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Defending Takeover Bid by Earling PLC

Question:

Discuss about the Mergers and Acquisitions for Poison Pill Defense.

Mergers and Acquisitions are considered as two of the major aspects in the world business over the years. In general, mergers and acquisitions refer to the process of consolidation of the companies. It needs to be mentioned that there are various forms of mergers and acquisitions; they are acquisitions, mergers, tender offers, consolidations and others (Cartwright and Cooper 2012). The main aim of the report is to analyze and evaluate different dimensions of mergers and acquisitions and the report is based on the provided case study of Earling Construction Plc and Manco Construction Plc.

Manco Plc should take the following steps to defend the takeover bid by Earling PLC:

  • Manco Plc should adopt the strategy of Poison Pill Defense to defend the takeover from Earling PLC. Under thus strategy, the target company that is Manco Plc is required to dilute their shares in such a manner that Earling PLC needs to incur large amount of expenses for obtaining the controlling percentage of share (Rhee and Fiss 2014). As per the provided case study, the economic crisis badly hit Earling PLC economically. In this situation, the company would think twice before incurring large expenditure for the acquisition of Manco Plc.
  • Apart from the above, Manco Plc can also adopt the strategy of Stock Repurchase to defend takeover. Under this process, Manco Plc needs to repurchase their shares from their shareholders to prevent this takeover from Earling PLC. Manco Plc can adopt these two techniques (Auerbach 2013).

In general, Manco Plc can take the following techniques to defend any potential takeover:

  • Manco Plc can adopt the strategy of Staggered Board under which only one third of the directors are reelected annually.
  • Manco Plc can adopt the strategy of Shark Repellants in which the acquirer companies need a supermajority vote requirement for the takeover of the company.
  • In addition, other techniques are Golden Parachute, Greenmail, Standstill Agreement and others (Ferris, Jayaraman and Sabherwal 2013).

According to the provided case study, it is advised that Earling PLC is the ‘predator’ and Manco Plc is the ‘target’. The justification is provided below with definition.

Predator: In the process of mergers and acquisitions, a company with sufficient financial power can easily bear the associate risks of the process of takeover. For this reason, financial stronger companies are regarded as Predators. In this case, Earlings PLC has financial superiority than Manco Plc and thus, needs to be considered as predator (Jordan 2016).

Target: In the merger and acquisition process, companies with less financial capability are considered as Target; as they can be easily takeover by more financially stable companies. As per the provided case study, Manco Plc needs to be considered as target due to their poor financial condition (Shi, Sun and Prescott 2012).

As per the provided case study, Earlings PLC offered Manco Plc €4.75 per share while the actual value was €10.50 per share. It can be seen that Earling PLC is offering very less amount of the actual share value. However, in case of Management Buyout (MBO) strategy, Manco Plc can get higher price of share value than the offering of Earling PLC. For this reason, Manco Plc might consider a potential MBO (Mao and Renneboog 2015).

The advantages and disadvantages of MBO are discussed below:

Advantages

  • The main advantage of MBO is that it increase the motivation of the employees as the overall success of the business create positive impact on them.
  • The new owners of the business can make effective business decisions based on their experience as they have been the employees of the company for years.
  • In case the business was a part of large group, MBO increases the efficiency of the business as the management does not have to discuss the decision with the head management of the group (Berry and Green 2016).


Disadvantages

  • In the process of MBO, the new management is required to put much effort to turn the business in a successful one. This can be considered as a disadvantage.
  • In case, the business is struggling due to the lack of strengths, skills and vision of the management team, then the MBO is not going to be much helpful for the company (Mao and Renneboog 2015).

Three major types of acquisitions are Horizontal Acquisition, Vertical Acquisition and Concentric Acquisition. These are discussed below with example:

Horizontal Acquisition: Horizontal acquisition refers to the acquisition of one company by another company in the same industry. The main advantage of horizontal acquisition is that it expands the capacity of the acquirer while keeping the business operations same. The companies in this acquisition process involve in the selling of same product or services (Ferreira et al. 2014).

