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
reasons for takeover
target company is undervalued
this may occur when
when the market value of the target company is less than the sum of the market values of its assets
reasons for takeover
target company is undervalued
this may occur when
so?
when the market value of the target company is less than the sum of the market values of its assets
other managers see that there can be alternative and/or better uses of the copmany’s assets ==> takeover
reasons for takeover
target company is undervalued
corporate raiders?
aggressive corporate or individual investors who takeover a company with the intention of achieving a controlling interest and replacing its current management
reasons for takeover
target company is undervalued
why may the activites of corporate raiders be synergystic?
because acquiring company’s managers is identifying opportunities to create value by redeploying assets to alternative uses.
reason for takeover
cost reductions
describe
the total cost of operating the combined company is expected to be less than the cost of operating the two companies separately.
reason for takeover
cost reductions
these cost savings are due to
more likely to be achieved?
example
various economies of scale
horizontal takeover
e.g. two furniture manufacturers
reason for takeover
cost reductions
describe how cost savings can be achieved by vertical takeovers
combining companies where one is a supplier –> costs of communication and various forms of bargaining can be reduced ==> more efficient coordination
reason for takeover
increased market power
Taking over a company in the same industry may increase the market power of the combined company.
reason for takeover
increased market power
the increased market power may?
. The increase in market power may enable the acquiring company to earn monopoly profits if there are significant barriers to entry into the industry
reason for takeover
increased market power
government’s response?
Section 50 of the Competition and Consumer Act 2010 prohibits a company from acquiring the shares or assets of another company where the acquisition is likely to result in a substantial lessening of competition in a market.
reason for takeover
increased market power
what are the merger guidelines?
ACCC has issued Merger Guidelines to explain the procedures and policies that it will follow in determining if a certain takeover is anti-competitive and should be opposed
reason for takeover
increased market power
Give an example of a takeover ACCC opposed and reasons for the opposition
- October 2012. ACCC opposed joint venture partners behind the Masters chain of hardware stores from acquiring a small chain of three hardware stores around Ballarat in country Victoria
- Why? acquisition would result in a substantial lessening in competition in the hardware market in the Ballarat region.
reasons for takeover
diversification
takeover enables a company to reduce risk via diversification.
reasons for takeover
give an example of why risk may not be in fact reduced
- steel company diversifies its interest by acquiring an oil exploration company
- The steel manufacturer’s shareholders already had the opportunity to hold shares in oil exploration companies so the takeover does not provide any investment opportunity that did not previously exist
reasons for takeover
diversification
when shareholders themselves hold diversified portfolios does diversifcation by a company increase their share value?
it will neither alter its market value nor benefit its shareholders
reasons for takeover
diversification
takeovers motivated by diversification may benefit who?
what may arise
managers –> this creates agency problems
Reasons for take-over
diversifcation
what is the co-insurance effect?
when two companies, each with debt securities outstanding, merge –> The default risk of each company’s debt will fall and the value of the debt securities will increase –> lenders to one company can now be paid out of the combined assets of both companies
Reasons for take-over
diversifcation
another argument for reduction of risk is?
Co-insurance argument:
risk of default on debt is lowered when two companies whose earnings are less that perfectly correlated
debt capacity of the combination> than the sum of the debt capacities of the two companies operating separately.
Reasons for take-over
diversifcation
while the
risk of default on debt is lowered when two companies whose earnings are less that perfectly correlated
debt capacity of the combination> than the sum of the debt capacities of the two companies operating separately.
reasons for takeover
diversifcation
while the co-insurance argument is correct …..
While the co-insurance argument is essentially correct, the problem is that shareholders will not necessarily benefit from the reduction in default risk and interest cost of debt.
Reasons for take-over
diversifcation
co-insurance effect
the gain to debtholders is?
This gain to debtholders is at the expense of shareholders, who now have to guarantee the debt of both companies
the loss to shareholders exactly offsets the gain to debtholders
Reasons for take-over
diversifcation
co-insurance effect
If two companies combine and then borrow
shareholders will benefit from a lower interest rate, but they are providing the lenders with lower risk, so there is still no net gain.
Reasons for take-over
diversifcation
co-insurance effect
how may shareholders benefit from the co-insurance effect
shareholders can benefit from the co-insurance effect to the extent that expected bankruptcy costs are reduced, or there are net tax savings.
