During the Second World War, from 1940 to 1941, mainland Britain was subjected to intense attacks by Nazi Germany. London, the heart of Britain, could not escape the prolonged bombing that lasted for a total of eight months. At that time, Prime Minister Winston Churchill regularly held social gatherings in the Pinafore restaurant at the Savoy Hotel, refusing the hotel management's advice to evacuate and continuing the meetings. Subsequently, the Savoy Hotel became a symbol of Churchill's steadfast will to maintain composure despite the wartime situation.
The Savoy Hotel has made a significant mark not only in political and wartime history but also in the history of capital markets. After the war, when property values soared in Britain during the 1950s, it became prey for hostile mergers and acquisitions (M&A). When property mogul Charles Clore attempted to acquire the Savoy Hotel Group and convert its subsidiary, the Berkeley Hotel, into commercial offices, the Savoy Hotel's board devised a clever strategy. They chose to sell the core asset, the Berkeley Hotel, to a third party while leasing it back for 50 years. The Savoy Hotel Group included a clause in this lease contract that stated, "The Berkeley Hotel must be operated solely for hotel purposes." This tactic was designed to lock in the core value of the asset and render acquisition attempts meaningless.
Clore's attempt to swallow the Savoy Hotel failed, but this incident is recorded as the beginning of "modern" hostile mergers and acquisitions, significantly influencing British corporate law. During the management rights dispute, the Ministry of Commerce directly investigated whether the Savoy Hotel's board could legally sell the Berkeley Hotel without consulting shareholders. Subsequently, a self-regulating body called the City Panel on Takeovers and Mergers was created to resolve M&A disputes.
◇ "I'll make a tender offer at $28; if you don't like it, you can take junk bonds instead."
In this way, hostile M&A has a rich history of over 70 years. Beginning with the Savoy Hotel incident, the form of hostile M&A through tender offers sprouted in the United States during the 1960s, and in the 1970s, the famous acquisition of battery manufacturer ESB by Canadian Inco took place. When the chairman of Inco attempted an aggressive M&A by offering $28 per share, the management of ESB strongly resisted, and the entrance of United Technologies as a competitor drove the acquisition price up sharply from $157 million to $234 million.
In the English-speaking world, the history of hostile M&A is deep, and as such, the methods and tactics of attack and defense are systematized, with countless related laws and precedents.
One of the older tactics in hostile M&A is known as "Saturday Night Specials." This name originates from the fact that it is executed unexpectedly over the weekend. By suddenly proposing a tender offer on a weekend, it denies the company's management and board time to respond. Saturday Night Specials were utilized in the United States during the 1970s; however, they disappeared from history as the response period for tender offer proposals was extended to a minimum of 20 business days.
The "two-step tender offer" tactic involves initially purchasing a limited number of shares at a high price and then buying the remaining shares at a lower price. From the shareholders' perspective, if they do not sell their shares at a high price in the first step, they may have to sell them at a bargain price in the second step, compelling them to consider early sales.
The two-step tender offer became famous during the 1985 management rights dispute of the American company Unocal (now Chevron). Unocal was the parent company of California Union Oil Company. At that time, Mesa Petroleum, which held 13% of Unocal shares, announced its intention to make a tender offer for 37% of the shares held by other shareholders. They would make a tender offer at $54 per share in the first step, but for shareholders who did not comply, they would provide junk bonds worth $54 instead of cash.
Such hostile M&A methods are allowed in most regions of the United States today, but they are not applicable in South Korea. According to our Capital Markets Act, the entity making the tender offer must clearly disclose the price, quantity, duration, etc., and can change the conditions, such as raising the price, during the tender offer period. However, lowering the price is not permitted.
◇ MBK's tender offer for Korea Zinc: similar to the 'toehold' strategy?
Additionally, tactics such as 'toehold', 'bear hug', and 'dawn raid' are methods that are also permitted domestically. Among these, the toehold strategy is particularly similar in purpose to the strategy used by MBK Partners and Youngpoong in the recent Korea Zinc management rights dispute.
A toehold is a strategy of securing a portion of the target company's equity in advance of an official acquisition proposal. It originally means securing less than 5% of equity to avoid disclosure obligations. While it cannot be considered a typical case, MBK Partners entered into a shareholder agreement with Youngpoong ahead of the tender offer for Korea Zinc shares, agreeing to jointly exercise voting rights and receiving a call option to acquire half of Youngpoong's shares. By securing equity in advance, a favorable position for securing management rights can be established.
A bear hug is a strategy in which the acquirer directly delivers a tender offer to the target company, pressuring the board to disclose it to shareholders. By proposing a significantly higher acquisition price than the market price, this strategy takes advantage of the fact that shareholders have no reason to refuse. In other words, by sending the message, "If you don't quickly accept my offer, I'll go directly to the shareholders,” it saves time and cost associated with hostile M&A. A representative example is when Carl Icahn and Warren Lichtenstein sent a letter to KT&G's board in 2006 proposing to buy shares at $60 each.
A dawn raid is a strategy of purchasing shares in large quantities as soon as the stock market opens. While it has the advantage of not allowing the existing management time to prepare a response, there is a limitation that during this process, the stock price may skyrocket, leading to significantly higher costs than initially planned.
◇ High costs and falling stock prices… the limitations of hostile M&A
However, hostile M&A has a critical weakness. According to a 2022 study by Takeshi Evina and others, hostile M&A incurs additional costs in legal responses, persuading shareholders, and resolving conflicts with employees of the target company compared to friendly M&A. If additional costs exceed expectations, the likelihood of hostile M&A being delayed or canceled increases significantly.
Costs for hostile M&A also rise when market uncertainties are high. The greater the uncertainty, the more significant the synergy effects after the merger become; in the case of hostile M&A, the costs to achieve synergies are not negligible. This is because the target company may resist strongly, and competitors may emerge during the acquisition attempt, potentially driving prices even higher.
Additionally, research shows that during hostile M&A, while the stock prices of target companies tend to rise sharply, those of the acquirer tend to fall. According to a 2008 study by Marina Martinova, the average excess return of companies that led hostile M&A from the 1960s to the 1990s at the announcement time was negative (-) 5 to -3%. In contrast, the average excess return rate at the announcement time for the companies they acquired was very high at 20% to 30%.
This means that choosing hostile M&A can result in the acquiring company suffering losses in stock prices for some time, while the target company benefits. However, when selecting acquisition targets within the same industry, the acquiring company's stock prices have been shown to remain relatively stable. For instance, acquiring another IT company through a hostile M&A tends to lead to less price decline compared to acquiring a shipping company.
Furthermore, hostile acquisitions often occur through leveraged buyouts (LBOs). It is common to mobilize significant debt to secure acquisition funding. It is also important to note that hostile M&A is not always conducted based on rational judgment. Randal Mock, Andrei Shleifer, and others noted in a 1990 study that "hostile M&A is often driven by the excessive confidence (vanity) of the acquirer," and such decision-making carries a high risk of overvaluing the target company's value, leading to inefficient acquisitions.