Acquisition strategy and process - Bid tactics, regulation, ...

Learning Outcomes

After reading this article, you should be able to explain the main steps in the acquisition process, differentiate between friendly and hostile bids, and evaluate key bid tactics and takeover defences. You will understand the regulatory environment, how stakeholder models affect takeovers, and be able to assess the effectiveness of different defence strategies. This article prepares you to analyse acquisition scenarios and make recommendations in the ACCA AFM exam.

ACCA Advanced Financial Management (AFM) Syllabus

For ACCA Advanced Financial Management (AFM), you are required to understand the strategic and regulatory aspects of mergers and acquisitions. Ensure your revision includes the following areas:

• The process and rationale behind acquisitions and mergers as a corporate growth strategy
• Comparison of friendly and hostile takeover approaches
• Key bid tactics used by acquirers and target companies
• The regulatory environment for mergers and acquisitions, including shareholder vs stakeholder frameworks
• Typical post-bid defence strategies used by target companies
• Factors influencing the success or failure of takeovers

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following actions is a classic "defence strategy" for a company facing a hostile takeover?
   1. Direct negotiation with the acquirer
   2. Poison pill
   3. Friendly share exchange
   4. Announcing a merger with a competitor
2. In the context of takeovers, the "mandatory-bid" rule typically requires:
   1. All staff be retained post-acquisition
   2. The target company must make a counter offer
   3. The acquirer to offer to buy all outstanding shares after reaching a certain stake
   4. The government to approve every acquisition

3. List two key differences between shareholder and stakeholder models of takeover regulation.

4. True or false? A White Knight defence involves buying back a company’s own shares to increase management control.

Introduction

An acquisition is a major strategic event that can lead to significant changes in a company’s direction, market position, and stakeholder interests. For the AFM exam, you must assess both the rationale behind acquisitions and the practical tactics employed throughout the process—whether the takeover is friendly or hostile. Key concepts include bid tactics, the legal and regulatory framework for takeovers, and the strategies that target companies deploy to defend themselves against unwelcome advances.

This article breaks down the typical process, outlines the main regulatory controls that guide fair practice, and sets out the primary tactical options for both bidders and targets in acquisition situations.

ACQUISITION STRATEGY: OVERVIEW OF THE PROCESS

The acquisition process involves key stages, each with associated tactics and regulatory considerations.

Identification and Evaluation of Targets

The acquiring company identifies potential targets using strategic, financial, and operational criteria. Suitable candidates are assessed for value, potential synergies, and alignment with group strategy.

Approaching the Target: Friendly vs Hostile Bids

A friendly bid involves early consultation and negotiation with the target’s board and key shareholders. By contrast, a hostile bid bypasses the board and goes straight to shareholders, often triggering intense boardroom resistance.

Key Term: hostile takeover
An acquisition attempt where the target company's management does not support the bid and the acquirer appeals directly to shareholders.

Announcement and Bid Tactics

After initial engagement, the acquirer must choose the optimal bid tactic—open negotiations (friendly), or a public offer and possible market purchases (hostile). Tactics are influenced by the target’s response and anticipated regulatory scrutiny.

Key Term: dawn raid
A tactic where an acquirer rapidly buys a significant stake in a target company at market open to gain influence or force a formal offer.

Key Term: bear hug
An unsolicited but generous takeover offer sent directly to the target’s board to pressure them into negotiation.

Targets may employ tactics to delay disclosure or stall the process, while bidders may launch partial takeover offers or use complex financial incentives.

Worked Example 1.1

A large corporation aims to acquire a mid-size competitor. After quiet preliminary discussions stall, the acquirer purchases 12% of the target’s shares overnight and immediately publicly announces an intention to acquire the remainder at a premium.

Question:
Explain the bid tactics being used here and why they may be effective.

Answer:
The acquirer is executing a 'dawn raid' combined with a public offer, seizing significant voting interest before announcement. This can pressure other shareholders to accept the bid, while limiting the target's time to react with countermeasures.

REGULATORY FRAMEWORK FOR ACQUISITIONS

The acquisition process is subject to strict regulatory scrutiny to ensure fair treatment for shareholders and, in some jurisdictions, wider stakeholder interests.

Shareholder vs Stakeholder Models

Most global takeover codes follow either a shareholder or stakeholder approach:

• Shareholder model: Focuses on the fair and equal treatment of all shareholders, requiring transparency and equal access to information and terms.
• Stakeholder model: Expands consideration to employees, creditors, customers, and society, sometimes requiring regulatory review of effects beyond shareholders alone.