Reasons for take-over
excess liquidity or free cash flow
describe
- companies seeking access to funds may takeover a company with excess liquidity
- companies with excess liquidity acquire other companies rather than distribute cash to shareholders
Reasons for take-over
excess liquidity or free cash flow
Contrary of this argument
capital market can provide funds at lower transaction costs rather than paying premium to acquire a company to access their free cash flow
reasons for takeover
free cash flow
when a company with excess cash flow acquires another company instead of distributing it as cash to shareholders can be viewed as?
how come?
the managers are acting in their own interest rather than shareholders
- Managers may pursue greater market share in existing lines of business or diversification into additional industries because larger companies are often associated with higher salaries and benefits, and more promotion opportunities.
reasons for takeover
free cash flow
what did Jensen Argue
Jensen argued that this conflict of interest can be severe in companies that generate substantial free cash flow and can lead to such companies engaging in takeovers that generate very small benefits, or even value reductions
reasons for takeover
what does the free cash flow hypothesis show?
some takeovers are evidence of the conflicts of interest between shareholders and managers
reasons for takeover
tax benefits
describe
Taking over a company with accumulated tax losses may reduce the total tax payable by the combined company.
reasons for takeover
tax benefits
describe the law in australia regarding tax losses
In Australia, the Commissioner of Taxation restricts the use of past accumulated tax losses to situations where it can be shown that either the continuity-of-ownership-and-control test or the same-business test is satisfied
reasons for takeover
tax benefits
describe the law in australia regarding tax losses
In Australia, the Commissioner of Taxation restricts the use of past accumulated tax losses to situations where it can be shown that either the continuity-of-ownership-and-control test or the same-business test is satisfied
reasons for takeover
tax benefits
how do you pass the continuity-of-ownership-and-control test?
- owners of at least 51 per cent of the company’s shares when it incurred losses 2. these owners must remain as owners when those accumulated losses are offset against taxable income and the effective control of the company has not changed between the generation and utilisation of the tax losses
reasons for takeover
tax benefits
The same-business test provides that
where the continuity-of-ownership-and-control test is not satisfied, the past accumulated losses can still be offset against taxable income where the acquired company continues in the same business after the takeover.
reasons for takeover
tax benefits
For companies with resident shareholders?
the incentive to reduce company tax payments by takeover is smaller under the imputation system compared to classical
BECAUSE
company tax is essentially a withholding tax against the personal tax liabilities of shareholders SO reduction of company tax –> shareholders have to pay more personal tax on dividends
reasons for takeover
tax benefits
takeover for tax benefits is reduced under the imputation system b/c reduction in company tax means shareholders will have to pay more on their dividends
what does this mean?
any advantage associated with lowering company tax payments will be only a timing advantage
reasons for takeover
tax benefits
what about in an international setting?
there are potentially substantial gains to be made by acquirers operating in high-tax jurisdictions taking over target companies which are located in countries with lower tax rates.
reasons for takeover
Increased earnings per share and price–earnings ratio effects
what may an acquiring company do?
acquiring company may evaluate the effect of a proposed takeover on its EPS.
reasons for takeover
Increased earnings per share and price–earnings ratio effects
why may evaluating the effect the proposed takeover has on EPS be unreliable?
a takeover that is economically viable _should lead to increased EPS f_or the acquiring company BUT it is easy to design a takeover that produces no economic benefits, but which nevertheless produces an immediate increase in EPS
reasons for takeover
Increased earnings per share and price–earnings ratio effects
describe bootstrapping
it occurs in share-exchange takeovers whenever the acquiring company’s price–earnings ratio exceeds the target company’s price–earnings ratio.
e.g. A (with PE ratio of 10) was able to acquire a company (PE ratio of 5) with earnings of $100 000 per annum by issuing only 50 000 of its shares.
reasons for takeover
Increased earnings per share and price–earnings ratio effects
Since EPS may be due to the bootstrap effect, what should we do
distinguish between true growth and the bootstrap effect, or ignore EPS b/c it can be misleading
reasons for takeover
Increased earnings per share and price–earnings ratio effects
should the acquiring company’s pre-takeover P/E ratio apply to the combined company?
there is no basis for assuming that an acquiring company’s pre-takeover price–earnings ratio will continue to apply to a combined company.
what is the most popular motive for takeover?
to take advantage of synergystic benefits
in a survey about motives for takeover
what was a popular response for diversification benefits from takeover?
diversification ‘results in much less devastating effects on the firm during economic downturns’.
how do shareholders benefit from the company diversifying?
reduced expected bankrupty costs –> reduced risk of bankrupty –> lower risk fo for shareholders
benefit of diversification for managers?
how will this affect shareholders wealth?
management can protect the value of their own capital (both financial and human), which is largely tied up in the company.
