Merger Arbitrage
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Foreword by Michael Zaoui xiii
Acknowledgements xix
About the Authors xxi
Introduction xxiii
PART I THE ARBITRAGE PROCESS 1
1 The Role of the Market in Mergers and Acquisitions 3
1.1 Structural Changes to the Financial Markets 4
1.2 Changes to M&A Practice 7
1.3 Market Evaluation of M&A 9
1.3.1 The price offered to shareholders of the target company 9
1.3.2 Structure - the key to evaluating an offer 9
1.4 Types of Synergies and Waves of M&A 11
1.4.1 Justification for transactions 11
1.4.1.1 Better efficiency 11
1.4.1.2 Obtaining market power 12
1.4.1.3 Acquiring specific resources 13
1.4.1.4 Benefiting from the intellectual property of the target company 13
1.4.1.5 Hindering the progress of a troublesome competitor 13
1.4.1.6 Blocking new entrants to a sector 14
1.4.2 Waves of M&A 14
Case Study: The Alcan/Pechiney Deal 18
2 The Different Types of Transactions 33
2.1 Types of Transactions 33
2.1.1 Cash transactions 33
2.1.2 All-share transactions 39
2.1.3 Mixed cash-and-share transactions 46
2.1.4 Collars 53
2.2 The Choice of Payment Method 57
3 Risk and Return Factors 59
3.1 The Different Outcomes 59
3.1.1 The transaction is completed 59
3.1.1.1 The probability of success 59
3.1.1.2 Risks of failure 60
3.1.2 The transaction fails 65
3.1.2.1 Estimating failure 66
3.1.2.2 Estimating potential losses 66
3.1.3 The transaction is completed at a price lower than the initial offer 70
3.1.4 Rival bids and bidding wars 70
3.2 M&A Timetable 73
3.2.1 Timetable considerations according to offer type 73
3.2.1.1 Takeovers 73
3.2.1.2 The unique case of tender offers 75
3.2.1.3 Mergers 76
3.2.2 Sector differences 77
4 The Merger Arbitrage Strategy 81
4.1 The Long-Term Profitability of the Strategy 81
4.2 The Factors that Influence Returns 82
4.3 The Different Approaches to the Strategy Developed by Specialist Managers 85
4.3.1 The deal's risk zone 86
4.3.2 The use of leverage 87
4.3.3 The use of options or bonds 87
4.3.4 Investment portfolio analysis 89
4.3.5 Portfolio concentration 89
4.3.6 The role of trading 90
4.3.7 Classifications 90
4.4 The Conclusions of Academic Studies 91
4.4.1 Studies on the returns generated by merger arbitrage strategies 92
4.4.2 The role of arbitrageurs in the execution of M&A transactions 94
4.4.3 Other characteristics of merger arbitrage strategies 96
PART II ANALYZING THE RISK OF FAILURE 97
5 Financing Risk 99
5.1 The Different Financing Methods 99
5.1.1 Revolving credit 101
5.1.2 Bridge loan 102
5.1.3 Term loan 102
5.1.4 Syndicated loan 105
5.1.5 Mezzanine loans 106
5.1.6 The bond market 107
5.1.7 Contingent value rights (CVRs) 110
5.2 The Legal Security of the Financing 111
5.2.1 The UK legal framework 111
5.2.2 The US legal framework 113
5.2.3 The European legal framework in general 121
Case Study: The Dow Chemical/Rohm & Haas Deal 122
6 Competition Risk 129
6.1 Origins and Regulatory Framework of Competition Law 129
6.1.1 United States 129
6.1.2 Europe 132
6.2 Competent Authorities and Approval Process 133
6.2.1 United States 133
6.2.2 Europe 137
6.2.3 China 140
6.3 Competition Remedies 143
6.4 Country Differences in Evaluation 145
6.5 The Allocation of Competition Risk between the Parties 151
Case Study: The Oracle/Sun Deal 153
7 Legal Aspects of Merger Agreements 159
7.1 The Different Documents 159
7.2 Structure of a Merger Agreement 161
7.3 MAC Clauses 162
7.3.1 A negative definition of the MAC clause 164
7.3.2 MAC clauses and court decisions 165
7.3.3 MAC clauses and private-equity transactions 167
7.3.4 Why these clauses? 168
7.4 Other Legal Clauses 171
7.4.1 Go-shop clause 171
7.4.2 Break-up-fee clause 175
7.4.3 Matching-rights clause 176
7.4.4 Specific-performance clause 178
7.4.5 Dissenters'-rights clause 180
8 Other Risks 183
8.1 Administrative Authorizations 183
8.1.1 United States 183
8.1.1.1 The role of the CFIUS 183
8.1.1.2 Sector authorities 185
8.1.1.3 PSCs 187
8.1.2 Canada 187
8.1.3 Europe 190
8.2 Political Risk 190
8.3 Natural-Disaster Risk 193
8.4 The Risk of Fraud or False Accounting 195
PART III SPECIFIC TRANSACTIONS 197
9 Hostile Transactions 199
9.1 A General Overview of Hostile Transactions 199
9.1.1 Profile of the target company 200
9.1.2 The different parties involved in hostile offers 201
9.1.2.1 The buyer 201
9.1.2.2 The target company and its constituent parts 201
9.1.2.3 Other potential buyers 202
9.1.2.4 Arbitrageurs 203
9.1.3 The offer strategies 203
9.1.3.1 Direct purchase on the market 203
9.1.3.2 Tender offer 204
9.1.3.3 Directly approaching the board of directors 204
9.1.3.4 Proxy contest 205
9.1.3.5 Legal battle 205
9.1.4 The matter of price 206
9.2 Regulatory Frameworks for Hostile Offers and How They Differ in Different Countries 208
9.3 Defense Mechanisms 211
9.3.1 Preventive measures 211
9.3.1.1 Staggered vs unstaggered boards 211
9.3.1.2 Fair-price provision 212
9.3.1.3 Supermajority provision 213
9.3.1.4 Dual-class recapitalization 213
9.3.1.5 Golden parachutes 213
9.3.1.6 Employee stock ownership plans 214
9.3.1.7 Poison pill 214
9.3.2 Mechanisms adopted during an offer 215
9.3.2.1 The crown jewel defense 215
9.3.2.2 Litigation 216
9.3.2.3 Just say no 217
9.3.2.4 Countertender offer: Pac-Man 218
9.3.2.5 Asset restructuring 219
9.3.2.6 White knight and white squire 219
9.3.2.7 Going-private transaction/LBO 220
9.3.2.8 Greenmailing 220
9.4 Regulatory Differences in Different Countries 220
9.4.1 The UK 221
9.4.2 Continental Europe 223
Case Study: The Sanofi/Genzyme Deal 229
10 Leveraged Buyouts 239
10.1 Main Characteristics of LBOs 239
10.1.1 Principles 239
10.1.2 The different parties 242
10.1.2.1 The target company 242
10.1.2.2 The investment funds 242
10.1.2.3 The banks 244
10.1.2.4 The management 244
10.1.3 Exit opportunities 245
10.2 A Brief History of Private Equity 245
10.2.1 Emergence and growth of private equity 246
10.2.2 The explosion of private equity 247
10.3 How LBOs Affect Arbitrage 248
10.3.1 The reasons for the transaction 248
10.3.2 Financing 249
10.3.3 Competition risk 249
10.3.4 Agreement terminology and the use of reverse termination fees 250
10.3.5 Management and a potential conflict of interests 250
Case Study: LBO as an Arbitrage Opportunity: Del Monte Foods 251
Conclusion 257
Glossary 259
References 265
Index 271
