Insider Trading and
Securities Fraud Enforcement Act of 1988 - maximum penalties, up to 20 years in prison,
and a program where informants can collect up to 10% of the insider’s profits.
o Singapore Regulations: Securities and Futures Act (SFA), Sections 218 and 219.
Fundamental driver is creating a level playing field. Fines up to $250,000, treble
damages, 7 years in prison.
53
M&As – Legal/Social Concerns:
Could a firm obtain too much market power via M&A activity? => Anti-trust legislation

 E.g. U.S.: Sherman Act of 1890, Clayton Act of 1914, Federal Trade Commission Act of
1914, Celler-Kefauver Act of 1950. =>Purpose to promote free markets and
competition, to prevent monopolies/oligopolies. => Hart-Scott-Rodino Antitrust
Improvements Act of 1976: If assets/sales > $222M, must provide notice filings,
triggering waiting periods - Justice Department and FTC have the opportunity to review
proposed M&A transactions in advance. Filing fees (from $30K to $2.5M) depend on size
of transaction. Individuals and companies can also initiate antitrust proceedings

 E.g., Singapore: Competition Act, Section 54, administered by the Competition

Commission of Singapore. Disallows acquisitions that are expected to result in a
reduction in competition for any good or service in Singapore. Exceptions made for
mergers approved by MAS, or any other ministry or regulatory authority. Can apply for
approval both pre and post merger. Notification to Commission is voluntary. Rough
guidelines, unlikely to investigate unless resulting firm will have a > 40% market share or
the combined share of the three largest firms will be > 70%
54
M&As – Legal/Social Concerns:
Could a firm obtain too much market power via M&A activity? => Anti-trust
legislation

 E.g. in the U.S. Department of Justice Guidelines:

• 1982 guidelines introduced the Herfindahl-Hirschman (HH) Index. The HH Index is

the sum of the squares of the market shares of each firm in the industry. If post-
merger HH is < 1000, then there is unlikely to be an antitrust challenge, unless there are
other additional antitrust effects
n
HH =  si2 where si = the market share of the ith firm
i

• 1984 guidelines introduced a 5% test – examines the potential effect of a 5% increase

in price on the elasticity of demand.

• 1992 guidelines: Continue to examine HH index and impact of price increase on

elasticity of demand, but will also consider (i) if significant increase in market
concentration, (ii) anticompetitive effects of the transaction, (iii) if offsetting efficiency
gains result, (v) if either party would fail and exit the market but for the merger. 55
M&As – Legal/Social Concerns:
National Security Interests:

