Introduction to Corporate Finance

ONLINE CHAPTERS

merger the next day to own 100% of the target’s outstanding shares, as long as the payment in the merger

is the same as the payment in the tender offer.

Tender offers can be part of a hostile takeover attempt (an offer not solicited by the target board of

directors that bypasses the target board and goes straight to target shareholders) or a friendly tender

offer (that occurs after a deal is negotiated with the target board). Unsolicited takeover attempts are not

particularly common, especially outside the United States, but many a friendly merger was completed

because of the threat of an unsolicited takeover by an undesired bidder. There are, of course, some

mergers that are friendly from the start.

In Australia, an individual shareholder is considered to have a relevant interest in a listed company if it

owns 5% or more of the company’s voting shares. Under s671B of the Corporations Act 2001 (Corporations

Act), shareholders are required to disclose any ownership of 5% or more, and any subsequent increase

of 1% or more of the company’s voting shares, so that the company’s other shareholders can monitor

any attempts to gain control of the company. Furthermore, although there are various exemptions to

this requirement, the 20% takeover threshold means that an individual cannot normally acquire 20% or

more of the company’s voting equity without making a formal takeover bid. A shareholder is entitled to

compulsorily acquire any remaining securities of a listed entity if it owns 90% or more of those securities.

In recent years, the financial press has used the phrase merger of equals to describe some transactions.

For example, on 3 May 2010, Continental and United Airlines announced a merger of equals, indicating

in a press release that ‘the all-stock merger of equals brings together two of the world’s premier airlines,

creating a combined company well positioned to succeed in an increasingly competitive global and

domestic aviation industry’. In September 2012, Cortona Resources Limited (listed on the ASX as CRC)

and Unity Mining Limited (listed on the ASX as UML) announced their merger of equals to form an

Australian gold business to be known as Unity Mining Limited. The merger announcement document

summarises this merger of equals and can be viewed at the company website: http://www.unitymining

.com.au/documents/asx/ASX_28SEPT12.pdf.

Mergers of equals most often involve bidders and targets of roughly similar size, and are friendly

in terms of board negotiations. Often, the bidding company promises to treat the board members,

management and employees of the target company fairly, and perhaps offer concessions in terms of the

location of headquarters or company name. On average, mergers of equals result in a smaller premium

paid to target shareholders. Cynics argue that the target board and management sell out shareholders

by accepting a lower premium in exchange for their own well-being and remuneration. Proponents of

mergers of equals argue that a smaller premium allows the bidder to proceed slowly and carefully when

integrating the companies, rather than making drastic changes quickly in an effort to justify the larger

premiums that usually accompany acquisitions. While there may be elements of truth to both arguments,

we note that ultimately there is one surviving company, with one CEO, one CFO and one board, and

often this surviving entity is dominated by representatives of the bidding company.

21-4b LBOs, MBOs AND RECAPITALISATIONS

Changes in corporate control also occur when voting power becomes concentrated in the hands of one

individual or a small group. Public-to-private transactions (known as going-private transactions in the

US) are one way to achieve this concentration of control. Just as they sound, public-to-private transactions

transform public corporations into private companies through issuance of sufficient debt to buy all of

the outstanding shares of the corporation. The acquiring party may be a leveraged-buyout (LBO) or

hostile takeover

When a bidder makes an

unsolicited offer for a target

merger of equals

A merger of two companies

that are roughly the same size;

usually friendly

public-to-private

transactions

The transformation of a public

corporation into a private

company through issuance of

large amounts of debt used to

buy the outstanding shares of

the corporation

thinking cap

question

Why is it sometimes said that

‘there is no such thing as a

merger of equals’?

thinking cap

question

What are common characteristics

of a good LBO target?