Techniques for Defending Potential Takeover

Example: The acquisition of Instagram by Facebook can be presented as a major example of horizontal acquisition. This acquisition took place in the year 2012 and the reported value was $1 billion. It is regarded as horizontal acquisition as both Facebook and Instagram operates in the same industry with same services that is photo sharing (Forbes.com 2018).     

Vertical Acquisition: Vertical acquisition refers to the acquisition of one company by another company in the same industry, but both of them occupy different position in the supply chain of the industry. The main advantage of vertical acquisition is that it establish cooperation between the companies by improving efficiency and lowering the overall cost (Frésard, Hoberg and Phillips 2014).

Example: The acquisition of PayPal by Ebay in the year 2002 can be well presented as the example of vertical acquisition. This can be considered as the example of vertical acquisition as both the companies operates in the online platform, but provides different services. Ebay involves in online shopping, but PayPal involves in online payment and money transfer (Forbes.com 2018).

Concentric Acquisition: In the process of concentric acquisition, the two companies involved belong to the same or related industry, but they do not involve in the offering of same products or services. However, these companies may use similar distribution channel (Risberg 2013).


Example: The acquisition of Travelers Insurance by Citigroup can be considered as a perfect example of concentric acquisition. This is called concentric acquisition as both Citigroup and Travelers Insurance belong to financial industry, but both of them involves in the offering of different products and services (Forbes.com 2018).   

From the provided case study, it can be seen that both the companies that are Earling Construction PLC and Manco Construction Plc belong to the same industry that is the construction industry. From this, it is clear that both the companies involves in the offerings of same construction related products and services. Hence, it implies that both the companies operates in the same industry and sell same products and services. For all these reasons, the acquisition of Manco PLC can be classified as horizontal acquisition as it possesses all the features of horizontal acquisition (Ferris, Jayaraman and Sabherwal 2013).

The seven reasons of acquisition for Earling PLC are discussed below:

  1. The major reason of acquisition for Earling PLC is survival. The case study states that the economic crisis of 2008 affected Earling PLC in a bad manner. In this kind of situation, acquisition was one of the ways for Earling PLC to survive and remain in the competition (Cartwright and Cooper 2012).
  2. It is possible for Earling PLC to ensure growth from the positive effects of acquisition. Most of the time, acquisition ensures satisfactory and balance growth of the business (Vazirani 2012).
  • It would be possible for Earling PLC to gain necessary competitive advantage and bigger market share due to the acquisition as it improves the distribution and marketing networks. It would also help Earling PLC in developing wide customer base (Cartwright and Cooper 2012).
  1. Diversification of products and services world be another reason for Earling PLC for adopting the strategy of acquisition and it can complement the current product and services of the company (Vazirani 2012).
  2. It can be happened that the management of Earling PLC failed to identify eligible successor of the company. In this situation, the option of acquisition can provide Earling PLC with the option of eligible leadership (Vazirani 2012).
  3. Reduction or cutting of costs could be another major reason for Earling PLC for acquisition as the acquisition of two companies with same services is effective in cost reduction (Vazirani 2012).
  • Better financial planning would be possible for Earling PLC due to the positive effects of acquisition. The collective finances of both the companies can be resulted in better financial planning (Cartwright and Cooper 2012).


Among many cases, the acquisition of Volvo and Renault in the year 1993 as both the companies failed to address the ownership structure of them after the process of acquisition. Both the companies were supposed to save $5 billion from this acquisition. However, the main reason for the failure of this acquisition was the consideration of the problem related to the combination of investors-owned company with the government-owned company. Due to this acquisition, the shareholders of Volvo would have left with 35% stake in the combined company and the rest was controlled by the government of France (Nytimes.com 2018). Thus, the shareholder of Volvo could not accept the selling of the prized company to the French Government. These were the major reasons for the failure of this acquisition.