 Could the sale of the target company to a foreign entity compromise the National
Security of the target company nation? => Many jurisdictions (e.g., US, UK, EU,
China, Singapore, etc.) have legislation enabling federal authorities to block the
sale of a target to a ‘foreign person’ (defined as foreign national, government or
entity) if allowing the sale is deemed to be a threat to national security. E.g.,In the
U.S.: Committee on Foreign Investment (CFIUS) and Foreign Investment Risk Review
Modernization Act of 2018 (FIRRMA). In the UK: National Security and Investment
Act (NSI Act) via the Investment Security Unit (ISU). In China: Provisions on the
Takeover of Domestic Enterprises by Foreign Investors via the National Development
and Reform Commission (NDRC) , In Singapore: Ministry of Trade and Industry has
power to review. In EU individual member states have agencies that review foreign
investments re national interest (in France, the National Security Council; in Germany,
the Federal Ministry for Economic Affairs; etc.) – in addition, the EU has Foreign
Subsidies Regulation (companies need to indicate what financial contributions they
received from non-EU countries, or identify situations where they suffer from unfairly
subsidized competition) 56
E.g., Potential Regulations Implicated in a
Singapore Listed Acquisition
• Companies Act – how shares can be transferred, amalgamated, etc., administered by
the Accounting and Corporate Regulatory Authority (ACRA). Amendment to
Companies Act, the Corporate Registers (Miscellaneous Amendments) Act 2022.
• Securities and Futures Act, administered by the Monetary Authority of Singapore –
notifications required when substantial % shares acquired, issuance of new
securities/shares, insider trading
• Competition Act – administered by Competition and Consumer Commission of
Singapore – guidelines provided by the CCCS
• Singapore Code on Takeovers and Mergers for listed companies –not legislation, but
non-compliance can invite significant sanctions – administered by the Securities
Industry Council (SIC)
• Singapore SGX Listing Rules for listed companies – requiring notifications/and or
approvals in certain circumstances
• Personal Data Protection Act (PDPA) – may be implicated in an acquisition –
something to bear in mind. 57
E.g.,For a Singapore Listed Acquisition:
SGX Listed companies that are acquiring or being acquired, then under Chapter
10 of the SGX-ST Listing Manual:
• Disclosure: must disclose any material information related to the transactions,
including the terms of the deal, the impact on the company's financial position,
and the implications for shareholders.
• Approval: must obtain the approval of their shareholders before entering into
any material transactions, unless the transaction is exempt from shareholder
approval under the Listing Manual.
• Fairness: must ensure that any transactions are fair and reasonable to the
company and its shareholders, and that the terms of the deal are not unfairly
prejudicial to any shareholder.
• Independent financial advice: must obtain independent financial advice on
any M&A transactions that are material to the company.
• Filing requirements: Listed companies must file a circular with the SGX-ST
disclosing all material information related to the M&A transaction, including
the terms of the deal and the independent financial advice received. 58
In General, Once a Target is Identified:
1. Pre-announcement: the companies involved may engage in
preliminary negotiations and due diligence.
2. Announcement: Once the terms of the deal have been agreed upon,
the companies will announce the transaction to the public. This
may involve filing disclosure documents with regulatory bodies,
e.g., SEC in the US, MAS in Singapore, etc.
3. On-going due diligence between buyer & seller.
4. Potential review by regulatory bodies to assess its impact on
competition and/or national security.
5. Potential need for shareholder approval and document filings.
6. Closing: the transaction is completed, integration begins
59
Contractual Documents b/w Buyer & Seller:
Purchase Agreement - also called Sale and Purchase Agreement (SPA):
Legally binding contract –
Transfers ownership of a company or assets from a seller to a buyer, and includes all
the terms of the transaction: e.g.,
• purchase price,
• payment terms,
• representations and warranties,
• closing conditions/details,
• covenants,
• conditions to closing,
• indemnification terms,
• termination terms,
• governing jurisdiction where agreement will be legally interpreted and enforced,
• etc.
60
Contractual Documents b/w Buyer & Seller:
Preceding the Purchase Agreement *may* be a preliminary agreement(s) -
preliminary agreement documents can go by different names, but all similar.
• Term Sheet: Not legally binding (except for confidentiality and exclusivity).
Usually in bullet-point form, captures key metrics, points of contention,
usually without detail – serves as a base for future completion of deal.
• MOU (Memorandum of Understanding) is similar to a term sheet, non-
binding, but in paragraph form.
– Both might be preceded by an “indicative offer”, non-binding, but may help to move
discussions forward. OR

• Letter of Interest: Like a term sheet, has foundational info for future deal
agreement. Unless a term states otherwise, non-binding. May include a
request/expectation of “exclusivity”.
– An “Indication of Interest” letter is even earlier stage than letter of interest. Sellers may
aggregate these letters to then determine who to further negotiate with. 61
Things to Keep in Mind:
• Why do we acquire? Purpose/Strategy
• What are we acquiring? Due Diligence – financial, legal, operational,
environmental, reputational, etc. (have check lists, involving all levels of firm and
operations). DD should motivate the offer price, offer structure (including legal
and tax implications) and integration plans. Virtual Data Rooms
• How will this acquisition add value? Qualitatively and quantitatively
• What offer price (how much should we pay)?
– How we pay (the type of consideration) affects how much we pay
– How we pay (covenants, indemnities, earnouts, collars, etc.) affects post-
acquisition risk and potential for subsequent success (incentive effects).
• Post-acquisition Integration
– Style: Preservation, absorption, transformation or reverse merger.
Communicate effectively with stakeholders, don’t forget day to day
operations.
62
Due Diligence, e.g.:
Examples of due diligence in M&A transactions:
• Financial: financial statements and other financial information.
• Legal: all legal documents, contracts of the target - identify any legal issues or
liabilities, existing and potential. Intellectual property, contracts with customers
and suppliers, and any legal proceedings are all relevant.
• Operational: target company's operations, products and services, supply chain,
management structure, HR/employee relations, etc. – identify concerns or
opportunities?
• Environmental, ESG: target company's compliance with environmental
regulations and identifying any potential risks/liabilities, including the
environmental impact of target’s operations. Singapore: as of 2022, SGX has
mandated mandatory climate reporting in issuers’ sustainability reports. Annual
reports must include board diversity policies.
• Reputational : target’s reputation and any potential risks to its reputation - media
coverage, relationships with stakeholders/employees, social and environmental
impact, etc,
Due Diligence, e.g.:
What to get What to look for Examples of how to
–Census info
–Benefits plans – Assets get it in a friendly
–Compensation plans – Liabilities and expenses
(including exec plans, stock, – Potential cost savings
deal:
severance) – Potential synergies – Employee attitude surveys
–Employment agreements – Substantiation of financial – Performance reviews
–Union Contracts records – Succession plans
–Org Structure (e.g., org – Organization fit – HR metrics & systems (e.g.,
design, headcount, layers, – Cultural norms and values HRIS, Diversity, Staffing)
centralized/decentralized, – Technology – Company communications
staff/line ratios) – HR capabilities – Policy manuals and
–HR Compliance risks employee handbooks
– HR fit
–Pending employment – Organization Charts
– Depth of management
lawsuits talent
–Turnover Examples of how to get it
– Talent Retention
–Open requisitions in an unfriendly deal:
– Motives and mindset of
–HR technology systems
management team - Published reports and news
–HR contracts/vendor stories
– Labor relations issues
obligations - Exes or employees who have left
–HR Policies – Integration risk
- Customers and suppliers
–Leadership/Mgmt. practices – Fit with business case and
- Researchers, recruiters, retirees
integration strategy
– Values and other 3rd parties