This reduces shareholders’ wealth
what are the 2 main roles for takeover?
- threat or potential for akeover can discipline management of target companies
- takeovers can take adv of synergies
Role for takeover
threat or potential for takeovers can be used to discipline target companies
describe?
how will this be effective?
it is important in controlling managers’ behaviour
- threat needs to be carried out
Role for takeover
threat or potential for takeovers can be used to discipline target companies
what if there is still significant efficiencies or agency problems even after the threat is made?
the managers of target companies can be replaced via takeovers e.g. there is evidence turnover of top executive managers increase significantly pursuant to a takeover (Martin and McConnell 1991)
Role for takeover
can take adv of synergies
give examples
takeovers can take advantage of synergies such as economies of scale or complementarity between assets.
Role for takeover
distinguish between using takeovers to discipline managers AND to take adv of synergies
discipline managers - gains related to changes of control
take adv of synergy - gains related to combining assets or companies
For an acquiring company, takeovers are investments that should proceed if
NPV is +
if the value of the target entity is not equal to its market value, what should management do
e.g. Board Ltd has been regarded by market participants as a likely takeover target and this speculation has increased its share price from $1.70 to $2.
- management should check that the share price of a proposed target has not already been increased by takeover rumours
- management should keep i_ts takeover intentions completely confidential_ until formally announcing the bid.
if the value of the target entity is not equal to its market value, what should management do
if there are rumours that have increased the target’s share price,
if there are rumours that have increased the target’s share price, the market price no longer gives a measure of the target’s value as an independent entity.
what is a share-exchange takeover?
acquiring company issues shares in exchange for the target’s shares.
difference between cash and share-exchange offers
cash offer: net cost independent of takeover gain; if there is a valuation error e.g. board’s assets worth 5m, cash to board’s shareholders cannot be recovered –> acquring company’s shareholders bear the loss
Share-exchange offer: cost depends on the takeover gain, because the cost is a function of the acquiring company’s share price after the bid is announced.
- valuation error: part of the loss will be borne by target company’s shareholders
role of ASIC
to administer activities covered under Corporations Act 2001
e.g. ASIC can apply to the Takeovers Panel for an acquisition of shares to be declared unacceptable or for a declaration of unacceptable circumstances.
what can the takeovers panel do?
The panel can make a declaration that an acquisition is unacceptable even if the legislation has not been contravened
what does s 659B provide
parties to a takeover cannot commence civil litigation relating to a current takeover
when there is a current takeover, how can disputes be resolved?
what other power does this body have?
Takeovers Panel has the power to resolve these disputes
which also has the power to review decisions about parties to a takeover made by ASIC
The takeovers legislation provides that, unless the procedures laid down in Chapter 6 of the Corporations Act are followed, the acquisition of additional shares in a company is virtually prohibited if this would:
result in a shareholder being entitled to more than 20 per cent of the voting shares; or
increase the voting shares held by a party that already holds between 20 per cent and 90 per cent of the voting shares of the company.
If an investor wishes to exceed the 20 per cent threshold and obtain control of a target company
how can this be done?
this can generally be done only by following one of the two procedures that the legislation permits: an off-market bid or a market bid.
once the holding exceeds 5 per cent?
a substantial shareholding notice must be issued within two business days, or by 9:30 am on the next business day if a takeover bid is currently underway
An off-market bid can be used to acquire shares that are
An off-market bid can be used to acquire shares in the target company that are listed on a stock exchange or shares in an unlisted company.
. A market bid is applicable only where
the target is listed on a stock exchange.
how long must an off-market bid be open?
This offer must remain open for between 1 and 12 months
an off-market bid may be for?
for 100 per cent or a specified proportion of each holder’s shares.
A broad outline of the steps involved in an off-market bid is provided in
s. 632 of theCorporations Act
Once an off-market bid has been made for a listed company, the offeror is allowed to
Once an off-market bid has been made for a listed company, the offeror is allowed to purchase target company shares on the stock exchange
off-market bid
what happens when the offeror increases its offer price?
