Talk the Talk

Mergers and acquisitions provide good drama in the stock market industry. Who is going to buy out whom? Will the merger between Company A and Company B become the next force to be reckoned? As soon as the word is out that a merger is going to take place, stock market enthusiasts religiously follow the process. However, for those who are yet familiar with the concept of corporate restructuring, there are terms that hold a different meaning when put in the context of mergers and acquisitions.

There are more ways than one in which a merger can proceed. Companies may become partners on a single pet project. Two or more regional stock exchanges can combine to build a national stock exchange. A large corporation can buy out their competition with all of its assets and liabilities and place a new management. In the perspective of mergers and acquisitions, these actions can be summed up in two-word terms that make up a rich vocabulary.

Hostile Takeover
There are two parties involved in a hostile takeover namely the raider and the target firm. A raider is a company that is in search for other companies that have considerable cash reserves, underestimated assets, or great potential. These companies are called the target firms. After singling out a target firm, the raider will get hold of shares that will guarantee controlling interest. If the top executives of the target firm firmly object the acquisition, it is referred to as a hostile takeover. Although there are some hostile takeovers that worked out for the best, they are generally perceived as disreputable since the employees of the target firm are likely to have ill feeling towards the raider.

Dawn Raid
A dawn raid takes place when a raider purchase enough shares of the target firm to gain a controlling interest through brokers at the time the stock market opens. Since there is a presence of a broker, the target firm does not have an idea who is the raider. The purchase is done as early as possible so that the target firm is not fully aware of what is happening. Some countries, such as U.K., already made some actions to limit this type of takeover.

Saturday Night Special
Saturday Night Special may bring to mind disco balls, live performances, vodka, tequila shots, and party people. In the world of merger and acquisitions, it is all about the unexpected effort of a company to acquire another through public tender offer. This kind of attempt is executed during weekends hence the name. Apparently, the U.S. is not so fond of Saturday Night Special since this action is limited due to the Williams Act, which states that if a company is to purchase more than 5% of another's shares, the purchase must be reported to the Securities and Exchange Commission.

A takeover is not a takeover unless the target company has already waved the white flag and surrendered to the raider. In most cases, companies are not willing to give out the controlling interest to the competition. To win the battle, there are techniques that can guarantee a way for companies to drive away the raiders. These practices are called shark repellent.

Golden Parachute
Once a company acquires another, the top executives of the target company will be forced to resign their positions. One strategy of preventing a takeover is to cite in the contracts of the corporate managers that in case of mergers and acquisitions, they are entitled to money-spinning benefits such as bonuses, compensation packages, even stock options. Since a golden parachute is tantamount to millions of dollars, raiders will then have second thoughts in pursuing the company.

People Pill
The top executives issue a memo stating that once another company takes over, everybody will resign their positions. Since the prospect of a new management is not appealing to the employees, nearly every one is agreeable to this action. Upon the knowledge of this, the raider will have doubts especially if the company it is targeting is known for effective human resources. However, the usual practice in a takeover is that the employees of the acquired company are going to be sent packing so this kind of strategy is not so much of a shark repellent.

Poison Pill
As opposed to the people pill, the top management of the target company makes the raider think twice in proceeding with the takeover by making their assets or shares less tempting. One of the ways to carry this out is for the actual shareholders of the company to purchase more stocks in a discounted price while the price is higher for other bidders. Before a company can be acquired, the raider must buy enough shares for the controlling interest. If the value of each share is too expensive, it is less likely for the takeover to proceed.

White Knight
Like the proverbial white knight, another company comes to the rescue of the target company who is at war with a raider, which is also known as the black knight. In essence, the target company is still facing a merger or an acquisition. The difference is that the white knight offers something like a partnership instead of a hostile takeover.

It seems that drama is the wrong word. Judging from the jargons used in its context, it is more befitting to say that mergers and acquisitions provide a good backdrop for a war or espionage film.

05 Sep 2008 08:01:29

Company to Create Airwaves Exchange - Wall Street Journal

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More details: http://online.wsj.com/article/SB122057863305202251.html

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