Corporate Finance (VIII): Mergers and Acquisitions

Introduction A corporate takeover is a transaction that transfers ownership of a firm from one group of investors to another, typically aiming to introduce significant changes in management and operations. The bidder—or raider—seeks to gain control of the target company. Bidders usually exchange cash, equity, or other securities for shares of the target company—or for some portion of its assets. Corporate takeovers can be categorized as follows: Tender offers—direct purchases of shares from shareholders—commonly used to overcome managerial opposition. Such offers may be conditional or unconditional, and restricted or unrestricted: • Conditional: The offer is not binding unless a pre-specified minimum number of shares is accepted and sold (i.e., volume reaches a certain threshold). • Restricted: The bidder is under no obligation to purchase more than a pre-specified number of shares (i.e., the bidder sets an upper limit on the number of shares it will acquire in advance). Note: An “any-or-all” offer is both unconditional and unrestricted. Corporate takeovers have triggered major restructurings across many industries; their social desirability remains a subject of ongoing debate. Takeovers are intellectually fascinating both conceptually and empirically, and constitute a key transaction in the market for corporate control. Stylized Facts (Hirshleifer, 1995) 1. Target company shareholders earn positive abnormal returns upon announcement of a takeover, and receive higher premiums in successful takeovers. 2. Bidder company shareholders, on average, earn zero abnormal returns at announcement—and thus often incur losses. 3. The combined market value of bidder and target companies rises, on average. 4. There is high uncertainty regarding whether a tender offer will succeed or fail. Success probability is positively correlated with the bid premium and the bidder’s initial stake (i.e., toehold). 5. If the target company is ultimately not acquired by any other bidder, the abnormal stock return observed during a failed offer tends to dissipate, on average. 6. Multiple bidders competing for the same target generate higher abnormal returns for the target’s stock. 7. The market’s average reaction to greenmail (i.e., payments made to potential bidders to induce them to abandon hostile takeover attempts) and other defensive measures—including anti-takeover charter amendments, poison pills, and defensive restructurings—is negative. 8. Bidding typically occurs in a few large, discrete jumps. Prior to formal bidding, bidders usually accumulate only a relatively small ownership stake. 9. Takeover premiums tend to be higher when target company management holds a larger equity stake in the target, and when the target’s leverage ratio is higher. 10. Takeover activity occurs in waves and varies significantly across industries and countries. 11. Extensive regulation affects takeover transactions—for example, prohibitions on secret share purchases, restrictions on and disclosure requirements for bidding strategies, and legal support for defensive measures. Nonetheless, corporate takeovers remain highly prevalent—especially in the UK and the US. Motivations for Corporate Takeovers Technical gains: economies of scale, economies of scope (complementary resources), and vertical integration efficiencies.

[Key Points] Acquisition of Listed Companies in Capital Operations

When the term “acquisition of a listed company” comes up, do you think of dramatic corporate warfare stories—such as “barbarians at the gate,” “white knights,” or “poison pills”—featuring alternating strategic maneuvers? In practice, however, public tender offers for listed companies and defensive anti-takeover actions are relatively rare. Nevertheless, the Measures for the Administration of Acquisitions of Listed Companies frequently surfaces in various capital-market activities. During periods when IPO review cycles are long and highly uncertain, achieving asset listing via mergers and acquisitions (M&A) and restructuring of listed companies represents a comparatively swift route. When a listed company issues new shares to acquire assets, the original shareholders of the target assets may thereby become shareholders of the listed company upon completion of the restructuring. Depending on the size and valuation of the target assets, if their financial and operational metrics meet the criteria stipulated in Article 13 of the Measures for the Administration of Material Asset Restructuring of Listed Companies, the transaction may result in a change of control of the listed company—and potentially constitute a backdoor listing (a de facto reverse takeover). From the perspective of the original shareholders of the target assets, they receive newly issued shares of the listed company as consideration, thereby becoming acquirers of the listed company. They must therefore disclose a restructuring report and register it with the China Securities Regulatory Commission (CSRC); additionally, they must file either an acquisition report or a report on changes in equity interests. Even if the transaction fails to meet the thresholds for a material asset restructuring defined in Article 11 of the Measures for the Administration of Material Asset Restructuring of Listed Companies, the original shareholders of the target assets may still be required to file a report on changes in equity interests—depending on the proportion of listed company shares they acquire. Concrete examples include: 1. Lekai New Materials (stock code: 300446) issued new shares in 2022 to acquire assets from Sichuan Aerospace Industry Group Co., Ltd. and others. As a result, the China Aerospace Science and Technology Corporation and its concerted actors increased their shareholding in the listed company from 30.61% to 66.83%, triggering a mandatory tender offer. However, pursuant to Article 63 of the Measures for the Administration of Acquisitions of Listed Companies, the tender offer requirement was waived. Prior to completion of the restructuring, the listed company disclosed a summary of the acquisition report. 2. Boshen Shares (stock code: 002282) issued new shares in 2021 to acquire assets and concurrently raised ancillary financing. The Tiětōu (Jǐnán) Equity Investment Fund Partnership (Limited Partnership) subscribed to the ancillary financing, acquiring over 5% of the listed company’s shares, and accordingly filed a simplified report on changes in equity interests. Issuing new shares to specific investors may also trigger acquisition-related obligations when such issuance causes changes in those investors’ equity interests in the listed company. If the specific investor is already the controlling shareholder, considerations arise regarding whether the issuance triggers a mandatory tender offer—and whether exemption from such an offer is available—requiring proactive planning during transaction design. A concrete example is Angcai High-Tech (stock code: 600207), which conducted a non-public offering of shares in 2021. Prior to the offering, Henan Investment Group Co., Ltd.—the controlling shareholder—held 47.26% of the listed company’s shares. It committed that: (1) if, following the non-public offering, its shareholding percentage increases by no more than 2 percentage points relative to its shareholding level during the twelve months preceding the offering (i.e., post-offering shareholding % − pre-offering shareholding % ≤ 2%), then the shares it subscribes to in the non-public offering shall be locked up for 18 months from the date of issuance completion; and (2) if its shareholding percentage increases by more than 2 percentage points (i.e., post-offering shareholding % − pre-offering shareholding % > 2%), then the subscribed shares shall be locked up for 36 months from the date of issuance completion.

Envestnet Asset Management Acquires 197,464 Shares of Solstice Advanced Materials

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Envestnet Asset Management acquired 197,464 shares of Solstice Advanced Materials valued at $17.5 million in Q2. Solstice reported strong earnings beating expectations and maintained its 2026 EPS guidance.

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