Question

Merger and Acquisition ch 19 Finance

How can legislation and regulation serve as merger defense?

Explain the difference between flip-in and flip-over poison pills?

Answer 1

Federal and state laws regulate mergers and acquisitions. Regulation is based on the concern that mergers inevitably eliminate competition between the merging firms. This concern is most acute where the participants are direct rivals, because courts often presume that such arrangements are more prone to restrict output and to increase prices. The fear that mergers and acquisitions reduce competition has meant that the government carefully scrutinizes proposed mergers. On the other hand, since the 1980s, the federal government has become less aggressive in seeking the prevention of mergers

Despite concerns about a lessening of competition, U.S. law has left firms relatively free to buy or sell entire companies or specific parts of a company. Mergers and acquisitions often result in a number of social benefits. Mergers can bring better management or technical skill to bear on underused assets. They also can produce economies of scale and scope that reduce costs, improve quality, and increase output. The possibility of a takeover can discourage company managers from behaving in ways that fail to maximize profits. A merger can enable a business owner to sell the firm to someone who is already familiar with the industry and who would be in a better position to pay the highest price. The prospect of a lucrative sale induces entrepreneurs to form new firms. Finally, many mergers pose few risks to competition.

Antitrust merger law seeks to prohibit transactions whose probable anticompetitive consequences outweigh their likely benefits. The critical time for review usually is when the merger is first proposed. This requires enforcement agencies and courts to forecast market trends and future effects. Merger cases examine past events or periods to understand each merging party's position in its market and to predict the merger's competitive impact.

difference between a "flip-in" and "flip-over" poison pill

A poison pill is a defense tactic used by corporations to thwart hostile takeovers. The takeover candidate uses a poison pill to make it difficult for the acquirer to take over the corporation. Flip-in and flip-over poison pills offer different defense mechanisms for a takeover candidate. The flip-in poison pill allows the existing shareholders to purchase shares of the targeted company at a discount, while the flip-over poison pill allows existing shareholders of the targeted firm to purchase shares of the acquiring company at a discount.

Flip-In Poison Pill

A flip-in poison pill is a strategy a target company may use to make it difficult for the acquirer to gain control of the company. It is a provision in the takeover candidate's bylaws that gives existing shareholders of the targeted company, excluding the acquirer, the rights to purchase additional shares of the targeted company at a discounted price. This defense tactic dilutes the share price of the targeted company and the percentage of ownership the acquirer may already have.

Flip-over Poison Pill

On the other hand, a flip-over poison pill is a tactic that gives existing shareholders of the targeted firm the rights to purchase shares of the acquiring company at a discounted price. However, this must be included in the bylaws of the acquiring company. These rights only go into effect when a takeover bid arises. The flip-over poison pill encourages existing shareholders of the targeted company to purchase shares of the acquiring company to dilute its share price.