Lent Term - Lecture 10 Flashcards
Why (and when) do takeovers occur?
- Synergy gains
- Market power
- Correcting managerial failure
What are the economic consequences of takeovers in terms of value?
- Value creation
- Value destruction
- Value redistribution
What is a tender offer?
The acquiring firm makes an offer directly to target shareholders to sell their shares at a specified price
When does M&A activity usually happen?
Usually in periods of growth and significant changes in business environment due to e.g. technological innovation or regulatory changes
What is the market for corporate control?
This is where corporate control is traded like an asset. Potential management teams compete for control. Control is allocated efficiently and incumbent managers disciplined by takeover effect.
What makes tender offers potentially powerful disciplinary mechanisms?
With tender offers the buyer can go straight to shareholders whereas with mergers you have to approach management
Why do managers get replaced in the market for control?
Because they are either less competent or they are not acting in the shareholders’ best interest
Why does the market for corporate control not operate smoothly in real life?
Frictions in the takeover market result in too few value-improving takeovers. On the other hand, takeovers may succeed even though they do not create value, hence there would be too many takeovers
What is the free-rider problem in relation to takeovers?
Shareholder prefer others to tender while they retain their shares. This allows them to retain the benefits of the market for corporate control without losing their share. As a result some efficient takeovers fail.
Why does the free-rider problem cause no bids to be undertaken?
The raider must bid a value that is greater than or equal to the amount that shareholders would receive if they retain their shares. In addition to this there is a cost of takeover. Therefore the raider’s profit is negative so they do not place a bid.
How can you overcome the Free-Rider problem?
1) Have a toehold in the company - This way you might be able to make a profit with the increase in value
2) If the raider gets private benefits that are greater than the cost of the takeover then the free-rider problem can be eliminated
What kinds of private benefits can arise from takeovers?
Exogenous private benefits - These are not at the expense of other stakeholders e.g. social status and prestige
Endogenous private benefits - These are at the expense of other shareholders
