Lecture 8a: Takeovers Flashcards

1.) Types 2.) Methods of payment 3.) Regulation of takeovers 4.) Takeover defences 5.) Financial evaluation of takeovers

1
Q

What is a control premium in takeovers. What is control premium also known as

A

Amount paid by bidder for control over-and-above the value operating as an independent entity

Also known as Net Cost

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2
Q

What are the 3 types of takeovers. Are the reasons for the 3 types of takeover different?

A
  1. ) Horizontal: Same Line of Business (Uber & Grab)
  2. ) Vertical: Same line; Different Points (One supplier; other consumer)
  3. ) Conglomerate: Unrelated (Westfarmers)

Yes. Different takeovers dictate different motives

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3
Q

What are the 3 payment methods in takeovers

A
  1. ) Cash (sometimes purchased at a premium)
  2. ) Shares in COMBINED company
  3. ) Combination of cash and shares in combined company
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4
Q

What are some legal regulations in takeovers. What is the implication of regulations

A
  1. ) Takeover Panel: Peer-body to review acquisitions
  2. ) ACCC: Prevents mergers which substantially lessens competitions and which might create monopoly (Protects consumers)
  3. ) FIRB: Foreign bidders who want >15% of shares must obtain approval of treasurer
  4. ) Other industry-specific bodies

It often dictates who wins/loses from a takeover

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5
Q

What firm are regulations biased towards in takeovers

A

Biased towards the target firms

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6
Q

What is the purpose of The Corporations Act (2001) in Takeovers

A

To ensure takeovers take place ECI

  1. ) Efficiently (Informed)
  2. ) Competitively: Everyone gets a chance to participate and all shareholders in the target company have a reasonable and equal offer to participate
  3. ) Informed

(It does not PREVENT takeovers)
(To make the bidder behave!)

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7
Q

What does The Corporations Act (2001) mean by ensuring takeovers are Informed

A

Shareholders of Target Company must:

a. ) know Bidder’s identity
b. ) be given reasonable time to consider proposal/merits of takeover

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8
Q

What is the process like for takeover (In percentages) based on The Corporations Act (2001)

A

0-5%: Okay
5% - 20%: For each 1% change, it must be declared (Ensure target shareholders are informed)
20% - 90%: Off-market/On-market/Scheme/Creeping
>90%: Compulsory Acquisition

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9
Q

Who does a compulsory acquisition benefit

A

It benefits all parties (Bidding and Target company shareholders)

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10
Q

20% - 90%: Off-market Bid and Properties

A

Bidding makes an offer to all target company shareholder (Cash/Shares/Combination)

  1. ) Time: 1 Month < Offer < 12 months
  2. ) 100%/ Proportion of each shareholders shares in target company specified
  3. ) Can increase price BUT increased price must be paid to all shareholders
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11
Q

20% - 90%: On-market Bid and Properties

A

Bidding makes an offer to stock exchange (Cash) (Not possible to swap shares)

  1. ) Time: 1 Month < Offer < 12 months
  2. ) No Conditions
  3. ) Can increase price AND increased price need NOT be paid to all shareholders
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12
Q

What is the option intuition behind On/Off-market Bids

A

The bidding company provides a put option to target company shareholders.

Bidding has an OBLIGATION to buy shares and target SHs have a RIGHT to sell.

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13
Q

What are some disclosure requirements for the bidder in an on-market/off-market bid

A
  1. ) Identity
  2. ) Intentions
  3. ) Details of how cash offered for shares will be financed
  4. ) Price paid by bidder to acquire target company shares in the last 4 months (reasonableness of price)
  5. (Off-Market Only): Bidding Voting Power
  6. ) Any other information
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14
Q

What are some disclosure requirements for the target in an on-market/off-market bid

A
  1. ) Recommendations with respect to the bid (Accept/Reject)

2. ) Give reasons for the acceptance/rejection

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15
Q

20% - 90%: Scheme of Arrangement and Requirements for it

A

Court approved arrangement - requires 100% acquisition.

Must have at least >75% of voting shares and 50% of members vote for this to take place (1/2 members with 3/4 of votes)

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16
Q

20% - 90%: Scheme of Arrangement and disadvantages

A
  1. ) Time Consuming

2. ) Costly

17
Q

20% - 90%: Creeping Bid and Properties

A

Acquire 3% every 6 months without public statements

18
Q

20% - 90%: Creeping Bid and Disadvantages

A
  1. ) Time Consuming (Takes 5 years to go from 20% to 50%)

2. ) Little commercial significance

19
Q

What are the 5 takeover defenses and what is the defense predicated upon

A

It is predicated on - Directors have a FIDUCIARY DUTY to shareholders (MUST act in SH’s best interest)

  1. ) Poison Pill
  2. ) Golden Parachute
  3. ) White Knights
  4. ) Response to Target’s Disclosure Statement
  5. ) Appeals
20
Q

Takeover Defence 1: Poison Pill. Elaborate. One Example

A

Target company makes itself less attractive (disposing asset/change ownership structure)

E.g.

  • Liberty Media announced 17% of News Corporation. - - News Corporations Defence: Gives all shareholders (other than Liberty Media) to purchase new share at half price
  • Dilute value and ownership of Liberty Media.
21
Q

Takeover Defence 2: Golden Parachute and Caveat

A

Employment agreement provides large payments if agreement is terminated&raquo_space; Target less attractive

However, it is limited as court may declare void if deemed unfair (Manager reap benefits, not shareholders)

22
Q

Takeover Defence 3: White Knights. What is it akin to. Pros and Cons

A

Akin to Private Placement (Invite third party to acquire shares)

Pros: Dilute ownership of bidding company.
Cons: White knights often turn into black knights by selling their shares to bidding company.

23
Q

Takeover Defence 4: Response to Target’s Disclosure Statement

A

Convince target shareholders, through their statement, that bid undervalues their company (i.e. release of publicly good statement in response to bidding’s negative statement)

24
Q

Takeover Defence 5: Appeals

A

Appeal to ACCC, Takeover Panels, Target Shareholder Loyalty

25
Q

How do we Financial Valuate a Takeover: Gains, NPV, Net Cost

A

Synergy/Gain = VBT - (VT + VB)

NPV/Gain to Bidding = Gain - Net Cost

Net Cost = Cash - VT/ (%)(Shares in COMBINED) - VT

26
Q

What is net cost also known as… Who captures the net cost

A

Control premium. The target company catches these costs (to check)