Lecture 8a: Takeovers Flashcards
1.) Types 2.) Methods of payment 3.) Regulation of takeovers 4.) Takeover defences 5.) Financial evaluation of takeovers
What is a control premium in takeovers. What is control premium also known as
Amount paid by bidder for control over-and-above the value operating as an independent entity
Also known as Net Cost
What are the 3 types of takeovers. Are the reasons for the 3 types of takeover different?
- ) Horizontal: Same Line of Business (Uber & Grab)
- ) Vertical: Same line; Different Points (One supplier; other consumer)
- ) Conglomerate: Unrelated (Westfarmers)
Yes. Different takeovers dictate different motives
What are the 3 payment methods in takeovers
- ) Cash (sometimes purchased at a premium)
- ) Shares in COMBINED company
- ) Combination of cash and shares in combined company
What are some legal regulations in takeovers. What is the implication of regulations
- ) Takeover Panel: Peer-body to review acquisitions
- ) ACCC: Prevents mergers which substantially lessens competitions and which might create monopoly (Protects consumers)
- ) FIRB: Foreign bidders who want >15% of shares must obtain approval of treasurer
- ) Other industry-specific bodies
It often dictates who wins/loses from a takeover
What firm are regulations biased towards in takeovers
Biased towards the target firms
What is the purpose of The Corporations Act (2001) in Takeovers
To ensure takeovers take place ECI
- ) Efficiently (Informed)
- ) Competitively: Everyone gets a chance to participate and all shareholders in the target company have a reasonable and equal offer to participate
- ) Informed
(It does not PREVENT takeovers)
(To make the bidder behave!)
What does The Corporations Act (2001) mean by ensuring takeovers are Informed
Shareholders of Target Company must:
a. ) know Bidder’s identity
b. ) be given reasonable time to consider proposal/merits of takeover
What is the process like for takeover (In percentages) based on The Corporations Act (2001)
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
Who does a compulsory acquisition benefit
It benefits all parties (Bidding and Target company shareholders)
20% - 90%: Off-market Bid and Properties
Bidding makes an offer to all target company shareholder (Cash/Shares/Combination)
- ) Time: 1 Month < Offer < 12 months
- ) 100%/ Proportion of each shareholders shares in target company specified
- ) Can increase price BUT increased price must be paid to all shareholders
20% - 90%: On-market Bid and Properties
Bidding makes an offer to stock exchange (Cash) (Not possible to swap shares)
- ) Time: 1 Month < Offer < 12 months
- ) No Conditions
- ) Can increase price AND increased price need NOT be paid to all shareholders
What is the option intuition behind On/Off-market Bids
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.
What are some disclosure requirements for the bidder in an on-market/off-market bid
- ) Identity
- ) Intentions
- ) Details of how cash offered for shares will be financed
- ) Price paid by bidder to acquire target company shares in the last 4 months (reasonableness of price)
- (Off-Market Only): Bidding Voting Power
- ) Any other information
What are some disclosure requirements for the target in an on-market/off-market bid
- ) Recommendations with respect to the bid (Accept/Reject)
2. ) Give reasons for the acceptance/rejection
20% - 90%: Scheme of Arrangement and Requirements for it
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)
20% - 90%: Scheme of Arrangement and disadvantages
- ) Time Consuming
2. ) Costly
20% - 90%: Creeping Bid and Properties
Acquire 3% every 6 months without public statements
20% - 90%: Creeping Bid and Disadvantages
- ) Time Consuming (Takes 5 years to go from 20% to 50%)
2. ) Little commercial significance
What are the 5 takeover defenses and what is the defense predicated upon
It is predicated on - Directors have a FIDUCIARY DUTY to shareholders (MUST act in SH’s best interest)
- ) Poison Pill
- ) Golden Parachute
- ) White Knights
- ) Response to Target’s Disclosure Statement
- ) Appeals
Takeover Defence 1: Poison Pill. Elaborate. One Example
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.
Takeover Defence 2: Golden Parachute and Caveat
Employment agreement provides large payments if agreement is terminated»_space; Target less attractive
However, it is limited as court may declare void if deemed unfair (Manager reap benefits, not shareholders)
Takeover Defence 3: White Knights. What is it akin to. Pros and Cons
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.
Takeover Defence 4: Response to Target’s Disclosure Statement
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)
Takeover Defence 5: Appeals
Appeal to ACCC, Takeover Panels, Target Shareholder Loyalty
How do we Financial Valuate a Takeover: Gains, NPV, Net Cost
Synergy/Gain = VBT - (VT + VB)
NPV/Gain to Bidding = Gain - Net Cost
Net Cost = Cash - VT/ (%)(Shares in COMBINED) - VT
What is net cost also known as… Who captures the net cost
Control premium. The target company catches these costs (to check)