An offeror can increase its offer price but has to pay this increased amount to all shareholders who accept the offer, including any who have previously accepted a lower price.
describe market-bid
- the buyer must pay cash for the shares
- offer cannot be conditional
- shares of target company listed in stock exchange
- procedure outlined under s 634
- offer open for a period of 1-12 months
market-bid
what happens if the offer price is increased
if the offer price is increased, there is no need to pay the higher price to target shareholders who sold prior to the increase.
info required to be disclosed in the bidder’s statement include
- bidder’s identify
- details of bidder’s intentions (continuing target business, major changes)
- details of how cash consideration will be obtained etc.
any other info that can assist target company’s shareholders in deciding whether to accept the offer.
The target must respond to the takeover bid by
issuing a target’s statement, which is the same for both off-market and market bids.
what must the target statement include?
- all information that target shareholders would reasonably require to make an informed decision on whether to accept the bid
- a statement by each director of the target recommending whether or not the bid should be accepted and giving reasons for the recommendation or not made
- expert report if bidder’s voting power in the target is 30%+ , or if a director of the bidder is a director of the target.
describe creeping takeover
permitted under s 611
cannot acquire up to 3% of target’s shares in 6 months, provided 19% threshold has been maintained for at least 6 months
no public statement needed
time to take control –> little commercial signifiance
what is a partial takeover
where a bidder seeks to gain control by acquiring only 51 per cent, or perhaps less, of the target company’s shares
VERY RARE IN AUSTRALI
The bidder in a partial takeover must specify
at the outset the proportion of each holder’s shares that the bidder will offer to buy.
proportional bid
partial take over bid to acquire a proportion of shares held by each shareholder
A company’s constitution may provide that a proportional takeover bid for the company can proceed only
what does the corporations act say about this
if shareholders vote to approve the bid.
The Corporations Act allows this restriction on proportional takeovers but also specifies that any shareholder approval requirements generally cease to apply after 3 years.
a bidder engaged in an off-market bid needs to acquire the approval of
at least 75 per cent of shareholders holding at least 90 per cent of the shares in the target company before it can compulsorily acquire the remaining share
describe scheme of arrangement
alternative to takeover bid when two companies want to merge operations
governed in chapter 5 of corporations
scheme of arrangement
when will court grant approval
court will grant approval
- once ASIC had provided a written statement stating it does not object
- scheme not designed to avoid chapter 6
scheme of arrangement
how many votes does the proposed scheme need to get?
Provided that more than 50 per cent of shareholders holding at least 75 per cent of shares in the company vote in favour of the scheme, the scheme will be passed, subject to the court’s approval, allowing all shares in the target company to be transferred to the bidder.
. The Takeovers Panel has issued a guidance note relating to takeover defences in which it states
a decision about the ownership and control of a company should ultimately be made by shareholders and not by management
BUT if a target’s management believes resistance is in the best interests of the company’s shareholders, such action would be consistent ch 6’s purpose
Outline defence strategies that can be used by target companies
poison pill
pre-emptive measure
- company that may become a target company makes its shares less attractive to the acquirer (potential bidder) by increasing the cost of a takeover
Outline defence strategies that can be used by target companies
Acquisition by friendly parties
the management of a company seeks the assistance of a
- white knight
Outline defence strategies that can be used by target companies
Acquisition by friendly parties
role of the white knight
purchases the target’s shares on the open market with the aim of either driving up the share price, or preventing the bidder from achieving its minimum acceptance level.
Outline defence strategies that can be used by target companies
Acquisition by friendly parties
give an example
mid-1980s
- Bond Corporation preparing for a takeover bid of Arnott’s.
- US company Campbell Soup Company purchased shares as a friendly party and acquired a strategic parcel (or ‘blocking stake’) of Arnott’s shares
- thwarted Bond Corporation’s takeover ambitions
Outline defence strategies that can be used by target companies
Disclosure of favourable information
Management of a target company may release information that it hopes will convince shareholders that the bid undervalues the company.
IT MUST BE ACCURATE
Outline defence strategies that can be used by target companies
Disclosure of favourable information
what is the purpose?
to make the takeover prohibitively expensive for the bidder and/or deliver additional value to shareholders in the form of an increased offer price.
