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Adlai Chua

Adlai Chua


Total Article : 14

The Hostile Takeover (pt.1)

The Hostile Takeover (pt.1)

The Premise of M&A


In an age where firms aim to grow and diversify, many seek to complete Merger and Acquisition (M&A) transactions in order to gain larger market share and growth through achieving greater synergies quickly. Synergies are a main reason for any M&A transaction and refers to the outcome where combining 1+1 gives a greater output than 2. In a competitive and fast pace environment, organic growth is considered slow and other reasons for M&A include - to branch out into foreign markets. Examples of this include Chinese technology giant Lenovo acquiring IBM’s Personal Computer division for $1.25bil in cash and shares in 2005 with overall 18.9% overall stake in the firm.


Mergers can take the form of horizontal and vertical; where horizontal refers to the merger of firms within the same production stage and vertical referring to when firms are in different ones. As a result, firms may experience economies of scale, for example - during a vertical merger, a merchant may receive raw materials from the supplier earlier in the production chain at reduced prices. This allows for cost-cutting measures and also can be tax saving too as the two firms now only count as one entity. Furthermore, greater market share can be allowed as the increased combined enterprise value would most likely give them advantages. Another firm may be restricted from purchasing the raw materials from the original supplier as they have been acquired by a rival.


Additionally, firms may aim to diversify through M&A in conglomerate mergers by acquiring firms in entirely different sectors to create a constant stream of revenue. Protection is offered because if one side of the business takes a ‘hit’, overall profits suffer less harshly as income reaped from other acquired businesses will even out the profit and loss. Other strategies include acquiring counter-cyclical firms in order to counter-balance such losses when the businesses cycle fluctuates. An example of this is a luxury restaurant acquiring eg. a cheap staple food brand to diversify if an economic downturn ensues.


But what if these firms were not friendly? What if the executive board opposes such targeting and thinks, it is a bad deal? Ultimately, the target firms’ executive board may be left redundant after the deals and will ‘fight for their jobs’ from a political perspective. Investment bankers not only have a role in financing and carrying out mergers but also a role in defending firms from such advances. The complete team may also include; lawyers and other financial specialists. In this article, I will be exploring a range of techniques in order to ward away competitors and attempts to seize an unwilling business…


Shark Repellent


Defence against takeovers are informally known as “Shark Repellent” whilst the defensive team are known as the “Killer Bees”, not to be confused with the infamous 90s hip-hop collective, the Wu-Tang Clan. In this section, I will be discussing the different strategies a team of Killer Bees will pursue.


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