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MGST 451 > Chapter 11 > Flashcards

Chapter 11 Flashcards

1
Q

The market for corporate control

A

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
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2
Q

Need for external mechanism

A
  • address internal corporate failure
  • corrects suboptimal performance relative to competitors
  • discipline ineffective and opportunities managers
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3
Q

Manne’s thesis

A
  • 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
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4
Q

financial synergies

A
  • the logic of a strategic buyer
  • the buyer believes that it can increase profits through revenue improvement, cost reduction or vertical integration
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5
Q

diversification + congolomate structure

A

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

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6
Q

change in ownership + private equity buyer

A

new owner may have superior access to capital, managerial expertise, and technology

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7
Q

Economics of scale + startegic buyer

A

the new firm may have increased profits by selling more goods and at a higher volume

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8
Q

Economies of scope

A

utilizing the marketing and distribution capabilities of a broader product offering –> logic behind a strategic buyer

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9
Q

Human capital and Intellectual property + strategic buyer

A

new owner may have desire human ideas and capabilities

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10
Q

Empire building (non strategic)

A

buying mainly for the sake of managing a larger enterprise

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11
Q

Hubris (non startegic)

A

overconfidence on management that it will be managed more efficiently than its owners

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12
Q

Herding behaviour (non-strategic)

A

senior managers pursue acquisition because a competitor has purchased an acquisition

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13
Q

Compensation initiatives

A

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

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14
Q

Three acquisition process

A

Merger

Solicited Takeover (friendly and negotiated)

Unsolicited takeover (Hostile)

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15
Q

Acquiror process

A

Board approval
valuation work in advance
Fairness opinion from an investment bank

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16
Q

Target Process (Merger)

A
  • 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
17
Q

Solicited Takeover

A
  • 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
18
Q

Unsolicited (Hostile)

A
  • 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
19
Q

BCE case

A

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

20
Q

Revlon duties and Unocal case

A

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

21
Q

Board duties in take over-process

A

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

22
Q

when is a takeover hostile?

A
  • 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
23
Q

why would managers reject takeover?

A
  • increase purchase price (shareholder’s interest theory)
  • ensure their longevity with the firm (management entrenchment theory)
24
Q

Takeovers may

A
  • minimize cost
  • transfer control to those who can manage it better
25
Q

when does acquisition become a threat?

A
  • 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
26
Q

why don’t we see HT as often now

A
  • 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
27
Q

Value of Takeover

A

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

28
Q

The target value

A
  • 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
29
Q

the acquirer value

A
  • no excess return or even negative returns
  • negative excess in hostile
  • experience greater decline if equity-financing bid
30
Q

problems acquirer face after takeover

A
  • 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
31
Q

Anti-takeover defenses

A

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
32
Q

Poison pills

A

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

33
Q

Staggered boards

A
  • 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%
34
Q

white knights

A

look for other friendly acquirer

35
Q

white squire

A

passive investors purchase blocks of stocks to frustrate bidding

36
Q

dual class share

A

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

37
Q

Recapitalization

A

change the capital structure, usually with debt

38
Q

golden parachute

A

extremely lucrative severance packages and only works for small companies

39
Q

regulatory approval

A

fight the deal on regulatory level

MGST 451 (9 decks)

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