*Ruchira Chaudry, Based on the work of Mitchell Marks, Joining Forces

Due Diligence – Culture:
• Don’t underestimate the importance of culture
• Don’t underestimate the importance of identifying the
key target employees and key acquirer employees
needed to be on board for the success of the merger –
culturally and operationally

Example:
https://qz.com/1776080/how-the-mcdonnell-douglas-boeing-merger-led-to-the-
737-max-crisis

65
Concerns Magnified in Cross-Border M&A (i) :
➔ Impact of Antitrust, Anticorruption and National Security legislation
➔ Taxes – impact of another tax regime’s rules, requirements, carryovers, etc and
their interaction with home tax regime
➔ Obscure transaction completion requirements, e.g., stamp duties on date of
completion
➔ Accounting practices
➔ Regulations, for example on:
▪ Labor – hiring/firing, benefits
▪ Capital inflows/outflows quotas (dividends or intercompany payments,
service/royalty fees, loans to foreign-related company, etc..)
▪ Public and private security purchases/sales (in general for all shareholders and
for foreign nationals in particular)
▪ Corporate operations, compensation, etc
66
Concerns Magnified in Cross-Border M&A (ii):
➔ Availability of Valuation Comparables
➔ Impact of Exchange Rates, Differing Rates of Inflation
➔ Country Risk – how to reflect in the valuation (discount rate)
➔ Corporate Governance – potential special concerns on reliability of
information provided
➔ Language
➔ Culture
➔ Management ability & suitability
➔ Receptiveness of local work force, suppliers
➔ Assessment of impact on ESG goals, regulatory requirements, etc
➔…
67
M&A: Identifying Opportunities Generally
 Ripe for Consolidation: Lower industry concentration? Higher growth rates? Many small
competitors? What is the current anti-trust policy re this industry?

 Industry Shocks: Changes in technology, globalization, regulation, tax, accounting,

government and anti-trust policy?

 Turbulence: At the industry level? At the market level?

 Debt: Examine debt yields and their associated risk premiums across an industry. Are there
trends over time?

 Equities: Valuation multiples across players in an industry and over time, sudden significant
changes in betas, charting trends implying changes in market sentiment.

 Overvaluations? (i) Relative valuation levels at present and over time – P/E, Market/Book,
etc. for firm, industry and overall market (ii) Do I have an information advantage?

 Corporate Operations/Financing: For firms and/or the industry, substantive changes in

earnings, profit margins, overhead, dividends, cash flows, etc.? Significant new capital
expenditures? Noticeable new issues or repurchases of debt or equity?
68
 APPENDIX:
This appendix is offered to
provide an idea of the detail
involved in applicable M&A
regulations, tender offer regs in
particular. Provided for
background reference. 69
E.g., Legal Issues Re Tender Offers in U.S.:
 “Tender Offer Rule” – Section 14(d) & Regulation M-A Tender Offers:
Requires disclosure of information regarding tender offers which would result in
the owner possessing 5% or more of a class of equity securities. Schedule 14D
and now Schedule TO must be filed at the time the tender offer is made. Filed
with SEC, target company head office, other bidders if any, and all relevant stock
exchanges.

