11. Takeover Defences Flashcards
1
Q
Role of The BDs: Learning Objs
A
- Outline role of BoD
- Explain the non-frustration principle.
- Provide a rational for non-frustration principle.
2
Q
Role of The BDs: Takeover Code (City Code)
A
- Provides rules governing takeovers of UK PLCs
- Ensures shareholders in target firms are treated fairly and are not denied an opportunity to decide on the merits of an offer.
- All shareholders are given the same information.
- Not favourable deals for any shareholders
- The board must obtain independent advice on a bid and make advice available to shareholders.
- Enforced by Panel on Takeovers and Mergers (Statutory Body)
3
Q
Role of The BDs: Friendly Takeover
A
- Target’s board recommends bid to its shareholders
4
Q
Role of The BDs: Hostile Takeovers
A
- Target’s Board recommends shareholders reject a bid and the bidder makes a takeover offer directly to shareholders.
5
Q
Role of The BDs: Non Frustration Principle (MCC)
A
- Efficiency Market for Corporate Control requires shareholders are not frustrated by target’s management from selling their shares.
6
Q
Role of The BDs: Non-Frustration Principle
A
- In Takeover code limits defensive action by target board: persuaders shareholders, lobby, find “white knight”, litigation
7
Q
Role of The BDs: Non-Frustration Principle: What does it pre-suppose?
A
- The MCC does not err in its selection of targets.
- Hostile bid represents a fair price and is beneficial to target and acquiring firm.
8
Q
Role of The BDs: Rationale for Non-Frustration Principle
A
- Kershaw 2007
- Ensures and active Market for Corporate Control that disciplines under-performing managers.
- Takeover defence could be an agency cost (managerial entrenchment)
- Successful defence prevents exploitation of synergies and scale/scope economies.
- However, post-bid takeover defences can occur in the US and are in target shareholders’ interests if used to elicit a new offer.
9
Q
Reasons for Takeover Defences (Ruback, 1987): LO’s
A
- Examine motives for takeover defences being in shareholders interests.
- Examine managerial motives for takeover defences.
- Understand legal distinction between UK and US regarding takeover defence.
10
Q
Reasons for Takeover Defences (Ruback, 1987): Shareholder Interests
A
- Mgrs believe firm has hidden value - managers have private information that stock market cannot value.
- Mgmt in firms with takeover defences do not have to succumb to short-term market pressure.
- Increase offer price: managers use defences to increase offer price
Use defences to create delay to try and create an auction with rival offers.
11
Q
Reasons for Takeover Defences (Ruback, 1987): Managerial Entrenchment
A
- If targets’ management will be removed post-takeover… managers use defences to protect their jobs…
managers use defences because a takeover is a signal of their failure. - Incumbent managers believe they are the best managers of the target firm.
12
Q
Reasons for Takeover Defences (Ruback, 1987): US Pre-Bid Defences
A
- Dual class Recapitalisation
- Staggered board elections
- Poison pill
13
Q
Reasons for Takeover Defences (Ruback, 1987): Post Bit US Defences
A
- Greenmail
- Litigation
- Defensive Restructuring
- Golden Parachutes
- Lobbying
14
Q
Reasons for Takeover Defences (Ruback, 1987): Pre-Bid UK Defences
A
- Pure defences not allowed by business decision (recapitalisation) allowed if primary motivation not defensive.
15
Q
Reasons for Takeover Defences (Ruback, 1987): Post-Bid UK Defences
A
- Litigation
- Defensive restructuring
- Golden parachutes
- Lobbying
16
Q
Pre-Bid Takeover Defences: Dual Class Recapitalisation
A
- Restructure equity of the firm into two classes with different voting rights - change preferred stock for common stock.
- Inside managers can increase their voting power without increasing their equity stake by not participating in the exchange.
- Evidence of negative ARs at announcement of a dual class recapitalisation (Jarrel and Paulson, 1989)
- Firm value positively associated with insiders cash-flow rights and negatively associated with insiders voting rights (Gompers et al 2010)
17
Q
Pre-Bid Takeover Defences: Staggered Board of Director Elections
A
- Directors are classified into groups, with a different group standing for election each year.
