Lecutre 2: The Corportate Takeover Market

Question 1

What is the market model of corporate governance?

Answer 1

-liquidity
-dispersed ownership
-disclosure
(Control model is opposite)

Question 2

What are the internal factors of the market model?

Answer 2

1. Board of directors

2. Control and incentive systems

Question 3

What are the board of directors responsibilities?

Answer 3

• have about 10 people (half the size in 1970s)
• review, hire, fire, compensate CEO
• oversee management, strategy and financial reporting

Question 4

What are some examples of control systems and incentives?

Answer 4

• implement employee share option plans (ESOP)
  - too much may cause management entrenchment
• encourage culture and values

Question 5

What are the external factors of the market model?

Answer 5

1. Legislation
2. Regulators
3. Institutional activism
4. Market for corporate control

Question 6

What are institutional activists?

Answer 6

Large investors who can exert significant influence

E.g. Pension funds, mutual funds,insurance companies

Question 7

What are the hostile takeover tactics?

Answer 7

1. Casual pass
2. Bear hug
3. Proxy contest
4. Multitiered offer to shareholders

Question 8

What is a bear hug?

Answer 8

When a public announcement is made with the intention of takeover

Question 9

What is a proxy contest?

Answer 9

When a bid to buy off the shareholders is directly made to them

Question 10

What are the pre bid defences?

Answer 10

1. Flip in pills
2. Flip over pills
3. Staggered/classified board elections
4. Cumulative voting rights
5. Limiting when board directors can be removed
6. Greenmail
7. Super voting stock
8. Reincorporation
9. Golden parachute

Question 11

What are flip in pills?

Answer 11

• Issuing rights to current shareholders with exercise price below market
• Acquired purchases specified amount of stock
• Each right entitles chosen shareholder to purchase preferred stock
• Not allowed in some states

Question 12

What are flip over pills?

Answer 12

-sale of at least some % of targets assets, rights holder may purchase target common shares

Question 13

What is greenmail?

Answer 13

When target buys back acquirers stock for a premium

Question 14

What is a golden parachute?

Answer 14

When you change employee severance packages to raise cost of acquisition

Question 15

What are the post bid takeover defences?

Answer 15

1. Greenmail
2. Pac man defence
3. White knights
4. Employee stock ownership plans
5. Recapitalisation
6. Share buy back plans
7. Corporate restructuring
8. Litigation

Question 16

What is the pac man defence?

Answer 16

When you buy shares of the acquirer

Question 17

What are white knights?

Answer 17

When you find a more suitable acquirer to take you over

Question 18

What is recapitalisation?

Answer 18

When you use leverage to buy back shares

Question 19

What are the abnormal returns to a target firm if it’s friendly?

Answer 19

20%

Question 20

What are the abnormal returns to a target if it’s hostile?

Answer 20

30%-35%

Question 21

What is the result on returns for targets if there are takeover defences used?

Answer 21

There is a small negative impact

Question 22

What happens if defences take place before IPO?

Answer 22

There will be a benefit to the shareholders?

Question 23

What is the effect for bondholders when takeover defences are used?

Answer 23

They may lose value