What Is A Hostile Takeover? | Brew Breakdown - YouTube

Elon Musk got a new toy. That's it.

That's the tweet.

If all goes well, you are.

Musk is set to buy Twitter for about $44 billion

with about half his money and the rest from the bank.

Must be nice.

Now, was your former investment banking analysts like me.

You probably don't even hear or care about most acquisitions

because they're boring Usually companies just shake hands, send bonds and move on

because the real world isn't exactly succession from there.

But sometimes the saucy drama actually happens.

And in the case of M&A, when you run into one of those made for the big screen

deals, it makes a hundred hour weeks and sleepless nights worth it.

But before I go corporate Napoleon on you, make sure to subscribe to the Morning

Brew YouTube page and hit the bell below.

So, you know, every time you drop a new one.

I'm a Nish Mitra, and this is Brew Breakdown

Before

Twitter accepted Ireland's bid, things were getting hostile.

Yuan sent a bear hug letter, Twitter adopted a poison pill,

and shareholders were about to get hit with a tender offer.

What is it?

Harry Potter, the Chamber of Commerce.

Let's walk through how a hostile merger plays out.

Using the weapons we saw in the Elan Twitter situation,

one offense, the bear hug to defense, the poison pill.

Three, the stakes, the shareholders and for the aftermath.

What should you do, if anything?

Hostile takeovers aren't exactly hostile.

Corporate raiders don't have hooks and hats.

They have iPads and Wi-Fi and an army of bankers and lawyers.

The opening chess move in a hostile

situation is usually when an acquire makes an official offer

to its board of directors in the form of a bear hug letter.

Now this bear hug is less

Winnie the Pooh and more like the dude who jumped Leo DiCaprio in The Revenant.

In a bear hug letter, the acquirer offers to buy the company

at a premium price, which applies pressure to management.

Quick story time.

When I was 22 I was an investment banking analyst.

I had to draft a bear hug letter for a client.

It still boggles my mind that billion dollar deals often

come down to PDF files created by 22 year olds running on Red Bull.

But I digress.

The board has a fiduciary duty to their shareholders

to act in their best interest.

Which means reading the letter and actually considering the offer.

But if you leave the letter on read or say No, they don't have to make a statement,

but they risk their shareholders finding out

if the inquiries loud motivated and tweets a lot.

What's interesting is how fast the board came to this decision to accept the offer.

And some people have suggested that they don't have any viable alternatives

Part of the reason is

if you look at the IPO price for Twitter, the price is basically the same.

So in about a decade's time, they haven't really increased shareholder value.

If you look at those two points in time.

For what makes a bear hug successful?

Has the buyer hired advisers like bankers and lawyers?

Does the buyer even have the money to do the deal?

And lastly, do they have big plans for their new life together

that results in more value through the combo than going it alone.

But what happens on defense?

One powerful tactic is the poison pill.

A poison pill is the only time a lawyer is allowed to prescribe medication.

Poison pill is the street name, the legal name is a shareholder rights plan.

These are one, two, two year plans

that companies adopt to block other companies, corporate raiders

or activists, investors from owning more than a certain percentage of their shares.

The common version is the flip in poison pill, which basically allows the target

to issue new shares of their stock to current shareholders.

Let's say half the price after a buyer buys more than a certain amount.

Let's say 10%.

The kicker is the shareholder who triggered the poison pill

doesn't get to participate

Let's say the company trades at 200 bucks a share.

The minute someone breaks 10%, they'll activate the pill

and issue shares to all other shareholders at $100 a share.

The other shareholders are having a blast because

they're getting shares at half price and they could sell them on the market.

For a quick profit.

But the would be acquirer is getting Big Mac

because now

there are more shares on the market that they'll have to buy if they want control.

The poison pill

is less about hitting the block button and more about playing hard to get.

If the acquirer

wants the board to accept an offer and they know there's a poison pill,

they'll have to tone down the aggression and bring more to the table.

Of course, in extreme cases where the board doesn't want to play ball,

the antidote to the poison

pill lies with the people, which in this case are the shareholders.

The key to a successful activist or hostile M&A campaign

is giving the people what they want.

In our case, even if management isn't playing ball,

if the offer is enticing enough to the shareholders,

the deal could still get done.

This is where tender offers come into play and there's nothing soft about them.

Ultimately, I think what it pays to remember

is that the shareholders are the owners of the company.

You can force a proxy vote where if you can get enough support,

you can have the shareholders say, Listen, board, you're going to either

get replaced when we hold these votes and we'll find directors who will

agree to the deal.

A tender offer is simply just a public offer to buy

shares from existing shareholders at a stated price.

And in this situation, the goal is to seek control.

While tender offers can be successful to shareholders feel it's a good deal.

They can be long, tiring and costly.

So what should you do?

Can you make money in a hostile environment?

There are a lot of people who have been waiting for a while.

We've seen a lot of them selling because they're like, All right.

The risk from here for that last few dollars in share price isn't worth it.

But I do know that a lot of people are now wondering, well, wait,

does this mean that there's a guarantee that if I buy now,

I'm going to get taken out at 50 for 20 when the deal closes?

If the deal closes, yeah, you'll get 50 for 20.

But that uncertainty is reflected in the current share price.

If it was a certainty, it would be a lot closer to 50 for 20.

And the fact that there is that bigger discount tells you that there is risk

in the deal not being completed.

But even if a company agrees to a deal, it doesn't mean it's a done deal.

M&A deals can run through another round of diligence to uncover red flags,

more shareholder votes on both sides, regulatory approval

and honestly any random Black Swan events can make a deal go bad

But if you happen to be a shareholder,

just pray the offer

price is as high as can be and make sure your broker delivers the goods.

So how'd we do? What else should we break down?

Let us know in the comments.

And as always, thanks for watching.