Chapter 11 Flashcards
The market for corporate control
external governance mechanism consisting of a set of potential owners seeking to acquire undervalued firms and earn above-average returns on their investment
- becomes active when a firm’s internal control fails
-less precise than internal governance systems
Need for external mechanism
- address internal corporate failure
- corrects suboptimal performance relative to competitors
- discipline ineffective and opportunities managers
Manne’s thesis
- the lower the stock price to it’s potential, the more attractive the takeover becomes
- rather than removing an executive, the board might decide to sell it to people who can manage assets better
financial synergies
- the logic of a strategic buyer
- the buyer believes that it can increase profits through revenue improvement, cost reduction or vertical integration
diversification + congolomate structure
two businesses whose earnings are uncorrelated can benefit by relying on the capital generated when one business is thriving to help the other when it is struggling. Larger entities have reduced risk profiles
change in ownership + private equity buyer
new owner may have superior access to capital, managerial expertise, and technology
Economics of scale + startegic buyer
the new firm may have increased profits by selling more goods and at a higher volume
Economies of scope
utilizing the marketing and distribution capabilities of a broader product offering –> logic behind a strategic buyer
Human capital and Intellectual property + strategic buyer
new owner may have desire human ideas and capabilities
Empire building (non strategic)
buying mainly for the sake of managing a larger enterprise
Hubris (non startegic)
overconfidence on management that it will be managed more efficiently than its owners
Herding behaviour (non-strategic)
senior managers pursue acquisition because a competitor has purchased an acquisition
Compensation initiatives
only agrees because it stands to receive a large payment upon change in control
CEO receive 29 million in cash and accelerated equity when there is a change in control
Three acquisition process
Merger
Solicited Takeover (friendly and negotiated)
Unsolicited takeover (Hostile)
Acquiror process
Board approval
valuation work in advance
Fairness opinion from an investment bank
Target Process (Merger)
- create legal entity ( a new name)
- exclusive and private negotiation
- negotiation by both management team
- supported by the board and fairness opinion to complete fiduciary responsibilities
- approval of shareholder by a proxy vote
- shareholders of merged companies are offered equal holdings
- small to no premium vs prior market price
- management is combine
- existing shares delisted and replaced with new shares in the combined company
Solicited Takeover
- seller requests bid through a broad and narrow auction process, run by an investment bank
- auction fulfils the boards fiduciary duties
- management negotiated with one or more bidder
- target management receives compensation (golden parachute)
- board accepts and recommends the bid providing the greatest shareholder value
- shareholders vote accept or not
Unsolicited (Hostile)
- bidder makes an offer directly to the shareholders against the wishes of management
- target management and board usually reject bid after evaluating it and may deploy takeover defences - white knight search, poison pills
- target must legally supply bidder with shareholders list so that bidder can mail offer directly to shareholder s
- if successful bidder takes over corporation - delist stocks, corporation usually becomes owned subsidiary, fires management and replaces the board
- unsuccessful, bidder can raise its offer or negotiate higher price and terms to turn the deal friendly
BCE case
director’s fiduciary duty is owed to the corporation as a whole rather than any particular shareholder, other, rejecting revlon
directors have a duty to understand other stakeholders and its interest
affirmed business judgement rule applies to directors
Revlon duties and Unocal case
revlon duties: if a change in control occur then directors must seek highest value for shareholders
Unocal case: when a board takes defensive actions, the actions can not be coercive or designed to preclude a deal
Board duties in take over-process
a) disclose conflicts: common law, statute and MBO case
b) corporate opportunities: Canaro and Peso silver cases: opportunities are owned by the corporation but fact-specific
c) Duty to confidentiality: keep secrets of the corporation: insider trading
d) duty to disclose: don’t keep secrets from the corporation
when is a takeover hostile?
- if the board rejects it and the person keeps pursuing it
- if the bidder makes an offer without informing the board prior
- changes in control can result from hostile takeover or proxy contests
- major issue for the bidder is lack of inside information to accurately value the target
why would managers reject takeover?
- increase purchase price (shareholder’s interest theory)
- ensure their longevity with the firm (management entrenchment theory)
Takeovers may
- minimize cost
- transfer control to those who can manage it better
when does acquisition become a threat?
- weak financial performance
- stock has been underperforming the peer group for 2 years
- managers who don’t hold any stock in the firm
- underutilized assets
- low debt levels
- high merger industry
why don’t we see HT as often now
- damage to reputation due to public fights
- more expensive (premium costs)
- too many effective defenses in place
- Ht bidder may always loose to a white night bidder found by the target
- post-deal integration is a big problem
- lack of inside information and lack of due-diligence
Value of Takeover
US takeover has shown that the incremental value of an acquisition always flows to the target that the acquirer
Acquirer also realize less value following there merge
The target value
- receives double-digit premium take over (20% returns of shareholders)
- experiences greater excess in hostile deals (returns of 30-35%)
-experiences greater excess return in all-cash deals
the acquirer value
- no excess return or even negative returns
- negative excess in hostile
- experience greater decline if equity-financing bid
problems acquirer face after takeover
- underperforms for 1-3 years
- performs worse if financed with equity
-decreases investment in working capital and cap-ex - disruptive and require high management attention
- elevated turnover rates for up to 10 years following
Anti-takeover defenses
are designed to pursue long term value creation without threat of takeover
- enhance bargaining power to secure higher bid
- raise overall cost of the takeover
- increase time required for the acquirer to complete the transaction to the give the target enough time to develop anti-takeover strategy
Poison pills
rights offering to existing shareholders that makes the deal so expensive that bidder walks away
allows company shares to be purchased at discounted price and triggered if shareholders accumulate an ownership positions above a threshold
not as common because security regulations has to approve a deal within 105 days which eliminates the main objective of buying time
Staggered boards
- official board members make proxy fights to chang the board difficult
- elected in three year term
- 1996 to 200, no corporate raider gained control of a staggered board through proxy contest
- do not receive a higher takeover premium 54% v 0%
white knights
look for other friendly acquirer
white squire
passive investors purchase blocks of stocks to frustrate bidding
dual class share
different classes of shares with different number of votes per share
Wedge: economic interest and voting interest
- low governance
- more negative to acquisitions
- negative to large capital expenditures
- CEO comp is higher
Recapitalization
change the capital structure, usually with debt
golden parachute
extremely lucrative severance packages and only works for small companies
regulatory approval
fight the deal on regulatory level
