Amongst my great learning privileges on Wall St was to be deep in the weeds as Managing Director at NYSE: RCS Capital Corporation (RCAP) in 2014. A firm into investment banking, capital markets, transaction management services, wholesale broker dealer and transaction manager.. inter alia. The only investment banking and capital markets business focused primarily on the specialized needs of the direct investment program industry then, and with exceptions none today.
That’s when I developed practitioner expertise in listings, mergers and acquisitions, tender offers and capital markets fundraising. An important part of that learning was I figured out – what is the role of Board members or of appointed directors in frequent M&A?
Here are my takeaways from that period in my career.
In this study I examine activism trends, proxy fights issues and success rates, as well as arrive at defense and poison pill analytics. Poison pills in force are declining and companies are increasingly letting pills expire naturally – and with that there are fewer plans in force, resulting in a decline in the number of shareholder proposals in favor of redeeming or removing plans.
It appears that companies have seen little impact on stock price as a result of adopting or renewing a poison pill. I also shed light on triggers and historical precedent rights plans. My study reveals that historically, only a handful of companies increased the exercise price of their poison pills and in most cases this resulted in excess abnormal returns. Counterintuitively and interestingly, a targets’ ability to fend off a hostile acquirer is not dependent on having a poison pill. I then describe with examples structural defense and takeover defense.
U.S. companies are dismantling their takeover defenses. The decrease can be attributed to companies switching to annually elected directors from staggered board terms, companies removing poison pills, and less companies providing that directors can only be removed for cause. The pace at which companies are erecting barriers against proxy contests and enacting rules to maintain tight rein over shareholder meetings has slowed significantly too. Also companies are increasingly allowing poison pills to expire.
I tackle these and other issues in our M&A series. Here I explain the general idea behind poison pills; in the event of a hostile takeover attempt, poison pills give shareholders (except for the would-be acquirer) the right to buy stock in their own company or in the acquiring company at a deep discount, if the bidder acquires a certain percentage of the outstanding shares. With other shareholders then able to buy shares at discounted price, the target company would become financially unattractive and the voting power of the potential acquirer would be diluted -i.e., acquiring the company under those terms would be like swallowing a poison pill.
In public market M&A transactions, where at least part of the consideration is stock of the acquiror public company, the value offered is subject to market risk as the acquiror’s stock price changes. Collars – long underlying, long put options, financed with short call options- provide some degree of price protection to acquiror and target between signing (announcement) and closing. Valuing the hedge correctly is key to making profitable M&A arbitrage trades.
Protectionism includes foreign investment restrictions, antitrust regimes and takeover rules that regulators use to block or influence deal outcomes. Protectionism and trade barriers and inward-looking sentiment is seeping into policy and regulation. There have been many changes in discussions between Congress and Committee on Foreign Investment in the United States (CFIUS). Opposition is no longer just vocal; a lot of activity is taking place behind the scenes in Washington. Constituency interests, too are crowding out traditional policy interests. I describe what’s happening:
M&A Activity Especially Inbound Drastically Reduces
Protectionism Norms: Evolving
Protectionism in Foreign M&A Deals: U.S. Actors
Protectionism in Foreign M&A Deals: Rising
Foreign M&A Deals: Typical Post-Announcement Timeline Delay
Reaction to Japanese Investment: Exon-Florio Amendment
CFIUS Reform: FINSA and FIRRMA
Due Diligence Check List Questions: Acquirer
Post CFIUS >SEC Review Process
Share Purchase Considerations
In the movie “Pretty Woman” hostile corporate raider/black knight Edward Lewis (played by Richard Gere) buys, ransacks, breaks up and sells off the pieces of acquired companies. What defense do his Target companies have to thwart hostile M&A?
I have spent the bulk of my career in wealth management, asset management, investment banking and more recently in entrepreneurial FinTech. To develop domain expertise and bridge the gap between theory and practice I’ve published extensively over the years – though never around investment banking. The investment banking practitioner space doesn’t have much literature and one learns on the job. It is an incestuous world, with high entry barriers, much like the guilds in the medieval age to preserve high rents and transaction fees. I bring sunlight to this space here by explaining the typical process of buying a company.
Contents: Buy-Side Process, Assessment, Bidding Strategy, Negotiation and Execution, Transaction Considerations, Structure, Regulatory Issues, Financing, Accounting Treatment, Takeover Defenses, Valuation Methodologies, Tender and Closing, Timeline, Role of Advisor
October 2020 has 290 SPACs with $86.5 billion in cash that have either filed for IPOs, are searching for targets, or have announced proposed mergers. I put on my investment banker hat and describe how a Special Purpose Acquisition Corporation can be set up. I then put on my investor hat and describe by modelling a hypothetical deal how sponsors and IPO pre-merger investors stand to make money and post-merger investors loose.
Takeaways: (i) SPAC is not a poor man’s private equity, much as Alternative Mutual Fund is not a poor man’s hedge fund; (ii)SPAC structure results in severe dilution of the value of SPAC shares : post-merger share prices fall and price drops are highly correlated with dilution or cash shortfall ; (iii) SPAC investors bear structural cost of the dilution band pay for companies they bring public; (iv) SPAC creates substantial costs, misaligned incentives, and losses for investors who own shares at the time of SPAC mergers: SPAC shares tend to drop by one third of their value or more within a year following a merger (iv) Only those who buy shares in SPAC IPOs and either sell or redeem their shares prior to the merger do very well ( typically 10-13% historical annual return): IPO investors who are pre-merger shareholders should exit at the time of the merger, either by redeeming their shares or selling them on the market; (v) Investors that buy later and hold shares through SPAC mergers bear the costs of the generous deal given to IPO-stage investors (vi) Sponsor’s promote, underwriting fees, and dilution of post-merger shares caused by SPAC warrants and rights transfer value from SPAC investors to pre-merger investors; (vii)Sponsor has an incentive to enter into a losing deal for SPAC investors if its alternative is to liquidate.
ActiveAllocator summarizes the imminent Aramco IPO- soon to become the world’s most valuable company. We touch upon the offering, the firm’s vision, status, synergies between its upstream-downstream business, competitive strengths, risks to investing and general prospects.
Listen in here:
Disclosure: Inputs sourced from internet searches, offering docs, conversations. Shares are not offered in the USA and some other countries. This is not an offer to sell or a solicitation of any offer to sell any securities.