Student help center: Acquisition/Merger strategy Choice of the acquisition of Teleflex in a vertical integration

Part IV

Acquisition/Merger strategy

Choice of the acquisition of Teleflex in a vertical integration

Airgas seeks to expand its specialty gas segment, specifically in the healthcare area. Airgas originally considered two companies which would help it achieve this goal. It originally considered: Invacare, a direct competitor, and Teleflex, which is not a direct competitor. Teleflex is a company downstream in the value chain. As an example, a synergy of the combination would be that Airgas and Teleflex can package their products together in the Anesthesiology segment therefore increasing revenues and providing a better and more complete service for customers. Otherwise, Airgas would have been a supplier to Teleflex and there would be no synergies for the customer base.

The acquisition of Teleflex through vertical integration appears to offer a lower potential risk from anti-trust action than the acquisition of Invacare through a horizontal integration. According to an analysis using the HHI model, the Department of Justice

( DOJ) and theFederalTrade Commission( FTC) would likely challenge an acquisition of the competitor, Invacare (see Exhibit x). Fortunately, there are similarities in Invacare and Teleflex business. Although Teleflex is not considered a direct competitor of Airgas, the acquiring Teleflex would allow Airgas to benefit from the synergies of the R&D investments of Teleflex, and further concentrate in the healthcare segment. In addition, a vertical integration will most likely avoid the costly and time consuming litigation of an anti-trust suit.

The Acquisition of Teleflex

The range of the Teleflex valuation is from $68.36 to $72.44, and is a starting point to determine an offer price. The Best Alternative to a Negotiated Agreement (BATNA) defines the reservation price, and is the maximum amount that Airgas will pay for Teleflex, and in this deal, corresponds to the high end of the valuation range, $72.44.

If the deal to acquire Teleflex requires the payment of a price in excess of the reservation price, Airgas is prepared to walk away from the deal, However since the Airgas continues to revise its estimates on the deal, and it may decide to revise the BATNA, based on new information that revises the valuation upward.

OpeningOffer (Asking Price)

Initially, Airgas has decided on a medium range offer price rangebased on the following rationale:

· Airgas is not impatient and will wait to make the deal happen

· There are no known competitors for Teleflex, however some may emerge

· Teleflex is not a distressed company, therefore it will not accept a “bargain basement” price

· A bid higher than a low bid may win, but a high price may not be necessary to win

· A bid lower than a high bid may save value for Airgas, as the bidder

· Directors may be inclined to accept the medium bid over a low bid

· There is less of a chance that Teleflex, the target, may restructure

Under the investment opportunity hypothesis, Teleflex offers attractive investment opportunity to propel Airgas into further growth in the healthcare industry (textbook). P805 Therefore, this further justifies a medium range price offered.

Friendly Takeover Scenario

Once the CEO’s meet and Peter Maclausand of Airgas gives the intial pitch.and the CEO of Teleflex is supportive,Airgas will issue the first round documents, and the companies will begin to share information. Airgas will continue the due diligence process for this deal in real-time (textbook).

Tender Offers

Teleflex’s current share price (11.6.10) is $55.61, and the market capitalization is $2,224.4M. In the first tender offer, Airgas will offer $68.36/share to be paid as 25% in cash and 75% in stock,will be delivered to the Teleflex board of directors and shareholders. This offer price represents a total offer of $2,734.4M. The acquisition is expected to be immediately accretive to Teleflex’s earning per share on a GAAP and cash basis.If this first offer is not accepted, Airgas is prepared to increase the tender offer price to $70.38/share and a total offer of $2,815.2M.

Each tender offer must remain open for 20 days under 14e-1(a) of the Williams Act. However, if the management, board of directors, and shareholders of Teleflex are supportive of the deal, Airgas will encourage fast approval of this deal. Fast action will minimize the effects of other potential buyers and arbitrageurs who may bid up the price of the stock. As an example, Airgas will be willing to increase the first tender offer price to $70.38/share from $68.36, if the deal can be approved on the 21^st day after the offer is opened, all golden parachutes will be revoked, and no other anti-takeover provisions will be implemented. Airgas is willing to pay a premium for speed and closure of this deal.