Outline defence strategies that can be used by target companies
Disclosure of favourable information
the information disclosed must? example when information was witheld
the information disclosed must be accurate
three former directors of GIO (AMP target) have been targeted by ASIC for allegedly withholding information
Outline defence strategies that can be used by target companies
Claims and appeals
The management of a target company often claims that the bid is inadequate and may also appeal to regulatory authorities such as the Foreign Investment Review Board, the Australian Competition and Consumer Commission and/or the Takeovers Panel
may cricitise bidding company
Outline defence strategies that can be used by target companies
Claims and appeals
example of target company criticising bidding company
hostile takeover bid for Patrick Corporation by the Toll Holdings group. C
- hris Corrigan, the chief executive of Patrick Corporation, fiercely defended his company from acquisition
- placed ads in newspapers criticising Toll
Outline defence strategies that can be used by target companies
Effects of takeover defences
, directors of a target company may oppose a bid b/c
may be unemployed if successful
they place their interests before their responsibilities to shareholders
Outline defence strategies that can be used by target companies
Effects of takeover defences
esistance to a takeover bid can benefit shareholders if
if it forces the bidder to increase the offer, or attracts a higher offer from another bidder.
Outline defence strategies that can be used by target companies
Effects of takeover defences
findings by Maheswaran and Pinder (2005)
- examined 133 bids for companies listed on the ASX
- resistance by a target company’s Board reduced the probability that a bid would be successful and increased the likelihood that the bidder would increase the offer price
- no impact on the chances that a competing bidder would launch an alternative bid for the target company’s shares.
Outline defence strategies that can be used by target companies
The contention that managerial resistance to takeovers may not be in the best interests of shareholders is of concern since
the ‘market for corporate control’ concept sees takeovers as a mechanism for resolving shareholder–manager conflicts by replacing inefficient managers.
- The effectiveness of this market will be reduced if such managers use defensive tactics to entrench their positions
Outline defence strategies that can be used by target companies
who will find it most difficult to maintain employment
poorly performing managers are likely to have the greatest difficulty in maintaining employment or obtaining other jobs after a takeove
Empirical evidence supports this - companies whose management resisted takeover are characterised by poorer performance prior to the takeover bid (Morck, Shleifer & Vishny 1988; Maheswaran & Pinder 2005).
Outline defence strategies that can be used by target companies
. The problem of managers giving predominance to their own interests may be overcome by
structuring the compensation of top-level managers so that their own interests will be better aligned with those of shareholders.
Some companies approach this problem by offering top-level managers large termination payments (‘golden parachutes’) if they lose their jobs due to a takeover.
Outline defence strategies that can be used by target companies
golden parachutes
large termination payments offered to top-managers if they lose their jobs from a takeover
Outline defence strategies that can be used by target companies
golden parachutes may help reduce
be effective in preventing managers from resisting a takeover bid that is in the best interests of shareholders
Identify the various types of corporate restructuring transactions
Divestitures?
involves assets, which may be a whole subsidiary, being sold for cash, and is therefore essentially a reverse takeover from the viewpoint of the seller
- also increases wealth of target shareholders (seller)
Identify the various types of corporate restructuring transactions
spin offs
The operations of a subsidiary are separated from those of its parent by establishing the subsidiary as a separate listed company.
no change in ownership because shares in the former subsidiary are distributed to the shareholders of the parent company.
Identify the various types of corporate restructuring transactions
Leveraged buyouts.
A company or division is purchased by a small group of (usually institutional) investors using a high proportion of debt finance.
after the buyout, it is privately owned
- almost always arranged by a buyout specialist who invests equity capital in the company, arranges the necessary debt finance and takes an active part in overseeing its performance
Identify the various types of corporate restructuring transactions
management buyout.
senior managers of a company purchases all of a company’s issued shares
Identify the various types of corporate restructuring transactions
Leveraged buyouts.
benefit of going private?
avoidance of listing fees and shareholder servicing costs,
Outline the main findings of empirical research on the effects of takeovers on shareholders’ wealth
how does this benefit the target company? what evidence is there?
target company shareholders earn significant positive abnormal returns.
Brown and Da Silva Rosa (1997) found an average abnormal return of 25.5 per cent over the 7-month period around the takeover announcement. For the 1528 target companies in their sample, the total increase in shareholders’ wealth was approximately $15 billion
Outline the main findings of empirical research on the effects of takeovers on shareholders’ wealth
Significant gains to target shareholders are to be expected because t
the acquiring company must offer more than the previous market price of the shares.
