M&A and Investment Banking

1. M&A and Investment Banking Lecture 4.1 – M&A Tactics

2. M&A Tactics • Art or Science? • Hostile • Shareholder Activism

3. M&A Tactics Hostile M&A

4. Hostile M&A • Hostile M&A is really only possible in public M&A situations • As a bidder in a private sale process, there are opportunities to exert pressure on a seller, but truly hostile bid tactics are the preserve of public M&A • Hostile M&A comes in many forms, but at its core involves making an offer to public shareholders (formally or informally) that bypasses the target’s management or board • Exerting pressure through publicity has become an increasingly common tactic in recent years ‘01 – ‘14 YTD EMEA Public M&A: % of Hostile Transactions Source: Thomson Reuters as at 20 August 2014.

5. Hostile Pros and Cons Friendly Hostile Advantages • Friendly and recommended by the board • Board support may reduce likelihood of counter bid • Greater level of due diligence possible • Ongoing co-operation from management • Traditionally lower premium • Likely to run to shorter bid timetable • Board irrevocables • Possible to implement via a scheme of arrangement • Possible to address any regulatory / anti-trust issues with co-operation of the Offeree Disadvantages • Risk of leak • ‘Cost’ of board recommendation and support • Management control of enlarged group may be compromised Advantages • Can acquire a target against the management’s wishes • Seizes PR initiative • Greater control over timing of announcements and offer timetable Disadvantages • Possible reputational damage to offeror • Higher risk / uncertainty • target incentivised to seek alternative solutions (i.e. white knights) • No due diligence access or co-operation with respect to regulatory issues • Greater costs • Higher premium likely • Unwanted press attention • Unlikely to close early in 60 day timetable • Institutional shareholders can be averse to hostile bids • Cannot implement via a scheme of arrangement

6. Approach Tactics:Key Steps and Options Typically a potential bidder will seek to engage with the target board in private in order to secure a recommendation before considering other tactical options Accept Key Terms Due Diligence Announce Offer Private Approach Made to Target Board Meet to Clarify Terms Board to Consider Terms Walk Away 1 Go Public – Bear Hug 2 Bidder Options • Usually initiated by a call to the Chairman (or CEO) • Followed by an offer letter • Can be helpful to have meeting with the potential bidder (may be through advisers) to get clarity on offer terms • Value and assumptions • Deal structure • Diligence requirements • Confidentiality • Financing • Intentions for the business • Financial adviser to assist with evaluation of offer terms and provide advice on recommendation Hostile Bid 3 Improve Terms Reject Seek Improved Terms Reject – ‘Just Say No’ Target options Seek White Knight Other Defence Options

7. Approach Tactics:Spectrum of Potential Approach Strategies Private Approach 1 Seek Board Recommendation • Majority of bids initiated via a private approach Decision to go public Public Statement and Engagement with Shareholders – ‘Bear Hug’ 2 Short Announcement of Interest / Rejection Fuller Announcement of Intentions e.g. Price Full Announcement Subject to pre Conditions • May be triggered by a leak / / / / / Go Hostile 3 Launch Unrecommended Offer Launch Hostile Offer / / /

8. Strategies to Avoid Being Targeted • Peer and Sector Review • Declining valuation metrics, “missing the numbers” or other signs of financial weakness (particularly as compared to peer) should prompt immediate focus on rectifying financial performance • Focus on short and long term shareholder value • Waiting for the sector or economic conditions to improve is unlikely to be sufficient • Review of Investor Base and Trends • Monitor investor base • Monitor actively trading volumes and ownership trends • Keep track of equity, debt and convertible securities holders • Maintain a proactive and constant dialogue with all investors/classes of investor • Tailor presentation and messages to hedge funds • Engage in dialogue with equity advisory services (when appropriate) • Keep credit rating agencies informed • Actively build-up supportive shareholder base • Capital Structure and Distribution Review • Optimize capital structure and cost of capital • Historically, share repurchases and increased dividend • Now, focus on financial stability and size