P692 means of exit

Bargain from ranges, not a point value

Hostile takeover

Takeover tactics p831

However, based on Airgas’ extensive experience having done 400 acquisitions, the company expects that Teleflex may reject a friendly takeover believing that the shareholders may receive higher acquisition premiums in a hostile deal than under a friendly negotiation (textbook). If a friendly takeover is rejected in a “just say no” defense, the CEO of Teleflex must ground his decision in a belief that the acquisition is not in the best interests of shareholders (p690). Airgas expects that Teleflex will claim: the price offered is too low, the company is actually worth much more, the stockholders should hold out for the higher offer price, and that, in fact, Airgas is taking advantage of the economic downturn and offering a lower price than they would offer in better economic times.

If Teleflex’s CEO rejects an initial Airgas tender offer and subsequent tender offers, Airgas will send a letter to Teleflex explaining that it has no choice but to initiate a hostile takeover (See Appendix X).

Any current or future tender offers will be submitted to the s’holders in a letter.

Bear hug to board of directors – tender offer contingent on removal of poison pill

Airgas will then begin to buy up Teleflex shares in the open market. Once it has purchased 5%, the company must file a form 13-d with the SEC within the 10 day timeframe, signaling to the market that Airgas is acquiring control. Filing the 13-d Days that follow, buys up more The purposes of this buy up is to gain voting power as a shareholder, place directors on the board who favor the acquisition and remove others who oppose it, and ultimately pass a vote to approve the takeover.

Teleflex Bylaws

The process of gaining control of the board is defined by Teleflex’s bylaws. The bylaws can be amended but only under certain conditions, Since Teleflex is incorporated in Delaware, only shareholders get to amend the bylaws (textbook p711).

Currently, there are 11 directors on the board. There can be as few as 6 or as many as 15 according to the company bylaws. Directors may be removed at anytime for cause by a majority vote of the shareholders at any meeting, even a meeting convened especially for that purpose. (bylaws). However, Teleflex has a staggered board which means only 1/3^rd of the board comes up for election per year (bylaws).

P712 Asa shareholders, Airgas can intitate a suit for neglect of fiduciary duties resulting in economic harm. Not to vote for the acquisition deprives the shareholders from realizing a significant increase in their shareholder value.

Get elected directors who are supportive of acquisition

Current number of directors According to the Teleflex website, in 2010, there are currently 11 directors on the Board, there can be as few as 6, and as many as 15 according to the bylaws

Mandatory retirement at 70, and 3 of the directors are of retirement age.

Replace enough to get a majority – some of these directors may favor the acquisition. However, Airgas may have to have 6 directors who will vote for the acquisition.

The second prong of the hostile takeover is the purchase of Teleflex shares in the open market. Once Airgas has purchased 5% of the outstanding Teleflex stock, the company must file a form 13d with the SEC.

A third prong is to level charges of neglect of fiduciary duty against the board of directors who have a duty of loyalty and a duty of care not to deprive the shareholders of the value from the acquisition.

Anti-Takeover Measures p833+

Staggered Board/Poison Pill

Airgas assumes that Teleflex will use a combination of defensive anti-takeover devices including a staggered board/poison pill defense. Teleflex has a staggered board which means only 1/3 of its directors come up for election each year. Teleflex will combine its staggered board, with the poison pill p850: the pill blocks any stock acquisition after the triggering event (the purchase of 10% of the company’s stock by Airgas), Airgas becomes an “interested person” and the staggered board makes it necessary to go thru 2 proxy fights in order to gain control and redeem the pill. However according to the SEC, a company will adopted the poison pill, with the intention of not adopting it.