 Schedule TO Disclosure Requirements:

• Summary Term Sheet
• Name of Target, Class of Securities Involved, Any Prior Purchases
• Identity/Background of Filer (individual/corporation/partnership)
• Description of Past Contracts/Negotiations/Transactions with the Target
• Purpose of the Transaction
70
E.g., Legal Issues Re Tender Offers in U.S.:
 Tender Offer Disclosure Requirements Continued:
• Source of Funds to Complete Transaction
• Number of Shares Bidder Already Owns
• Identity of persons and parties employed by bidder for the transaction
• Bidder past two years of Financial Statement
• Any potential material agreements between bidder and any of its officers
• Any recommendations of the bidder to target shareholders
• If a proposed going-private transaction, the purposes and reasons for it
and alternatives considered
• A comment on the fairness of a going-private transaction
• Reports, Opinions and Appraisals.
71
E.g., Legal Issues Re Tender Offers in U.S.:
 Rule 14d-2, Commencement of the Offer:
▪ Begins at 12:01 A.M. on the day that anyone of the following takes place:
• Publication of the tender offer
• Advertisement of the tender offer
• Tender offer material submission made to the target
▪ Bidder has 5 business days to disseminate tender offer materials.
 1980 Amendment to Williams Act – Target Response
▪ Target must respond to the tender offer by filing a Schedule 14D-9 form
within 10 days after the commencement of the tender offer date, whereby the
target indicates whether it recommends acceptance or rejection of the offer. If
the target takes a neutral position, it must also state the reasons for its position.
Form is filed with the SEC, relevant stock exchanges.
72
E.g., Legal Issues Re Tender Offers in U.S.:
 14D – Time Period Tender Offer Must Remain Open: The tender offer must
remain open for at least 20 business days (about 30 days). The acquiring firm
must accept all shares tendered, but may not buy them until the end of the offer
period. The bidder is obligated to buy the shares tendered (on a pro rata basis) at
the offer price unless the firm does not receive the total number of shares it
requested in the terms of the tender offer (but may nevertheless purchase them).
May include other ‘escape’ clauses (e.g., those related to antitrust concerns with
either Justice Department or FTC objecting). May extend the 20 day offer period
if it believes there is a better chance of getting the shares it needs.