Key Term: mandatory-bid rule
A regulation requiring an acquirer to make a public offer to all remaining shareholders once a specific stake threshold is crossed.

Key Term: squeeze-out rights
Legal provisions allowing an acquirer with a dominant holding (e.g., over 90%) to compel minority shareholders to sell their stakes under certain conditions.

Key Principles and Controls

• All shareholders must receive the same price per share.
• Acquirers above regulated thresholds must make an offer for all remaining shares (mandatory-bid).
• Regulatory approval is required for deals that might affect market competition or national interests.
• The process must be conducted transparently, with full disclosure of terms and intentions.

Worked Example 1.2

An acquirer owns 31% of a listed company's shares after a partial offer. Local law sets a mandatory-bid threshold at 30%.

Question:
What must the acquirer do next, and why?

Answer:
The acquirer must make a public offer to purchase the remaining shares from all other shareholders, ensuring all have the chance to exit at a fair price. This is to protect minority shareholder interests.

Regulatory Bodies and Competition Concerns

In many jurisdictions, mergers with potential anti-competitive effects are reviewed by dedicated authorities (e.g., Competition and Markets Authority in the UK or the European Commission). Clearance is required before completion; otherwise, deals may be blocked or made subject to conditions.

DEFENCE STRATEGIES FOR TARGET COMPANIES

When facing a hostile bid or an undervalued offer, target companies deploy defensive measures to deter, delay, or secure better terms.

Pre-bid Defence Strategies

• Shareholder communications: Maintain regular engagement and demonstrate company value.
• Poison pill: Adopt provisions making a takeover prohibitively costly, e.g., by allowing shareholders to buy discounted shares if a bid occurs.
• Asset revaluation: Revalue assets upwards to justify a higher share price.
• Supermajority amendment: Change company by-laws to require a higher approval percentage for takeovers.

Key Term: poison pill
A defence mechanism enabling existing shareholders to acquire more shares at a discount if a takeover occurs, diluting the bidder's stake.

Post-bid Defence Strategies

• White Knight: Seek a friendlier bidder willing to offer better terms.
• Attack the bidder: Publicly question the bidder’s strategy, financial stability, or motives.
• Counterbid (Pacman defence): The target launches its own bid for the acquirer.
• Appeal to authorities: Refer the bid to competition or governmental bodies for investigation.

Worked Example 1.3

A hostile bidder offers below current market value and refuses to negotiate. The target's board knows another, industry-aligned company is interested in friendly discussions.

Question:
Which defence should the board consider and why?

Answer:
Seeking a "White Knight" is appropriate. This involves inviting a friendly alternative bidder to acquire the company, potentially at better terms for all stakeholders.

Exam Warning

Do not confuse the poison pill (prior arrangement to dilute a hostile acquirer) with the white knight strategy (inviting a third-party bidder). Both are used in hostile takeovers but serve different tactical purposes.

Regulatory Constraints on Defences

Some regulatory codes prohibit extreme defence measures or require shareholder approval for major changes during a bid period. Boards cannot act solely to frustrate an offer; their actions must be justifiable in shareholders' interests.

Revision Tip

Be precise when recommending defence tactics in exam scenarios—always assess whether the strategy is permissible under local regulations and justifiable under the board’s fiduciary duties.

Summary

Acquisition strategy involves multiple tactical and regulatory considerations. Companies seeking to acquire must manage initial approach, regulatory obligations, and potential hostility, while targets must weigh pre- and post-bid defences within the law. Understanding bid tactics, regulatory controls, and defence options equips you to evaluate acquisition scenarios and recommend appropriate actions in the AFM exam.

Key Point Checklist

This article has covered the following key knowledge points:

• Distinguish between friendly and hostile takeover processes and tactics
• Explain main regulatory principles: mandatory-bid rule, squeeze-out rights, stakeholder vs shareholder models
• Identify and evaluate major bid tactics and post-bid defence strategies
• Recognise the limits imposed by regulatory bodies and competition authorities
• Assess the suitability and effectiveness of defence strategies against hostile takeover bids

Key Terms and Concepts

• hostile takeover
• dawn raid
• bear hug
• mandatory-bid rule
• squeeze-out rights
• poison pill