Lecutre 2: The Corportate Takeover Market Flashcards
What is the market model of corporate governance?
-liquidity
-dispersed ownership
-disclosure
(Control model is opposite)
What are the internal factors of the market model?
- Board of directors
2. Control and incentive systems
What are the board of directors responsibilities?
- have about 10 people (half the size in 1970s)
- review, hire, fire, compensate CEO
- oversee management, strategy and financial reporting
What are some examples of control systems and incentives?
- implement employee share option plans (ESOP)
- too much may cause management entrenchment - encourage culture and values
What are the external factors of the market model?
- Legislation
- Regulators
- Institutional activism
- Market for corporate control
What are institutional activists?
Large investors who can exert significant influence
E.g. Pension funds, mutual funds,insurance companies
What are the hostile takeover tactics?
- Casual pass
- Bear hug
- Proxy contest
- Multitiered offer to shareholders
What is a bear hug?
When a public announcement is made with the intention of takeover
What is a proxy contest?
When a bid to buy off the shareholders is directly made to them
What are the pre bid defences?
- Flip in pills
- Flip over pills
- Staggered/classified board elections
- Cumulative voting rights
- Limiting when board directors can be removed
- Greenmail
- Super voting stock
- Reincorporation
- Golden parachute
What are flip in pills?
- 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
What are flip over pills?
-sale of at least some % of targets assets, rights holder may purchase target common shares
What is greenmail?
When target buys back acquirers stock for a premium
What is a golden parachute?
When you change employee severance packages to raise cost of acquisition
What are the post bid takeover defences?
- Greenmail
- Pac man defence
- White knights
- Employee stock ownership plans
- Recapitalisation
- Share buy back plans
- Corporate restructuring
- Litigation
What is the pac man defence?
When you buy shares of the acquirer
What are white knights?
When you find a more suitable acquirer to take you over
What is recapitalisation?
When you use leverage to buy back shares
What are the abnormal returns to a target firm if it’s friendly?
20%
What are the abnormal returns to a target if it’s hostile?
30%-35%
What is the result on returns for targets if there are takeover defences used?
There is a small negative impact
What happens if defences take place before IPO?
There will be a benefit to the shareholders?
What is the effect for bondholders when takeover defences are used?
They may lose value