Advantages and Disadvantages of Management Buyout

The acquirer companies can use various ways to pay for the target companies in the process of take over. Three of these major ways are discussed below:

Payment in Cash: Cash payment is considered as one of the most popular ways for the payment of takeover in acquisition process. Cash transaction is considered as clean, instantaneous and it does not require high level of management as compared to the stock payment. The shareholders who are not able to sell their shares prefer the payment of takeover through cash (Harford, Humphery-Jenner and Powell 2012). Most importantly, the shareholders do not have the worry about the future performance of their companies that has impact on the amount they will be paid. There are both advantages and disadvantages of the process of cash payment. In the process of competitive bidding, the target companies always prefer cash payment for the process of takeover. However, the main disadvantage is that the shareholders of the target company will not receive any dividend in case the company performs well in near future. It implies that the shareholders of the target company are taking cash instead of future performance bonus and they ate blocked from any future gains (Harford, Humphery-Jenner and Powell 2012).

Payment with Stock: It is considered as another popular ways of payment in the process of takeover. In the process of payment with stock, the shareholders of the target company swap their shares for the shares of the acquirer company (Fu, Lin and Officer 2013). The payment by the shares is essential for the target companies when their shareholders do not want to recognize any kind of taxable gains in the near future. It implies that the shareholders of the target companies do not have to pay income taxes on the acquisition process due to the absence of cash transaction. This option of financing is considered as the most safe way to pay for the takeover as both the acquirer and the selling company share the risks on an equal basis. In case the stocks are overvalued, the particular way becomes largely beneficial for the acquirers (Fu, Lin and Officer 2013). At the same time, the acquirer firms have to bear the risk of decline in the stock price. Thus, there are both advantages and disadvantages.

Debt Acquisition: The agreement to take on the debt of the seller is considered as one of the major ways of the payment for takeover and it is also considered as a viable alternative of cash payment and share payment (Phan 2014). For many business organizations, debts become one of the major forces to be acquired. In this position, it is the priority of the debtors of the target companies to be acquired by a company that can pay the debt. At the same time, from the point of view of the creditors, this way can be considered as one of the cheapest way for the acquisition of assets. At the same time, this way is also beneficial from the perspective of the shareholders of the target company as they do not have to pay income taxes until they receive the payment of debt. At the time of takeover under this payment process, the sellers is required to be sure about the financial stability of the acquirer (Phan 2014). In case the acquirer become bankrupt, the shareholders of the target or seller company would be fallen under the creditors of the acquirer. Thus, this way also has certain advantages and disadvantages.

Types of Acquisitions with Examples

Advised Finance Technique: The above discussion evaluates three ways of payment for a takeover. It can be observed that all the three ways have some advantages and some disadvantages. Based on the above discussion, it is advised that Earling PLC should adopt the way for cash payment for the takeover considering the advantages of this technique. Payment through cash is a clear process that needs less management involvements. After that, the shareholders of the seller company do not have to depend in the performance of the shares as the payment is done in cash. Most importantly, the shareholders of the seller company cannot claim any future gain of the company (Ferris, Jayaraman and Sabherwal 2013). For all these reasons, Earling PLC is required to adopt the strategy of cash payment for financing the takeover.

It needs to be mentioned that there are many risks involved in the process of acquisition and there is not any exception of this fact in case of Manco PLC. From the provided case study, it can be seen that Earking PLC is considering offering a paper offer to Manco PLC for acquisition that is one share of Earling PLC is for every share of Manco PLC. In case, this deal is extended, Manco PLC can face some deals. First, Manco PLC can lose the deal as it is a good deal for the company. After that, there is a possibility that Manco PLC can face legal risks due to not compliance with the laws and regulations. Most importantly, Manco PLC can face the risk of closing down the business due to be not acquired (Weber and Yedidia Tarba 2012).

Conclusion

As per the above discussion, it can be seen that Manco Plc should adopt the strategy of Poison Pill and Stock Repurchases against the takeover of Earlings Plc. The discussion also shows that Earling Plc is the predator due to financial superiority and Manco Plc is the target. The study shows the advantages and disadvantages of management buyout in the process of acquisition. As per the above discussion, three kinds of acquisition are there; they are Horizontal Acquisition, Vertical Acquisition and Concentric Acquisition and the takeover of Manco Plc by Earling Plc is the example of horizontal acquisition. It can also be seen that the companies can use various strategies to pay for the process of acquisition like cash payment, stock payment, debt acquisition and others.