Leveraged Recapitailization/Poison Put

A greater threat is from a leveraged recapitalization combined with a poison put: If Teleflex mounted a leveraged recap, it would borrow heavily, pay a large one-time dividend to its shareholders, leaving a more highly leveraged firm with a potential higher return on equity. The immediate result is a high dividend payout to shareholders, a lower stock price, and a high amount of debt that would have to be assumed by Airgas, as the acquiring company. If Teleflex implemented a poison put, that may require an immediate payment of the debt. P847

Supermajority vote - no majority vote

Fair price – check state of DE

Cumulative voting for directors

Golden parachutes are granted by the bod and do not require a shareholder vote – no negative effect on

Shareholder right to obtain common shares at a nominal cost at a triggering event (

· Acquiring 10% of stock, without prior consent of board, Airgas becomes and “interested person” p838

Pac Man defense – probably not feasible

Reactive Defenses

The following types of litigation may be used by Teleflex as anti-takeover defenses:

· Violation of section 13(d) of the Williams Act if Airgas did not promptly disclose an interest greater than 5% to the SEC

· Failure to comply with tender offer disclosure requirements Filing of form 14e-1e – keeping tender offer open for 20 days and what plans Airgas has for Teleflex

· Airgas does not anticipate any anti-trust litigation since this is a vertical integration with Teleflex

Arbitrageur – difference between current share price and the offer price by the bidder .

P804

· If no, and buyer still wants to proceed

o Appeal directly to the BOD, “bear hug”

o Hostile tender offer directly to s/holders

· If positive, more meeting to hash out a plan

o Letter of intent

First round documents

· Term sheet

· Exclusivity agreement

· Adisoryengaqgement letter

· Confidentiality agreement

· Standstill agreement

· Letter of intent

Concept proposal

Airgas is a company that has built its growth on acquisitions: the company is formed on the integration of 400 companies since 1982. Most of the prior acquisitions have been horizontal integrations with small independent gas companies. This acquisition with Teleflex

In this case,the members of the corporate development team have gained a mandate from the CEO, won the approval of the Airgas Board of Directors, informed the public of the proposed deal, and have had preliminary discussion with the employees of the target company chpt 35 employees?

Disclosure – in order to have a vote of the s/holders, for the approval of the deal, must give then a merger prospectus & a proxyvoting form

Date for vote and meeting – set and advertised months before

Documenting the Deal

Merger proxy and prospectus – p770

Proxy statement - disclose the deal toinvestors in sufficient detail to enable them to vote on the thetxn

Communication to the public

Disclose terms, history, and effects of the merger

Proxy – document empowering someone to act on your behalf

Chpt 30

ZOPA process: p778

Zone of Potential Acceptance

________________

____ ____ ____ ____

Chpt 6 strategy p780

Value the target – p780

PRICE P780

Opening offer price and reservation price

BATNA and Offer Price

BATNA – defines reservation price (for buyer, the maximum price that the buyer will pay); reservation price, for the seller, the minimum the seller will accept

BATNA – one end of the negotiation range

Determine open offer (asking price) and reservation price

Low price

Gains for bidder

May attract other suitors

Target co may restructure (Cadbury/Hershey white chocolate knight)

Longer contest

Good strategy: for patient bidder or when small chance of other bidders

High price

Bear hug

Kills off all resistance (Southwest)

Deters competitors

Pressures directors to support the bid

High bid strategy probably wins

Gives value to the target s/holders that may have gone to the bidder in a lower bid

Good strategy: for impatient bidder or when little chance of other competitors

Airgas may decide on a medium (neither low nor high) offer price based on the following reasons:

· Airgas is not impatient and will wait to make the deal happen

· There are no known competitors for Teleflex, however some may emerge

· Teleflex is not a distressed company, therefore it will not accept a “bargain basement” price

· A bid higher than a low bid may win, but a high price may not be necessary to win

· A bid lower than a high bid may save value for Airgas, as the bidder

· Directors may be inclined to accept the medium bid over a low bid

· There is less of a chance that Teleflex, the target, may restructure

Identify other players p781

Are there other suitors

Is the company run by an entrepreneur who founded the company

Is the Board objective or friends of the CEO

Trade-offs –

Motivations

How motivated the seller and buyer are to do a deal

Role playing – first I’ll do this, then they will respond with that

Impact of bargaining costs

Williams amendment – p727 also talks about tender offers

Chpt 33 takeover attack & defense

Take-over attack

· Open Market Purchase: After purchasing up to 5% of the stock of Teleflex, the target,Airgas must file with the SEC on form 13(d)..This is required under the Williams amendment to the Securities Exchange Act of 1934 p727 (textbook). This will alert all who are not already aware of the potential take-over; it will be an early warning to the target, Teleflex, its shareholders, and any competing bidders that Airgas intends engage in a takeover contest. In the 10 days that follow, Airgas will aggressively acquire more shares. The goal is to purchase the enough shares to gain control, and also to have influence at meetings.

