class 5 powerpoint

Question 1

A causal pass

Answer 1

occurs prior to any hostile takeover

the bidder may attempt some informal offer to the target firm’s management

Question 2

A toehold

Answer 2

a purchase of an initial accumulation of the target firm’s shares by a hostile bidder

leads to lower average cost of acquisition, and a dual role

Question 3

A value leakage

Answer 3

hostile bidders should see whether the target firm has important contracts that could be lost following the acquisition

(i.e., lower value and lower bid)

Question 4

when could a value leakage take place?

Answer 4

could take place due to information asymmetry

Question 5

A fiduciary out clause

Answer 5

exists in merger agreements whereby a bidder and a target firm seek to pursue a friendly agreement

the latter’s board is required to still consider other bids so as to ensure shareholder wealth maximization

Question 6

The optimal bid

Answer 6

when the initial bidder structures its first bid so as to discourage other bids while not overpaying

Question 7

The premium offer stemming from single bidder is relatively higher or lower that the one offered by an initial bidder in a takeover contest involving multiple bidders?

Answer 7

The premium offer stemming from single bidder is relatively higher

Question 8

A bear hug

Answer 8

takes place when a bidder contacts the board of the target firm with an expression of interest in acquiring that firm

the bidder tends to reach the shareholders with a tender offer if the overtures are not effective

less expensive takeover tool

Question 9

two kinds of bear hugs

Answer 9

A teddy bear hug

more aggressive bear hug

Question 10

A teddy bear hug

Answer 10

does not encompass a price or specific deal terms (i.e., less threatening)

Question 11

more aggressive bear hug

Answer 11

the bidder offers a specific price so as to determine a specific range for damages in potential shareholder lawsuits

Question 12

A long-form merger

Answer 12

a statutory merger that requires the target firm’s shareholders approval of the deal

Question 13

A short-form merger

Answer 13

occurs if the bidder acquires 90%+ (e.g., Delaware)

the remaining shareholders receive the same compensation the others received, and no voting is necessary

Question 14

A two-step tender offer

Answer 14

starts with the first step as the tender offer, while the second one is a short- or long-form merger (ownership level dictates)

Question 15

which is usually quicker between a tender offer and a long-form merger?

Answer 15

a tender offer

Question 16

Reasons that motivate a tender offer

Answer 16

A faster deal completion than other alternatives

The bidder may be able to circumvent unfavourable management and board

While a tender offer could trigger an auction process and by extension increase its transaction cost, it could increase returns to shareholders

Question 17

how can tender offers be paid?

Answer 17

An all-cash offer

An exchange offer stands for the use of the bidder’s own shares (attractive as it could be considered tax-free to target shareholders)

A double-barreled offer occurs when target shareholders have a choice: cash or securities

Question 18

Response of the Target Management to tender offers

Schedule 14D-9

Answer 18

Recommend acceptance

Recommend rejection

State that it has no opinion and is neutral

State that it cannot take a position on the bid

Question 19

Considerations about resisting a bid

Answer 19

A winner’s curse could yield value to target shareholders

The original bidder could simply withdraw its bid

A potentially treacherous move, since a target firm may receive an increased offer that is better than the gains that shareholders could enjoy: resistance could erode firm value

Question 20

A winner’s curse

Answer 20

i.e., flocking in competing bids, which ultimately increases premiums

Question 21

Investment bank

Answer 21

provides the requisite financing and advisory service through the tender offer

Question 22

Legal advisors

Answer 22

savvy attorneys on tactics and defences employed to fend off tender offers

Question 23

Information agent

Answer 23

a proxy soliciting firm in charge of forwarding tender offer materials to shareholders

Question 24

Depository bank

Answer 24

handles the receipt of the tender offers and the payment for the shares

Question 25

Forwarding agent

Answer 25

enhances the resources of the depository bank and transmits tenders received to the depository bank

Question 26

how does a two-tiered tender offer (also known as a front end-loaded tender offer) function as follows

Answer 26

1. a better compensation quality (e.g., cash or stock)
2. subpar compensation quality (e.g., subordinated debentures)

–> A coercive approach

Question 27

Shareholder’s dilemma

Answer 27

target shareholders may get unwanted cash to avoid the back end

Question 28

Glamour firms

Answer 28

bidders with low B/M ratio due to their overconfidence in managing an acquisition

tend to underperform ex post: firms with low B/M tend to make poor acquisition decisions

Question 29

when do Target shareholders realize positive cumulative abnormal returns?

Answer 29

around the announcement month of the tender offer

such a pattern persists for a while even in the case of rejected bids

Question 30

which type of directors are more supportive to shareholder value?

Answer 30

Independent directors

non-independent ones are wankers

Question 31

who tends to substantially increase the number of press releases disseminated to financial media during the private negotiation of a merger? what about those who dont?

Answer 31

Fixed exchange ratio bidders

floating exchange ratio bidders have no incentive to manage their media during the merger negotiation

Question 32

true or false

active media management reduces takeover costs

Answer 32

true

Question 33

Gross Stock Spread (GSS) formula

Answer 33

GSS = OP - MP

OP = Offer Price

MP = Market Price

Question 34

Risk Arbitrager’s Annualized Return (RAR) formula

Answer 34

RAR = GSS/(I * (365/P))