 14D – Tender Offer Shareholder Withdrawal Rights: Williams Act amended

several times on this. Since 1986, Rule 14d-7, allows shareholders to withdraw
their shares any time during the entire period the offer remains open. Goal is to
allow shareholders sufficient time to evaluate the offer or offers in cases of
multiple bids.
73
 E.g., Legal Issues Re Tender Offers in U.S.:
 Definition of Tender Offer –statue is unclear, thus we look to case law. Kennecott
Cooper Corporation v. Curtiss-Wright Corp (1978): open market purchases without a
deadline are not an offer. In Wellman vs. Dickson (1979), court established Eight Factor
Test.
• Active and widespread solicitation of public shareholders for shares of an issuer.
• Solicitation made for a substantial % of an issuer’s stock
• Offer to purchase is made at a premium over prevailing market price.
• Terms of offer are firm (not negotiated)
• Offer is contingent on a fixed number of shares and may specify a maximum
• Offer is time-limited
• Offeree is subject to pressure to sell stock
• Public announcements of a purchasing program that precede or are coincident with a
rapid accumulation of shares.
 Hanson Trust PLC v. SCM Corp. (1985): Wellman is not determinative. Issue is
whether target shareholders would be at an informational disadvantage if official tender
offer protocol not followed. 74
 E.g., Legal Issues re Tender Offers in U.S.:
 S-G Securities, Inc. v. Fuqua Investment Co. (1978): Tender offer if (i) bidder publicly
announces intention to acquire substantial block of target’s shares for purposes of
acquiring control of the company, and (ii) a substantial accumulation of target company’s
stock by the bidder via open market or privately negotiated purchases.
 Tender Offer Materials Received by Target Shareholders: (i) Offer to Purchase:
indicates the number of shares to be purchased, offer price and length of time the offer
will be open. May contain much more detail including withdrawal rights, tax issues and
other offer issues.
 Method of Tendering Shares: Via intermediary – commercial bank or trust company –
a letter of transmittal is attached to shares submitted to paying agent. Paying agent only
pays stockholders once offer expires, unless obtains other instructions. Bidder may
extend the offer many times as attempts to obtain full amount of shares desired (no later
than 9 am of day after offer was to expire). At the time the bidder must disclose the
number of shares that have been purchased. But shareholders can also withdraw their
shares anytime during the offer period.
75
E.g., Legal Issues Re Tender Offers in U.S.:
 Modification of Offer & Offer Period Extension: If there is a material change in the offer
(a new offer price), then it is considered a new offer and as such, stockholders get another
20 days minimum to consider the new offer. A less significant offer change (number of
shares to be purchased) is considered an offer amendment and results in a minimum 10 days
to consider the amendment. **By Section 14(d)(7), any new higher price must be offered to
all who have already tendered their shares (at the lower price). All shareholders treated the
same no mater when within the offer period they tendered their shares. **If a competing
offer is made, the original offer must be open for at least 10 business days after that (so may
result in an extension if already into day 11 or more of original offer).
 Purchases Outside Tender Offer: During the duration of the tender offer, the bidder may
not purchase shares outside the tender offer on terms that differ from the tender offer.
 After a Successful Tender Offer: Target and Bidder agree that bidder may elect majority of
B of D. Thus Bidder takes control of Board without calling a meeting of shareholders.
Target must then communicate to SEC and target shareholders, info regarding the new
directors. Issues may arise if there are antitakeover defences (e.g. Staggered board) in place.
If the takeover involves a merger, then the bidder/target file for SEC approval of de-listing
of target shares from the relevant exchange that the target was traded on.
76
 E.g., Legal Issues Re Tender Offers in U.S.:
 US Tender Offer Rules Apply to Foreign Companies whose shares are registered in the
US if these shareholders comprise 10% or more of the foreign firm’s total shareholders.
 Most large stock exchanges have additional rules related to takeovers, antitakeover
provisions, and proxy contests. E.g. NYSE requires shhd approval for transactions such as
issuance of shares equal to 20% or more of listed company’s shares outstanding. Requires
shhd approval for stock sales that will lead to a change in control of the company.
 Regulation of Proxy Solicitation: State corporation law imposes annual shhd meetings.
If an attempt is made to takeover a firm via proxy, Section 14(a) of the SEC requires a
proxy statement and a Schedule 14A be given to shareholders and must be filed with the
SEC at least 10 days before they are used. Recall, few proxy takeover attempts are
successful.
 If considered a threat to U.S. National Security, a takeover can be stopped by the
Committee on Foreign Investment in the US (CFIUS) which makes recommendations to
the President. For example, in 2018 CFIUS raised national security concerns about
Singapore-based Broadcom’s proposed acquisition of U.S. semiconductor company
Qualcomm. President blocked the transaction 77
 Tender Offers – International Jurisdictions:
 Canada: Based on Provincial Securities Commission. Most important is Ontario Securities
Commission. Ontario Securities Act much like the Williams Act – kicks in for takeover bids of
20% or more of a firm. Tender offers must remain open for at least 35 days.
 Japan: Undergoing much change. Prompted by a number of factors. (i) Mitsubishi Tokyo
Financial Group, UFJ and Sumitomo takeover battle. Japanese courts have reached decisions
similar to those of courts in the State of Delaware, i.e., they allow for antitakeover defences but
with a view toward increasing shareholder value. Tender offers are regulated by Financial
Instruments and Exchange Act. Tender Offers must be open for at least 20 days but less than 60
days.
 Korea: Korean Commercial Code / Securities and Exchange Act – once obtain a 5% position,
must report this to the Financial Supervisory Commission (along with any intentions they may
have to change the underlying firm’s management) within 5 business days. Additional reports
required for purchases of 1% or more. Shareholder must wait 5 days before exercising the voting
rights associated with the stock. Regarding tender offers: a tender offer statement must be filed
when such a bid is initiated. Rules allow for large golden parachutes and require two thirds
shareholder approval of any changes to the Board of Directors.
 Singapore: Tender offer must stay open for at least 28 days. At 60 days the offer becomes
unconditional as to acceptances received. 78
 Tender Offers – International Jurisdictions:
 China: Securities Law of China requires than any shareholders owning 5% or more of a public
company’s shares, disclose their holdings within 3 days of reaching this position, to the Chinese
Securities Regulatory Commission, the relevant exchange, and the underlying company. A
purchaser can not purchase more than 30% of the company’s shares without making a bid for the
entire company. Tender offer open between 30 and 60 days.
 Taiwan: Tender Offer Rules for Public Issuance Companies. In effect since 1995, updated 2005.
Bidders must make a public announcement prior to initiating an offer. But much of business
controlled by large family shareholding positions. Tender offer open between 20 to 50 days.
 India: Tender offers regulated by Company Court and the Department of Company Affairs.
Takeover Code governs takeovers. The Securities and Exchange Board of India supervises the
transaction as it relates to public companies. Bidder’s investment bank must make a public
announcement of the offer, which includes disclosure required in US. Offer must remain open for at
least 20 days. Many firms have accordingly adopted antitakeover defences.
 Australia: Corporate Law Economic Reform Program (CLERP) makes Corporations and
Securities Panel the sole entity responsible for ruling on various takeover related disputes. Requires
disclosure of acquisitions of 5% or more. Bids seeking to acquire 20% or more allowed as long as
followed by subsequent bids for remaining stock. Bids must be open for at least one month but less
than one year. 79