· Annual meeting: propose nominees, set time for meetings, pass proposals to exclude certain people from the board.

· Tender offer to s/holders: Based on the valuation price, make tender offer to s/holders. Go with medium price. If this first offer is not accepted, Airgas will make additional offers. These offers may be accepted or rejected.

· Attend annual meeting and put forward nominees that favor the takeover; directors will vote on the nominees

· There do not appear to be standardized elections of directors. However, a director can only be let go for cause

· If a majority of the directors oppose the take-over bid, Airgas will move to remove them and replace them with directors in favor of the acquisition. There are currently 11 directors on the Teleflex board of directors, according to the Teleflex website. There are not standardized elections for the directors. According to the Teleflex bylaws, a director can be removed, but only for cause. Cause may be holding the target bod personally responsible for failing to execute their fiduciary responsibilities as directors, duty of loyalty and duty of care p885

· Once Airgas has majority representation (at lkeast 6 members who favor the approval of the deal) on the BOD, they can put before the board proposals to;

o Change the date of the annual meeting

o Prohibit certain directors from being on the bpard, if they totally oppose the deal, and will cause others to oppose it

· Shareholder litigation

TACTICS OF TAKEOVER ATTACK P831

TACTICS OF TAKEOVER DEFENSE P833

Most large company have antitakeover defenses

EVNT – expected value of not tendering

Antitakeover defenses:

Golden parachute

Poison pill

Shareholders’ rights plan – official name for poison pill

http://en.wikipedia.org/wiki/Shareholder_rights_plan

SWOT Analysis – Teleflex

Strengths Well-established company in the healthcare segment Strong margins, according to the Motley Fool High yield dividend payer, 10.26.10	Weaknesses Emphasis in a narrowly defined business segment Outstanding Litigation
Opportunities Healthcare industry has high growth expectations now and in the future	Threats Litigation-prone industry – medical devices

Poison pill

Inform Teleflex of intention to acquire

Due diligence

Tender offer: once the valuation is done, offer a reasonable % above the valuation price (this is not the maximum price that Airgas is willing to pay), be prepared to have to sweeten the deal, if this is not accepted be prepared with a takeover strategy

Send correspondence to s/holders explaining the advantages of the deal

Board could pose the following objections:

· Unwise to agree to a deal in an economic downturn

· Price offered is not enough

· Airgas, the buyer, is taking advantage of Teleflex’s shareholders by offering a price that ia too low

If not accepted, implement take-over strategy

Takeover strategy

Buy stock – up to 5%, file with SEC form 13(d), then continue to buy stock to increase influence as stockholders

Plan to attend annual meeting – Last to be held on April 30, 2010The 2011 annual meeting has not yet been announced.

Historically held?

Can only be called by the board of directors

If hostile takeover, board of directors may hold at another time to take Airgas offguard

· Date of annual meeting is set by the Board of Directors

· Stockholders cannot call a special meeting

http://www.teleflex.com/investor/faq/index.html

Can the annual meeting be scheduled sooner

Air Products had a bylaw passed to schedule an annual meeting, went before courts, and was allowed to stand

Challenge directors who can be replaced for cause

What does cause mean, fail fiduciary responsibility

P712 As shareholders, we can intitate a suit for neglect of fiduciary duties resulting in economic harm. Not to vote for the acquisition deprives the shareholders from realizing a significant increase in their shareholder value.

Get elected directors who are supportive of acquisition

Current number of directors According to the Teleflex website, in 2010, there are currently 11 directors on the Board

Replace enough to get a majority – some of these directors may favor the acquisition. However, Airgas may have to have 6 directors who will vote for the acquisition.

