week 13 Flashcards
what does a takeover typically involve?
when an acquiring company acquires the controlling interest in the voting shares of a target company
Takeovers are important transactions in the
market for corporate control
After a takeover, the acquiring company obtains
After a takeover, the acquiring company obtains control of the target company’s assets, so a takeover is an indirect investment in assets
- so this investment should only proceed if it has a +NPV
describe why takeovers may be more common when share prices increase rapidly
rapid increase in share price –> reflect increased demand in goods –> increase productive capacity –> internal investment (buy machinery etc) + external invesment (take control of existing assets esp those not being used efficiently –> takeover)
Andrade and Stafford (2004) demonstrate that in
Andrade and Stafford (2004) demonstrate that in addition to takeovers providing an opportunity for companies operating in growth industries to expand productive capacity, they also provide the mechanism by which companies operating in industries that are contracting and have low growth prospects exit the industry and allow invested capital to be redeployed elsewhere
horizontal takeover
give example
takeover of a target company operating in the same line of business as the acquiring company.
e.g. take over by Westpac Bank of St George bank in 2008.
vertical takeover
takeover of a target company that is either a supplier of goods to, or a consumer of goods produced by, the acquiring company.
conglomerate takeover
example
is the takeover of a target company in an unrelated type of business.
e.g. in the last 30 years Wesfarmers has acquired companies operating in industries as diverse as retail, mining etc.
describe the market for corporate control
alternative management teams compete for the right to manage corporate assets
where is there competition in the market for corporate control?
Competition in this market should ensure that asset control is acquired by those teams that are expected to be the most efficient in utilising those assets.
e.g.
example of market for corporate control
Commpany is poorly managed, resulting in low profits and a low share price.
An opportunity then exists for a more efficient management team to take over this company, replace the inefficient managers and reverse the poor performance of the company.
increased profitability through a change of management does not imply what?
Increased profitability through a change of management does not necessarily imply that the previous management was incompetent, only that a more efficient team was available (Dodd & Officer 1986).
how can wealth be created by takeover?
When two companies are combined, wealth is created if the control of assets is transferred to managers who can recognise more valuable uses for those assets, either within the combined company or by redeployment of the assets elsewhere.
what is synergy
he situation where the performance and therefore the value of a combined entity exceeds the sum of the previously separate components
if there are synergistic benefits associated with combining two companies A and T, then
the combined company will be worth more than the sum of their values as independent entities:
VAT > V A + V T
VAT = value of combined assets of the company
VA = value of company A operating independtly VT = value of company T operating indenepdently
takeovers are what kind of transactions?
market for corporate control is influenced largely by what?
takeovers are value-increasing transactions
the market for corporate control is influenced largely by the existence of synergies.
evaluation of the reasons for takeover
the target company is managed inefficiently
describe
the acquiring company’s managers may see an opportunity to use the target company’s assets more efficiently –> when assets are being used efficiently –> increase target company’s value
evaluation of the reasons for takeover
the target company is managed inefficiently
can the acquiring company ALWAYS improve the efficiency of the target company’s operations.
Not always. Even if the acquiring company is efficiently managed, does not mean manager will improve the target company’s performance
evaluation of the reasons for takeover
the target company is managed inefficiently
when is it less likely for the acquiring company to improve the performance of the target company?
two companies operate in different industries, so less likely for efficiency to be improved when conglomerate takeovers take place
evaluation of the reasons for takeover
the target company is managed inefficiently
improvements in efficiency are more likely in what kind of takeovers?
improvements in efficiency are most likely to be achieved with a horizontal takeover, as the acquiring company’s managers are likely to have the expertise needed to manage the target company’s operations more efficiently.
evaluation of the reasons for takeover
the target company is managed inefficiently
the target company’s market value may be low why? apart from being inefficient
managers are not necessarily inefficient, rather they pursue their interests instead of shareholders
evaluation of the reasons for takeover
the target company is managed inefficiently
what if the reduction of the company’s market value is large?
Why?
it is likely that the company will eventually be identified as a takeover target, since an acquiring company will be able to eliminate, or at least reduce, the agency costs, thereby providing benefits for its own shareholders.
reasons for takeover
complementary assets
describe
give an example
if either or both of the companies can provide the other with needed assets at relatively low cost
e.g. the target company’s managers are considered to have valuable skills. motive for the takeover is to acquire expertise. It may be cheaper to acquire this expertise via a takeover than to hire and train new staff.
reasons for takeover
complementary assets
give an example in terms of small unlisted companies
engineers lack marketing skills –> low profit
large company with a strong marketing team takes over
target company benefits from acquiring company’s staff –> increase profitability, acquiring company benefits from skills of target company