9. Strategies to Avoid Being Targeted (Cont’d) • Portfolio Optimization • Evaluate regularly whether mix of businesses and activities is optimized • Focus on core competencies • Monetize low growth assets • Highlight value of high growth assets • Review Takeover Defenses • Review the strategic and financial alternatives on a regular basis • Review Business Plan, operating performance and competitive positioning • Have up-to-date structural defenses available, where allowed • Maintain an open shareholder dialogue • Ensure Supervisory Board / Non Executive Support • Supervisory board/non-executive support is important • A supervisory board that is used to be involved in the company’s affairs is more likely to support management in a crisis than a pure “ceremonial board”

10. Defense Tactics

11. Case Studies • Olivetti Takeover of Telecom Italia (1999) • Defense plan not approved at shareholder meeting. The Italian Government didn’t use its “golden” share with veto power • White knight (Deutsche Telekom) not successful • Olivetti ultimately purchased 52% of Telecom Italia’s voting shares at a cost of €31bn • Vodafone Takeover of Mannesmann (2000) • It was an hostile takeover but the merger was backed in a private deal. The Mannesmann board agreed to an increased offer of £112bn, then the largest corporate merger ever • Never before in Germany had a large company been acquired by a foreign owner • Total Takeover of Elf Aquitaine (2000) • Elf Aquitaine counterbid (Pac-Man defense strategy) – but institutional investors strongly preferred Total’s deal Source:Kruse, T., 2005. Ownership, Control and Shareholder Value in Italy: Olivetti's Hostile Takeover of Telecom Italia. ECGI - Finance Working Paper No. 83/2005 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=728284; http://www.nytimes.com/1999/09/21/business/a-french-concoction-totalfina-s-acquisition-of-elf-may-be-only-a-prelude.html?pagewanted=all&src=pm; http://news.bbc.co.uk/2/hi/business/445868.stm

12. M&A Tactics Shareholder Activism

13. Hostile - Shareholder Activism • Shareholder Activism: a way in which shareholders can assert their power as owners of the company to influence its behavior • Source of monitoring of managers and/or blockholders (principal-agent relationship) • Shareholder Activist: a shareholder who attempts to use his or her rights as a shareholder of a publicly-traded corporation to bring about social change

14. Who are the Activists? • Types of Shareholders • Large Shareholders • Individual Shareholders • Institutional Shareholders: banks, insurance companies, retirement or pension funds, investment advisors • The Old: Defensive Activism (ex-post): the investor disagrees with managers’ decisions and reacts to protect or enhance the value of pre-existing holdings (i.e.: Reluctant Activist) • Traditional Institutional Investors as mutual and pension funds (e.g.: CalPERS, CalSTRS) • The New: Offensive Activism (ex-ante): specialized activists, lacking a sizeable stake in the target, build up one “offensively” with the intention of actively prompt changes to maximize their investment return • Specialist Activists and Activist Hedge Funds (e.g.: Knight Vinke Asset Management, Hermes Fund Managers TCI, Cevian, Icahn Partners)

15. Can activism deliver over the long-term? Total Return S&P Index vs. Selected 2005 Activism Portfolio Credit Crunch Begins Lehman/AIG 116.6 102.1 Does This Graph Imply that Activism Will be Less Successful When There is Less Liquidity? Source: Institutional Shareholder Services (ISS) data as of 22 June 2010; includes 41 activist situations tracked by ISS in 2005

16. Range of Activist Shareholder Objectives • BA-CA (Various) • HVB (Various) • DisDeutscherIndustrie Service (Various) • Wella (Various) • ABN Amro(TCI) • Wyevale (Laxey) • TUI (Wyser-Pratte) • Curanum(Wyser-Pratte) • Cadbury Schweppes (Nelson Peltz) • Valora Holding (Golden Peaks Capital, Pictet-Fund, 3V Asset Management) • Minerva (Kifin) • HSBC (Knight-Vinke) • TUI (Wyser-Pratte) • Freenet(Various) • Sainsbury (Tchenguiz) • Lagadere (Wyser-Pratte) • Techem (Various) • Cumerio / NorddeutscheAffinerie(A-Tec) ` Frustrate M&ACapital Measures/ Integration Influence Decision Making Process Increase Capital Distribution Influence TakeoverOutcome ChangeManagementTeam Monetise other Assets Fair Takeover Compensation Break-up Sell Company • Deutsche Borse(TCI, Atticus) • Philips (Jana Partners, D.E. Shaw Group) • Deutsche Borse(TCI, Atticus) • Elan (Cabtree) • Mitchells & Butlers (Piedmont) • Old Mutual (Cevian) • ENI (Knight-Vinke)