Other suitors

INTEGRATION P893

AUTONOMY, INTEGRATION, CONTROL address these

AUTONOMY - R&D

Overlap in what co do, business segments

Airgas – entrepreneurial, yet local

Teleflex – R%D, medical breakthrus p894

P 896 – good diagram

Integration

Since Airgas has done 400 acquisitions, it has a permanent acquisition leader in place who will use Project Management software to track the process. Airgas will use a Confederation integration strategy framework, granting Teleflex high autonomy, but subject to high controls.The proposed plan will include the following changes:

· New organizational chart will reflect C-level changes and the addition of Chief R&D Officer – to be done immediately

· The technology platform will use enterprise-wide SAP software: SAP Financials and HR will be implemented first – this will be over several years

· Communication with employees to allay fears - immediately

o In the past Airgas has retained a high number of employees after an acquisition

o In the case of a vertical integration, there may be even a higher % retained

o Any employee who is terminated due to redundancy will be gien a generous severance package and outplacement services

· Retention of specific talent - ongoing

o Airgas expects to retain all of the R&D staff; there will be specific communication with this group

· Work space – both companies are based in PA, there may be consolidation of some departments, but initially the companies will operate as usual

· Supply chain changes to bundle Airgas specialty gas products with anesthesiology medical devices - immediately

INTEGRATION P893

P900 implementation of integration

· Appt of integration leader – acquisitions are such a part of Airgas; culture that they may have a permanent integration leader

· Communication with employees, to allay fears

o In the past, Airgas has retained many employees fro an acquisition

o In this case there may be an even higher % of employees who remain

· Deadlines and work plans use project mgtsw to track tasks for target

· Retention of talent –key employees, and knowledge base they carry

o R&D staff

· Production, logistics, supply chain

· Intangible capital

· Work space

· MIS

Integration strategy

Confederation p894

New org chart

New corp identities are announced in the meida

Technology platforms

Cost savings and layoffs

Time frame – days or months

Speed, determination,good communication

Speed & determination

Communication

Risks – chpt 23 – Risk p640

· The initial tender offer of a medium price will not be accepted, and additional tender offers will be made with higher prices

o Loss of Airgas value

· Teleflex will anticipate the takeover and implement anti-takeover measures

· Teleflex will restructure

Risks p894

Drop in Airgas Share Price:

Retention of Employees{ According to the Airgas annual report, Airgas tends to retain as many employees from its acquisitions as possible. In the case of Teleflex, Airgas considers the retention of the R&D staff to be of vital importance. Airgas has no R&D groups, and it is part of its strategic plan to offer medical device products as well as the gas that runs them.

Culture

Litigation, lawsuits -look up in notes of ar

Risks to our assumptions – revenue synergies

Environmental issues

Identify risks and then assessing the adequacy of risk control systems

Technology – Airgas is implementing an enterprise wide SAP IT system, and there is risk that the Teleflex IT system will not interface smoothly. Initially, only the financial systems will be integrated followed by the other systems

Idea – use new sap system, TQM, buyer’s policies and procedures

Lawsuits – Teleflex Product recall – humidifier, company moved quicly and acknowledged blame, and ordered a recall, no undue harsh media attention, due to a defective ventilator tube, could cause death, there may be lawsuit fallout, but Airgas feels there is insurance coverage to cover these claims

Law360 Teleflex was has liability for a factory it sold in 1990 that had environmental concerns, court going after deep pockets, Teleflex

Various patent lawsuits, no liability, a dispute between US and foreign patent alw

Conclusions

References

Teleflex Stock price, market cap, total shares

http://www.advfn.com/p.php?pid=financials&symbol=NYSE%3ATFX

CEO’s philosophy of acquisitions

http://www.sbnonline.com/National/Article.aspx?CID=11303

Acquisitions: PPT

http://files.shareholder.com/downloads/ARG/1034607248x0x339057/b0ac68d2-acb0-4302-a89d-0abdad70d756/07_-_Acquisition_Strategy.pdf

Executive Overview Analyst Meeting Dec 2009

http://files.shareholder.com/downloads/ARG/1034607248x0x339038/461b5e12-f93f-418c-9746-5c0966025ed1/02_-_Executive_Overview.pdf