Small firms in a growth industry enjoying expanding sales tend to make good targets for older, slower growth firms with a cash rich position

Firms in industries that have undergone deregulation.

Firms in industries with natural resources or undervalued assets or hidden assets if the market values of the assets is less than the cost to acquire the firm.

Liquid firms with stable cash flows.

Firms with unused debt capacity or overfunded pension plans.

Firms with low p/e ratios and positive earnings may inherit the higher p/e ratio of the acquirer.

 CORPORATE RESTRUCTURING TO REDUCE PROBABILITY OF A TAKEOVER

Acquire a competitor of the bidder to raise anti-trust concerns.

Divest of a crown jewel to secure funding to pay a high dividend or to repurchase company stock.

Go private through a leverage buyout.

Attempt a pac man defense.

Recapitalize the company by giving shareholders cash and new common stock.

 

PRINCIPAL CHARACTERISTICS OF A POTENTIAL TAKEOVER CANDIDATE

1. Poor market performance of stock C which may well encourage stockholders to tender.
2. Low P/E multiple C particularly in event of an exchange offer.
3. Strong liquid-assets position.
4. Assets that can be spun off to provide funds for takeover; under-valued assets.
5. Book value in excess of market.
6. Replacement value of physical assets that is far higher than is reflected in price of stock.
7. Substantial cash flow from depreciation.
8. Unused debt capacity; nominal debt.
9. Dividends that can actually pay interest on securities offered in an exchange offer or compensate raider for interest he may be paying on borrowed money.
10. Concentrated share ownership (which could be either a possible strength or a potential weakness, as in our scenario).
11. Large quantities of stock in Street name or held by institutions.
12. Declining or stagnant dividends that have led to shareholder dissatisfaction.
13. Small amount of stock owned (or controlled) by management.
14. Absence of extensive federal or state regulation of target=s business.
 

FOURTEEN TACTICS FOR FIGHTING TAKE-OVER

1. PUT A SIGNIFICANT AMOUNT OF THE COMPANY=S VOTING STOCK INTO FRIENDLY HANDS

2. SPLIT STOCK

3. ELIMINATE ACCOUNTING PROFITS

4. STAGGER ELECTION OF DIRECTORS

5. REQUIRE 80 PERCENT OR MORE OF STOCKHOLDERS= VOTES FOR APPROVAL TO MERGE (RATHER THAN CUSTOMARY TWO-THIRDS)

6. TAKE ON A LARGE DEBT

7. AROUSE BUSINESS COMMUNITY, ESPECIALLY STOCKHOLDING GENERAL PUBLIC

8. INVOLVE GOVERNMENT, LEGAL SYSTEM, AND FEDERAL AGENCIES

9. CALL IN COMMERCIAL BANKERS AND CREDITORS TO HELP

10. BUY AS MUCH COMPANY STOCK AS POSSIBLE

11. SELL STOCK HELD BY COMPANY

12. OBJECT TO RAIDER=S STOCKHOLDERS

13. THREATEN WALKOUT OF KEY PERSONNEL

14. THREATEN TO LEAVE AND START AN IDENTICAL COMPANY

 

WHY RETURNS ZERO OR NEGATIVE RETURNS TO ACQUIRERS AT ANNOUNCEMENT DATE
 
The full wealth effects may not be observed in the acquiring firm stock prices at the time of the bid because they were disguised in other information or were a relatively small component of acquirer wealth.

Competition between alternative bidders ensures that any excess returns are earned by the targets

The acquisitions are poor investment projects for the acquirers and the wealth effects reflect this.
 

SOME SPECIFIC CONSIDERATIONS
 
Size of the target versus the bidder

Presence of other bidders to force up the bids

Costs of adhering to the terms of the Williams Act

Presence of a hubris.