17. Stages of Shareholder Activism Identification of Target • Activist funds typically have team of ‘analysts’ reviewing undervalued companies • Many will take significant time to get to know business and perceived opportunity • Activist investor takes initial position in target – typically 5% - 15% • May choose to build over time or buy in one block • Share price may react strongly to presence of investor on the register Initial Acquisition • Investor seeks meetings with key management / board figures to discuss perspectives on business • Frequently also send ‘formal’ letter to board setting out perceived short-comings in current strategy and suggested improvements Private Correspondence with Board • Starts with mere presence on the register, particularly for the well-known funds • Will be ratcheted up depending on progress with the Board • Leaks / press briefings or ‘open letter’ • Likely to be coordinated with approaches to other key shareholders PR Campaign • Rights to requisition EGM common to most markets • Typically seeks to place representation on the Board (or remove existing board) rather than requiring specific action • Typically dependent on gaining support of majority of shareholders who vote Requisition EGM • Much less common in European situations than in the US • Lack of poison pulls, no-jury trials, potential for award of costs Litigation

18. Shareholder Activism in Europe is Here to Stay Background • Traditionally, activism has been seen as a US Phenomenon, with European Investors tending not to intervene in the running of their portfolio companies • While EU legislation is creating a common base of applicable laws and regulations, historically some jurisdictions have had very different starting places to the US in terms of • Board structure • Availability of, and appetite for, litigation • Shareholder based (including cross-holding structures) • Political and market environments • Primacy of shareholder value • However, the activist model is taking root in Europe and institutions such as ISS are becoming increasingly important in determining the outcome of shareholder campaigns • The market in Europe has evolved, with shareholder activism now recognised as a legitimate economic activity which can, in some cases, be beneficial for companies and shareholders as a whole • A shareholder prepared to challenged an incumbent board of a European company will find a range of tools at its disposal and increasing support and engagement of ‘vanilla’ investors Some Recent Examples Shareholder activism has been a common phenomena in the US for some time. US funds are now looking to Europe – as demonstrated by Elliott with Actelion (as well as Danisco and National Express).

19. Minority Rights

20. M&A and Investment Banking Lesson 4.2 – Contract Negotiation

21. Contract Negotiation • Sales and Purchase Agreement • Due Diligence Process

22. Contract Negotiation Sales and Purchase Agreement

23. Sales and Purchase Agreement • Legally binding contract between the acquiring and selling parties. It is subject to conditions such as shareholder approval • The contract can take the form of a stock purchase agreement, asset purchase agreement, tender offer document, or merger agreement • The SPA is a risk management device focused on the completion of the transaction • Therefore it may not include further details such as synergies, plans for integration, governance and organization, etc. Source: Bruner, 2004. Applied Mergers and Acquisitions. Wiley Finance: chapter 29

24. Key Sections in Purchase and Sale Agreements Source: Bruner, 2004. Applied Mergers and Acquisitions. Wiley Finance: chapter 29

25. Purchase Price Adjustments Source: Bruner, 2004. Applied Mergers and Acquisitions. Wiley Finance: chapter 29

26. Covenant Categories Source: Bruner, 2004. Applied Mergers and Acquisitions. Wiley Finance: chapter 29

27. Contract Negotiation Due Diligence Process

28. Due Diligence Definition & Principles • Definition • An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to a sale • Generally, due diligence refers to the care a reasonable person should take before entering into an agreement or a transaction with another party • Principles • Avoid a compliance mentality and adopt an investor mentality (look at the risk-return trade-off ) • Due diligence is a risk management device • Narrow- vs. Broader-scope due diligence: risk bearing is always costly • Broader-scope Due Diligence: Yields the basis for thinking like an investor. Focus mainly on wise acquiring rather than on legal issues. (Higher cost of the due diligence, but lower risk  surprise now) • Narrow Scope Due Diligence: Focus mainly on the legal and accounting issues to get the deal done. Should be bundled with other risk management devices. (Lower cost of the due diligence, but higher risk  surprise later) Source: Bruner, 2004. Applied Mergers and Acquisitions. Wiley Finance: chapter 8

