M&A and Governance

Question 1

What is a tender offer?

Answer 1

An offer to acquire shares directly from individual shareholders of target firm

Question 2

What do Moeller, Schlingemann and Stulz (2007) find about announcement gains?

Answer 2

That they tend to be small but positive. Avg. abnormal return is 0.8%.

Question 3

What is the general formula for expected gain from a takeover

Answer 3

[a * (z) + beta (z - x) ] * P - c
a is toehold share
z is value added
beta is share acquired
x is premium paid over current price
P is probability of success
c is the cost of information

Question 4

What is the general takeaway from the atomistic Grossman and Hart model?

Answer 4

That raiders never gain on takeovers except for on the appreciation on their toehold stake. Current owner will only sell their stake if the raider would acquire the shares for the value they will be worth after the takeover

Question 5

What is the free-rider problem in the Grossman and Hart model?

Answer 5

That without a toehold stake in the firm, a takeover will never occur even if it can generate value

Question 6

How do you find the mixing probability between tendering and not tendering in the non-atomistic raider model?

Answer 6

In order to mix, shareholder must be indifferent between mixing and not mixing.
If tendering you will get the premium with certainty. If not tendering, you will get the value appreciation if the take over succeeds
With this equality you can find the mixing probability

Question 7

How do you solve the non-atomistic raider model?

Answer 7

There are several equilibria, where 1 tenders and no one else does. To find the mixed-strategy equillibrium, start by finding the mixing probability (indifference argument). Then optimize the bid the raider makes

Question 8

What is the raiders expected total payoff in a model with 3 shareholders?

Answer 8

Total value of the firm minus payoff to the shareholders
Total value of the firm is 3 times probability of takeover succes.
Shareholder payoff is tender offer to each shareholders. We know that shareholders get the same value whether they tender or not (since they are mixing, hence indifferent), so the value to each shareholder will also be b, the tender offer, whether they tender or not

Question 9

In a nonatomistic model, what is the effect of a toehold on shareholders?

Answer 9

It increases the incentive to freeride, since if they do not tender, the probability of success is higher with a toehold

Question 10

What is the effects of toeholds on the optimal bid in the nonatomistic takeover model?

Answer 10

With higher incentive to free-ride, the bid needs to be higher to incentivize shareholders to tender

Question 11

How can winners curse be applied to corporate acquisitions?

Answer 11

Rational economic model. bidders factor in the winner’s curse when formulating their bis
Behavioral models: bidders ignore the winner’s curse and overbid

Question 12

What is the idea of hubris in corporate acquisitions?

Answer 12

That takeovers occur only when raiders make valuation mistakes. Takeovers are thus pure wealth transfers from raiders to targets, without any total value increase

Question 13

What is an empirical problem for the stock overvaluation theory?

Answer 13

That the stock run-up before 2000 did not lead to any increase in proportion of all-stock mergers

Question 14

What is the general effect of toeholds on the size of bids?

Answer 14

Toeholds should make bids larger. A part of the value goes to yourself and it may make shareholders demand a higher bid

Question 15

What does empirics say about toeholds?

Answer 15

Toeholds have become less prevalent. Troublesome if toeholds are very important

Question 16

What is tunnelling in corporate structures?

Answer 16

Describes the power of being a majority owner of a company that is a majority owner of another company. Control rights are 100% in both firms for the owner, although cash flows rights may be not much more than 25%

Question 17

What is an example of accounting manipulation?

Answer 17

Selling assets to a Special Purpose Entity at a premium. Record the premium as accounting earnings. SPE is financed by loan from company. Buy the asset back form SPE for smaller premium. Asset is now back on the books at an inflated value.
This has boosted current accounting earnings. Future accounting earnings are however lowered, since depreciation will be higher in coming years

Question 18

What is the idea of Gillette, Noe and Rebello (2013) on independent board members.

Answer 18

That they act as watchdogs whose services are never needed if the board is properly designed.

Question 19

What is Maug’s idea about board’s functions?

Answer 19

It is the general idea that boards can protect managers from opportunistic intervention of shareholders. Under assymetric information and non-verifiable returns, managers be change behavior due to the threat of shareholders interferring. Boards are supposed to resolve this dilemma.

Question 20

What are some empirically found effects of outsiders on boards?

Answer 20

Outsider dominated boards are less likely to replace CEO in periods of poor stock performance
Boards can be effective in periods where management greatly underperforms industry
Independent boards leads to smaller acquisition premia