- proponents argue it ensures continuity of experience and strategy.
- Critics argue that it makes it difficult for a hostile bigger to gain control of the board, even wot a majority ownership stake.
- Staggered boards associated with a reduction on firm value (Bebchuk and Cohen 2005 // Cohen and Wang 2013,2017)
18
Q
Unitary Board Definition
A
- All directors stand for election each year
19
Q
Pre-Bid Takeover Defences: Poison Pill (Shareholders Rights Plan)
A
- Target shareholders own shares with special rights triggered by a takeover - increases cost of takeover.
- Evidence they do not deter takeovers but associated with takeover premiums (Comment and Schwart, 1995)
- Reduce firm value by 5% upon adoption (Cremers and Ferrell, 2014)
- Increases firm performance in innovative funds (Bhojra et al 2017) protects firms from short-term market pressure detrimental to the firm.
20
Q
Pre-Bid Takeover Defences: Flip-in Definition
A
- Provide for existing target firm from shareholders to purchase additional shares in target firm at a discount.
21
Q
Pre-Bid Takeover Defences: Flip-Over Definition
A
- Provide for target firm shareholders to purchase shares in there newly merged firm at a discount after a successful takeover.
22
Q
Post-Bid Takeover Defences: Target Share Purchasers (Greenmail)
A
- Target firm buys shares from a potential bidder at a premium.
- Often accompanied with a standstill agreement.
- Concern is that greenmail protects under-performing managers.
23
Q
Post-Bid Takeover Defences: Target Share Repurchases Greenmail evidence
A
- Negative announcement returns (-2.57%)
- Positive repurchase premium of 18%
3, Repurchasing firms outperforming similar firms by 16% 17 months later (Peyer, Vermaelen 2005)
- Evidence suggests greenmail is not about managerial entrenchment, managers repurchase when they believe shares are undervalued.
24
Q
Post-Bid Takeover Defences: Litigation
A
- Charges against bidders are filed on grounds of anti-competitive, securities violation, or fraud.
- Delays bid, allowing time for entry for a competing bid.
- Encourages bidder to raise price in return for dropping litigation.
- Might discourage bids for inefficient firms but delay could increase shareholder wealth if an auction is created. (Franks and Harris, 1986)
25
Q
Post-Bid Takeover Defences: Defensive Restructuring (Financial)
A
- Issue new shares and sell to investors that support current management.
- Leveraged recapitalisation (issue debt and purchase equity/pay divided)
- Reduce shareholder wealth (Ruback 1987)
26
Q
Post-Bid Takeover Defences: Asset Restructuring
A
- Divest assets that bidder wants
- Buy assets bidder does not want.
- Restructure firms assets in the same way the bidder intends.
- Evidence they reduce shareholder wealth.
27
Q
Post-Bid Takeover Defences: Golden Parachutes
A
- Compensation to senior execs in the event of a control change.
- Supporters argue they encourage mgrs to accept changes of control - which can be in shareholders’ interests.
28
Q
Post-Bid Takeover Defences: Golden Parachute (What do opponents argue)
A
- They can increase costs of takeover
- Reward managers for failure
- Weaken the disciplinary effect of the market for corporate control.
- Motivate managers to sell out, even if their private information indicates takeover is not in shareholders interests.
29
Q
Post-Bid Takeover Defences: Golden Parachutes Evidence
A
- Bebchuk et al 2014 find firms that adopt GPs… experience negative ARs to stock when they are adopted.
- Associated with higher acquisition premiums
- Overall negative effect on shareholder wealth
30
Q
Post-Bid Takeover Defences: GP Evidence Consistency
A
- GPs weakening incentive effects of MCC
- Providing incentives to support a takeover even if it is not in shareholders’ interests.
31
Q
Summary of Takeover Defences
A
- Different perspectives in the UK and US on the role of takeover defences.
- Takeover defences could diminish the effectiveness of the market for corporate control, entrenching underperforming managers.
- Takeover defences can be used to extract a premium for target firms’ shareholders.