29. What to Look for in a Due Diligence • Legal Issues • Accounting Issues • Tax Issues • Environmental issues • Information Technology • Risk and Insurance issues • Real and Personal Property issues • Market Presence and Sales issues • Operations • Cross-Border issues • Intellectual and Intangible Assets • Finance • Organization and Human Resources • Culture • Ethics Source: Bruner, 2004. Applied Mergers and Acquisitions. Wiley Finance: chapter 8

30. Due Diligence Process: Timing • Due Diligence over the Life Cycle of a Deal First Proposal Letter of Intent Deal Contract Signed Closing • Focused on public data. Very small team. Due diligence oriented toward strategic or financial benefits of a combination • Focused on public and some target private data. Team grows to include important outside advisers and some integration managers. Aims to advise LOI negotiators, and plan detailed due diligence • Focused on target private documents as requested by buyer. Target provides data room. Aim is to support negotiators in their preparation of price, representation and warranties and other final terms. • Focused on target documents, field visits, interviews, consultants’ reports. Very large team. Aim is to test representations and warranties in advance of closing, and prepare for post-merger integration Source: Bruner, 2004. Applied Mergers and Acquisitions. Wiley Finance: chapter 8

31. Due Diligence Process: Team • Hypothetical Due Diligence Review Team • Attorney, general corporate review • Attorney, tax specialist • Attorney, regulation specialist • Attorney, risk management specialist • Attorney, environment specialist • Attorney, intellectual property specialist (e.g.: patents) • Attorney, pension and benefits specialist • Accountant, general audit • Accountant, tax specialist • Accountant, internal reporting • Consultant, information technology specialist • Buyer employee, information technology specialist • Actuary • Buyer employee(s), human resources, compensation, pension, benefits, and training • Consultant, human resources, compensation, pension, benefits, and training • Buyer employee, risk management specialist • Consultant, environment risk assessment specialist • Buyer employee, environment risk assessment specialist • Buyer employee(s), marketing and sales • Buyer employee(s), operations • Buyer employee(s), post-merger integration specialist • Buyer employee, cash management • Buyer employee, finance and valuation • Consultant, solvency analysis and credit analysis • Consultant, business forecast and operations • Consultant, real and personal property appraisal • Consultant, valuation specialist Source: Bruner, 2004. Applied Mergers and Acquisitions. Wiley Finance: chapter 8

32. Due Diligence Process: Outputs • Primary work papers and other resources • These are the raw material of the diligence effort (i.e.: list of records checked, work papers and notes from the checking process, transcripts and audiotapes from interviews, videotapes from field visits and inspections, photographs, etc.) • Summaries by specialists • In each of the areas of focus a specialist should be tasked with preparing a summary of findings • Diligence synthesis • Technical overview of the entire due diligence effort usually written for the benefit of negotiators, and to combine the specialists’ findings for possible future reference • Integration recommendations • Recommendations for integration planners, that begin their work after the signing of the definitive agreement and draw on the findings from the diligence review • Executive summaries • Summaries suitable to informing and guiding executives along the way Source: Bruner, 2004. Applied Mergers and Acquisitions. Wiley Finance: chapter 8

33. References • Bruner, 2004. Applied Mergers and Acquisitions. Wiley Finance: chapters 8, 29, 30, 32-34 • Fleuriet, 2008. Investment banking explained, McGraw-Hill: chapter 14 • Iannotta, G., 2010. Investment Banking, Springer-Verlag Berlin Heidelberg: chapter 9 • Kruse, T., 2005. Ownership, Control and Shareholder Value in Italy: Olivetti's Hostile Takeover of Telecom Italia. ECGI - Finance Working Paper No. 83/2005 • Miller, E.L.J., 2008. Mergers and Acquisitions: A Step-by-Step Legal and Practical Guide. Wiley: chapter 2