TAKEOVER PROCESS

VIKAS MEHROTRA
UNIVERSITY OF ALBERTA
Amazon Inc.
HEADQUARTERS, SEATTLE, USA
GROWTH VIA ACQUISITIONS
AMZN

S&P500
 TAKEOVER PROCESS

 Merger and tender offer terminology

 Types of mergers from an economic standpoint
 Mergers in a legal framework
 The nature of tender offers
 Risk arbitrage in M&A activity
 MERGER AND TENDER OFFER TERMINOLOGY

 Mergers generally refer to negotiated deals

 Mostly friendly, i.e. supported by the target board
 Tender offers involve direct offers to purchase shares from target
shareholders
 Less likely to be friendly
 TYPES OF MERGERS

 Horizontal mergers
 Scale effects, most likely to be challenged on anti-competitive grounds
 Roll-ups help consolidate a fragmented industry
 Vertical mergers
 Motivated by production technology, and contracting costs
 Conglomerate mergers
 Product extensions, geographical expansion, and pure unrelated mergers
 HORIZONTAL MERGERS

 Scale effects, merger among competitors

 Most likely to be challenged on anti-competitive grounds
 Roll-ups help consolidate a fragmented industry
 e.g. Shoe maker mergers with shoe maker
HORIZONTAL MERGERS

1998: Exxon + Mobil

Deal value: $74 billion
2000: Vodafone + Mannesmann
Deal value: $190
HORIZONTAL billion
MERGERS
HORIZONTAL MERGERS
2009: Pfizer + Wyeth
Deal value: $68 billion
 BAE SYSTEMS + EADS

The Guardian,11-Oct-2012:
Berlin's concern over the potential size of the French shareholding in the combined company,
as well as disagreements over the location of the group's headquarters, proved to be the deal
breaker…
 VERTICAL MERGERS

 Motivated by production technology, inventory savings, and

contracting costs
 e.g. Shoe maker mergers with leather producer
 Less likely to be challenged by competition bureau
 VERTICAL MERGERS

1995: Luxottica + US Shoe

(owner of Lenscrafters)
Deal value: $1.4 billion

1999: Luxottica + Ray Ban

Deal value: $640 million

2007: Luxottica + Oakley

Deal value: $2.1 billion
 CONGLOMERATE MERGERS

 Product extensions, geographical expansion, and pure unrelated

mergers
 Can be financial or managerial motivations
 e.g. Shoe maker mergers with hotel chain

 What is the rationale for conglomerate mergers?

CONGLOMERATES: GENERAL ELECTRIC CORPORATION
 MERGERS IN A LEGAL FRAMEWORK

 After respective board approvals, merger is submitted for

shareholder ratification
 Overwhelmingly approved by wide margins in most cases
 After approval by board and shareholders, appropriate documents
are filed with provincial authorities – one corporation survives, and
the other loses its existence
 BURGER KING & TIM HORTONS

 Back in August 2014, Burger King announced its acquisition of Tim

Hortons.
 http://www.theglobeandmail.com/report-on-business/burger-king-
tim-hortons-ink-merger-deal-for-125-billion/article20203522/

What do you think is the rationale behind this merger?

+ = ???
 THE NATURE OF TENDER OFFERS

 Direct offer to shareholders of target firm

 >50% shares tendered is equivalent to merger approval
 What happens to minority non-tendering shareholders in case of
successful tender offers?
CASE: AOL TIME WARNER MERGER
 AOL TIME WARNER MERGER

Deal announced on Jan-10-2000.

AOL and Time Warner merger remains the largest in U.S. history, valued at
$350 billion. If this was a country, it would rank #12 in the World based
on GDP in 2000.
As of the end of 2014, the company is worth 1/5th of the deal value in 2000.
Not counting opportunity cost in the last 14 years, this is a loss of
approximately 80% of the deal value.
Mr. Steve Case had been planning for months in 1999 on a merger of AOL with
a more traditional company.
 CASE: AOL TIME WARNER
TIMELINE OF EVENTS

• Oct-1999: chance meeting between Steve Case (AOL) and Gerald Levine
(Time Warner) in Beijing
• Nov-1999: Steve Case calls Gerald Levine, they meet over dinner later that
month and discuss the “fit”
• Nov-1999: AOL engages Salomon Smith Barney as advisor
• 10-Jan-2000: deal announced at Mr. Steve Case’s home in Virginia. AOL will
own 55% of the new company; Time Warner the rest.
• Senior execs at Time Inc. were shocked to hear of the deal, and expressed
frustration. Mr. Logan, head of Time Inc., had this to say: “dumbest idea I
had ever heard in my life.”
 CASE: AOL TIME WARNER
TIMELINE OF EVENTS

• May-2000: first signs of strain as dot.com bubble bursts, and internet

earnings slow down to a crawl.
• Over the next few months, news starts to leak out that AOL was misstating
its earnings. The SEC investigated this and levied fines.
 RISK ARBITRAGE IN M&A ACTIVITY

64

 In May 2002, Sears offered to buy 62

Lands’ End for $1.9 billion, or $62
per share.
60
 On the date of the announcement,
Lands’ End share price rose to
58
$61.72, from a close of $51.02 on
the previous day.
56
 You could make a sure profit by
buying Lands’ End at 61.72 and
selling it to Sears for 62. 54

 Or could you? Lands' End Stock Price

52
Offer Price by Sears

50
May 12, 2002 May 13, 2002
 MIND THE GAP

62.5

 The $0.28 gap represented an

arbitrage opportunity. 62
=$0.28
 Buy shares in Lands’ End at the
announcement of merger
61.5
 Sell at eventual consummation of
deal
 The real question is whether this 61
was riskless, and if not, what do you
need to do to minimize this merger
arb? 60.5
Lands' End Stock Price
Offer Price by Sears

60
May 12, 2002 May 13, 2002
 M&A News

Jan-7-2019: Eli Lilly announced acquisition of Loxo Oncology.

Jan-7-2019: Eli Lilly acquisition of Loxo Oncology