Lecture 7

Question 1

Mergers

Answer 1

between two equals

Question 2

Acquisitions = takeovers

Answer 2

Friendly takeover

Hostile takeover

Question 3

Hostile takeover

Answer 3

Refers to the acquisition of one company by another corporation against the wishes of the target companys management

Question 4

Friendly takeover

Answer 4

The takeover bid was made with the approval of the acquirer and target company management and board of directors

Question 5

Hostile takeovers extensive

Answer 5

Hostile bidder may reap the benefit of taking over an under performing company

Hostile takeover can be very costly for the bidder (HART 1995)

Identification and bidding costs

Competition from white knight

Competition from incumbent management

Question 6

White knight

Answer 6

A person or a company that saves a company from hostile takeover or collapse

Question 7

Takeover defence machnisms (us)

In the US, there are more statutory defence mechanism embedded in corporate charters

Incumbent managements tool kits include:

Answer 7

Poison pills: to issue extra shares at discount to existing shareholders

Greenmail: to repurchase company shares at a premium (requires supermajority for merger)

Golden parachute

Staggered board

Supermajority requirement for charter amendments

Question 8

Companies tend to use financial defense against hostile takeovers

Answer 8

Pay dividend

Update financial forecast

Disposal or revaluation of assets

Invite a white knight

Question 9

Merger and acquisition waves

Answer 9

1) horizontal mergers
2) vertical mergers
3) conglomerate, diversification
4) hostile takeovers
5) cross-border mergers
6)private equity, leverage biyout
7) BRICS countries taking the lead

Question 10

Merger and acquisitions
Economic rationales of the bidder

Answer 10

To exploit synergy effect, economies of scale

To create/enforce market power
-Vertical or horizontal M&A
-Antitrust regulations makes it harder to achieve

To discipline and replace incompetent management
-Through hostile takeovers
Mainly happened in 1980s

Creative destruction
-Driven by technological advancements, deregulation in the markets

To diversify portfolio
-More than half ended in failure
-Only 17% created more value

To acquire expertise and/or brand name
-Often used by chinese companies when expanding abroad

To save tax

Question 11

Incentives of the managers
CEO of the acquiring company

Answer 11

Often motivated by empire building and (enourmous) ego
-quite often pay high premium at the cost of shareholders

Question 12

Incentives of the managers
CEO of the target company

Answer 12

Reluctant to accept
-Either for his own job security considerations
-Or in the interest of the company
-Potential measures normal

Question 13

Proxy contests

Answer 13

When a group of shareholders are presuaded to join forces and gather enough shareholder proxies to battle the incumbent management

Very costly and no guaranteed success

Hardly used for discipline excessive executive compensation

Mainly used in the context of merger and acquisitions

Question 14

Shareholder proposals

Answer 14

A more modest form of proxy protest

Fairly cheap but usually not binding

Can be effective if the board accommodates the proposals

Question 15

Beneficiaries of M&A

Answer 15

On average premium that acquirers pay for target ranges from 20-30% or higher
-Share price of target companies mostly immediately increase at announcement
-Sometimes the acquirers share price also increase after announcement

But the empirical evidence about value gain from M&A is mixed

It benefits the target shareholders the most

Question 16

Legal challenges M&A

Answer 16

Competition law may prevent the deals

Local legislation may pose extra challenges

It takes years to complete a deal, if at all!

Question 17

Cultural differences M&A

Answer 17

It takes much longer time to successfully mer two cultures

Question 18

M&A other challenges

Answer 18

Social costs: lay-off labors (may also be a blessing), strategic reallocation

Question 19

Active players in M&A deals

Major bidders

Answer 19

Corporations

Private equity

Question 20

Active players in M&A
Service providers

Answer 20

Investment bankers

Legal advisors, notaries

Market intelligence services

Auditors (due-dilligence)

Question 21

Private equity

Answer 21

Equity and debt investment in a private (non-listed) company

-Include venture capital, angel investors and other private equity firms

-PE firms specialize more in leverage buyouts (LBO)

Question 22

LBO (Leverage buyout)

Answer 22

The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition

Often buying established firms with steady cash flows

Use the company assets as collateral for loans

Features: high leverage (mostly with junk bonds), heavy oversight on management

Benefit: Use debt overhang and concentrated shareholding to combat agency problem –> higher efficiency

Cost: over levarage destroyed value

Question 23

Does quality of corporate governance affect the financial performance of firms

Answer 23

If so, having an indicator about the corporate governance quality would help prdict firm performace

Institutional investors need some guidance on the corporate governance quality of firms for:

screening: which companies to invest

Monitoring: how are the investees doing financially and in corporate governance

Proxy guidance: how to vote at annual general meetings