Business Daily (Nairobi)
Cathy Mputhia
6 May 2008
opinion
In what would have been one of the largest take-overs of all time, software manufacturing giant Microsoft Corporation, offered to buy Internet company, Yahoo Inc. for $47.5 billion. The target's board rejected this amount.
The Microsoft bid was unsolicited and driven by the need of the bidder to upgrade its unprofitable Internet division.
Having failed in its bid, analysts expect the bidder to approach other Internet companies such as AOL and Facebook.
Recently in Kenya, CFC and Stanbic Bank concluded a merger that will see both banks expand their capacity. The reasons behind a merger/ acquisition/ take-over are varied and are common corporate finance strategies.
A take-over bid may be initiated with the consent of the target's board, commonly referred to as a friendly bid. A hostile one occurs when a company attempts to buy out another with or without the management's consent.
This type can only occur through publicly traded shares as the acquirer has to bypass the board of directors and purchase the shares from other sources. Such a strategy would be subject to regulation by the Capital Markets Authority.
One of the most common reasons for mergers or acquisitions would be the need to expand capacity. For example in the Microsoft-Yahoo proposed take-over, the main drive was the bidder trying to upgrade its unprofitable division.
Cutting production and other costs could also initiate take-overs especially in the manufacturing industry. A vertical merger, where two firms at different stages of production in the production of the same good, merge is usually driven by the need to cut costs.
At times, firms merge so as to penetrate new markets. This is the main driving force behind cross-border mergers. The bidder may wish to benefit from the target's good will such that instead of establishing a separate outfit in the target's jurisdiction, it opts to merge with the already established company.
All mergers and acquisitions are subject to regulatory authority. Consent has to be given by the Monopolies Commission as well as the industry regulatory authority if required. For insurance companies and banks, the relevant regulatory authorities must give approval.
If a company is listed, then mergers/take-overs are subject to CMA regulations on take-overs.
The role of the legal advisor in a take-over is paramount and includes drafting all the necessary documentation; including confidentiality agreements and any share purchase agreements. The expert also conducts a due diligence to ascertain that the target is unencumbered. Finally, the legal advisor is responsible for all regulatory approvals.
In the US, a number of take-over strategies are employed and the target's board also employs a number of resistance strategies. At times institutional shareholders in a target company initiate take-over bids in an effort to enforce good corporate governance. It usually results in the forced exit of current management and replacement by the bidder's team.
Mputhia is an advocate of the High Court of Kenya.
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