References

Auerbach, A.J. ed., 2013. Corporate takeovers: Causes and consequences. University of Chicago Press.

Berry, D.F. and Green, S., 2016. Cultural, structural and strategic change in management buyouts. Springer.

Cartwright, S. and Cooper, C.L., 2012. Managing mergers acquisitions and strategic alliances. Routledge.

Ferreira, M.P., Santos, J.C., de Almeida, M.I.R. and Reis, N.R., 2014. Mergers & acquisitions research: A bibliometric study of top strategy and international business journals, 1980–2010. Journal of Business Research, 67(12), pp.2550-2558.

Ferris, S.P., Jayaraman, N. and Sabherwal, S., 2013. CEO overconfidence and international merger and acquisition activity. Journal of Financial and Quantitative Analysis, 48(1), pp.137-164.

Forbes.com. (2018). Forbes Welcome. [online] Available at: https://www.forbes.com/sites/bruceupbin/2012/04/09/facebook-buys-instagram-for-1-billion-wheres-the-revenue/#4190d4b24b8a [Accessed 5 Mar. 2018].

Forbes.com. (2018). Forbes Welcome. [online] Available at: https://www.forbes.com/sites/quora/2014/10/03/the-real-reasons-paypal-sold-to-ebay/#5de1ef07698b [Accessed 5 Mar. 2018].

Forbes.com. (2018). Forbes Welcome. [online] Available at: https://www.forbes.com/2005/01/31/cz_rl_0131citi.html#7f0346eb668f [Accessed 5 Mar. 2018].

Frésard, L., Hoberg, G. and Phillips, G., 2014. The incentives for vertical acquisitions and integration. Working Paper Series. 13 April 2014. Available: https://ssrn. com/abstract= 2242425 or https://dx. doi. org/10.2139/ssrn. 2242425. Accessed 6 July.

Fu, F., Lin, L. and Officer, M.S., 2013. Acquisitions driven by stock overvaluation: Are they good deals?. Journal of Financial Economics, 109(1), pp.24-39.

Harford, J., Humphery-Jenner, M. and Powell, R., 2012. The sources of value destruction in acquisitions by entrenched managers. Journal of Financial Economics, 106(2), pp.247-261.

Jordan, C., 2016. The London Stock Exchange-Prey and Predator..

Mao, Y. and Renneboog, L., 2015. Do managers manipulate earnings prior to management buyouts?. Journal of Corporate Finance, 35, pp.43-61.

Phan, H.V., 2014. Inside debt and mergers and acquisitions. Journal of Financial and Quantitative Analysis, 49(5-6), pp.1365-1401.

Rhee, E.Y. and Fiss, P.C., 2014. Framing controversial actions: Regulatory focus, source credibility, and stock market reaction to poison pill adoption. Academy of Management Journal, 57(6), pp.1734-1758.

RICHARD W. STEVENSON (2018). Volvo Abandons Renault Merger. [online] Nytimes.com. Available at: https://www.nytimes.com/1993/12/03/business/volvo-abandons-renault-merger.html [Accessed 5 Mar. 2018].

Risberg, A., 2013. 13 The Stake of High Failure Rates in Mergers and Acquisitions. Mergers and acquisitions: The critical role of stakeholders, 52, p.247.

Shi, W., Sun, J. and Prescott, J.E., 2012. A temporal perspective of merger and acquisition and strategic alliance initiatives: Review and future direction. Journal of Management, 38(1), pp.164-209.

Vazirani, N., 2012. Mergers and Acquisitions Performance Evaluation-A Literature Review. SIES Journal of Management, 8(2).

Weber, Y. and Yedidia Tarba, S., 2012. Mergers and acquisitions process: The use of corporate culture analysis. Cross Cultural Management: An International Journal, 19(3), pp.288-303.

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