Number of bids and the OMXS inde

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Acquisition of Stock

Another way to obtain control of another firm is to purchase the firm’s voting stock in exchange for cash, shares of stock, or other securities. This can be done with the use of a tender offer. A tender offer is a public offer to buy shares of the target firm. It is made by one firm directly to the shareholders of the other company. The offer should be communicated to the target firm’s shareholders via press releases and public announcements (Ross et al. 2005, NBK, 2003). Aspects of choosing the acquisition of stock option: Takeovers Acquisition Proxy contest Going private Mergers or consolidation Acquisition of stock Acquisition of assets Frame of Reference 16 1. No shareholder meetings must be held and no vote is required. If the shareholders do not like the offer, they may reject it and they will not tender their shares. 2. The bidding firm can deal directly with the shareholders of a target firm by using a tender offer. The target firm’s management and board of directors can be circumvented. 3. Acquisition of stock is often unfriendly (Ross et al. 2005). In July 1st, 1999, a new regulation regarding companies listed on the OMXS were introduced. It stated that if one had less than 40 percent of the votes in a company and acquired stocks that increased the amount of holdings to 40 percent or more, one was obligated to leave a public offer to buy further stocks of the company within 4 weeks. The offer to buy stocks also includes subscription of stocks as well as conversion or other type of acquisitions that increase the holdings of shares (OMXS, 2005). Shareholders, who already had 40 percent of the stocks of a company, when the new regulations took effect, were not comprised by this law if they were to buy more stocks and increase their assets (OMXS, 2005).

Synergy

According to Campbell and Goold (1998, p. 133), synergy “refers to the ability of two or more units or companies to generate greater value working together than they could working apart”. The attention is to give the acquiring firm gains in two sources: (1) to improve the operating efficiency based on economies of scale or scope; and (2) the sharing of one or more skills (Harrison and St. John, 1994). As synergies are directly related with value creation in an M&A, they are critical to be achieved as soon as possible after the integration of the two firms. It is highly important that the integration of the businesses has been successful and efficient since the synergies derive from the collaboration of the two firms (Hitt, 2001). For managers, synergies exist when they find ways for the two companies together to create more value than the sum value they would have created as separate businesses. As for shareholders, the synergies exist when their financial results from the combined firm are greater than what they would have obtained through their independent portfolio diversification (Weston, 2001). Having said this, firms must take into consideration that mergers and acquisitions does not always create the greatest value. They must examine the acquisition activity in relation to the value that could be created through another strategy. Even in the abnormal cases where the acquiring firm does not pay a premium, synergies are difficult to achieve. So, when firms pay a premium, often a very high one, the creation of synergies must be great in order to create economic value (Hitt, 2001).

Synergy foundations

According to Hitt (2001), there are four foundations for the creation of synergies. These are (1) strategic fit, (2) organizational fit, (3) managerial fit, and (4) value creation. Although this is four independent foundations, it is the combination and existence of these that will create synergies in the combined firm. Strategic fit « …refers to the effective matching of strategic organizational capabilities. » (Harrison and St. John, 1994, p.180). In order to create synergies that generate competitive advantages and improvement of shareholder capital, the joint firm needs to exist of a combination of firms or businesses that are strong and/ or weak in different business activities. If this is not the case, the new firm will be provided with the same capabilities (or lack of capabilities) that the separate firms had, while the scale of the strengths or weaknesses will be greater (Hitt, 2001). The second foundation, organizational fit, arises when the two firms’ management processes, systems, cultures and structures are fairly alike (Harrison and St. John, 1994). This means that the firms should have characters that are compatible. The importance of this foundation arises since, as mentioned before, synergies can not exist if the firms do not integrate and the lack of organizational fit oppresses and in some cases even prevent the integration of the two businesses. (Hitt, 2001).

Premium

The investment value of a target firm is its value to a specific buyer. It is to recognize the buyer’s attributes and the synergies and other integrative benefits that can be achieved through the acquisition. This value will be different to each potential buyer because of the different synergies that each can achieve through the acquisition. It is important for the well-informed buyer and seller to determine these synergies in advance so that they can negotiate with this knowledge (Clemente and Greenspan, 1998). The increase in investment value over the company’s fair market value, which is the price at which both buyer and seller agree to do business, is referred to as the control premium. But this term is seen to be misleading. Although the typical buyer does acquire control of the target firm through the acquisition, the premium that is paid is often to achieve the synergies that the combination of the two firms will create (Clemente & Greenspan, 1998) Premiums paid are based on competitive factors, consolidation trends, economies of scale, and buyer and seller motivation. These are facts that again underline the need to carefully understand value and industry trends before negotiations begin (Spilka, 2005). As stated earlier in this thesis, the premium is calculated by taking the price paid minus the market value of the target firm. In order to work out this calculation, the stock price for the target firm is needed. Usually the stock price that is listed one business day before the bid is used. But in some cases an average of the stock price during 10, 22 or 30 days before the bid is calculated and that value is used instead for comparison with the price paid (Affärsdata, 2005).

Valuation risk

Valuation involves translating the expected synergies, for example reduced cost or increase in market share into increased future earnings and cash flows for the firms. Valuation is not a precise science since it is difficult to forecast the expected benefits. Due to this fact, the bidder is exposed to valuation risk. When there is a high valuation risk, the acquirer may pay too much for the acquisition. In other words, the acquisition premium increases due to the valuation risk (Warner, 2002). The method of paying for the acquisition can decrease the effects of valuation-risk. If the purchase is financed with a share-for-share exchange, any future loss due to errors in valuation will be shared with the stockholders. However, on the other hand, if the acquisition is financed by cash, the bidder is alone with all losses. The choice of method is also influenced by tax concerns and the bidder’s financial structure policy (Warner, 2002).

Table of contents :

• 1 Introduction
  • 1.1 Background
  • 1.2 Problem statement
  • 1.3 Purpose
  • 1.4 Delimitations
  • 1.5 Basic method
  • 1.6 Literature study
• 2 Frame of Reference
  • 2.1 Market Efficiency
  • 2.2 Bull- and bear markets
  • 2.3 Methods of acquisition
    • 2.3.1 Merger or Consolidation
    • 2.3.2 Acquisition of Stock
    • 2.3.3 Acquisition of Assets
    • 2.3.4 Classifications of acquisitions
  • 2.4 Synergy
    • 2.4.1 Synergy foundations
    • 2.4.2 Premium
    • 2.4.3 Financing the transaction
  • 2.5 Results from previous research
• 3 Method
  • 3.1 Methodological approach
    • 3.1.1 Primary and secondary data
    • 3.1.2 Induction, deduction, and abduction
  • 3.2 Mode of procedure
    • 3.2.1 Population
    • 3.2.2 Data selection
    • 3.2.3 Data collection
  • 3.3 Statistical method
    • 3.3.1 Multiple regression analysis and autocorrelation
    • 3.3.2 Simple regression analysis
  • 3.4 Reliability and Validity
• 4 Empirical findings and analysis
  • 4.1 Number of bids and the OMXS index
    • 4.1.1 Autocorrelation
    • 4.1.2 Simple regression analysis
    • 4.1.3 Analysis
  • 4.2 Acquisition premiums and the OMXS index
    • 4.2.1 Analysis
  • 4.3 Means of payment and the OMXS index
    • 4.3.1 Analysis
• 5 Conclusion
  • 5.1 Final conclusion
  • 5.2 Authors’ reflections
  • 5.3 Further studies
• List of References

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Acquisitions & Market Performance A study of the relation of takeover bids, premiums, and financing methods to the OMXS index