Outline the main findings of empirical research on the effects of takeovers on shareholders’ wealth
target companies pre-bid?
on average, the shares in target companies performed poorly before the takeover bid. Brown and Da Silva Rosa (1997) found very poor pre-bid performance by target companier in their sample of 1371 targets shares on average was –23.3 per cent
Outline the main findings of empirical research on the effects of takeovers on shareholders’ wealth
poor pre-bid performance of shares in target companies is consistent with?
the concept that takeovers transfer control of assets to companies with more efficient managers or more profitable uses for those assets.
Outline the main findings of empirical research on the effects of takeovers on shareholders’ wealth
target companies
The initial increase in wealth of the target company’s shareholders….
The initial increase in wealth of the target company’s shareholders appears to be maintained, even where the takeover bid is unsuccessful
Outline the main findings of empirical research on the effects of takeovers on shareholders’ wealth
target companies
The initial increase in wealth of the target company’s shareholders appears to be maintained. Why?
- the bid prompted a change in the target company’s investment strategy –> expected to improve performance
2. info released during the bid caused the market to revalue the shares.
3. market may expect a further bid for the target company.
Outline the main findings of empirical research on the effects of takeovers on shareholders’ wealth
target companies
what evidence is there for the the maintenance of the initial increase in wealth in target companies ?
Bradley, Desai and Kim (1983) found that many companies that were the subject of an initial unsuccessful takeover bid received a subsequent successful bid within 5 years of the first.
- These subsequent bids resulted in further positive abnormal returns for target shareholders.
Outline the main findings of empirical research on the effects of takeovers on shareholders’ wealth
target companies
Bradley, Desai and Kim (1983) found where no subsequent bid eventuated….
Where no subsequent bid eventuated, the shares of the unsuccessful targets declined, on average, to their (market-adjusted) pre-bid level.
Outline the main findings of empirical research on the effects of takeovers on shareholders’ wealth
target companies
how much are bid prices?
Baker, Pan and Wurgler (2012) analysed over 7000 takeover bids in the US showed that the most common offer price set matched the highest price that the target company’s shares had reached over the 52 weeks before the announcement of the takeover bid.
the likelihood of the bid being accepted increases abnormally when the offer price exceeds a peak price
Outline the main findings of empirical research on the effects of takeovers on shareholders’ wealth
acquiring companies
shareholders of acquiring companies earn positive abnormal returns in the years before the takeover bid is made.
Outline the main findings of empirical research on the effects of takeovers on shareholders’ wealth
acquiring companies
Brown and Da Silva Rosa (1997) found that
Brown and Da Silva Rosa (1997) found that average abnormal returns accumulated to almost 32 per cent over the period from –36 to –6 months before the bid.
Outline the main findings of empirical research on the effects of takeovers on shareholders’ wealth
acquiring companies
Brown and Da Silva Rosa (1997) found that average abnormal returns accumulated to almost 32 per cent over the period from –36 to –6 months before the bid.
what does this suggest
takeover bids are typically made by companies that have been doing well, and have demonstrated an ability to manage assets and growth.
Outline the main findings of empirical research on the effects of takeovers on shareholders’ wealth
acquiring companies
describe the decline in abnormal returns
In the 7-month period around the announcement of the bid, the average abnormal return for successful bidders was 5.0 per cent.
other studies that have have found that the average abnormal return to shareholders of bidding companies is close to zero surrounding the announcement of takeover bids
Outline the main findings of empirical research on the effects of takeovers on shareholders’ wealth
acquiring companies
negligible wealth effects of acquiring companies can be explained by?
takeovers are profitable, but the wealth effects are disguised
competition (multiple bidders) depresses returns to acquirer
takeovers are neutral or poor investments.
Outline the main findings of empirical research on the effects of takeovers on shareholders’ wealth
acquiring companies
takeovers are neutral or poor investments. give evidence
Roll (1986)
- many managers of acquiring companies are affected by ‘hubris’ -over confident that their ability to value other companies is better than that of the market —> pay more for target company shares than they are worth
- arge returns to target company shareholders represent wealth transfers from the shareholders of acquiring companies
Outline the main findings of empirical research on the effects of takeovers on shareholders’ wealth
acquiring companies
Jarrell and Poulsen (1989) found
returns to acquirers were positively related to the size of the target relative to the bidder, which is consistent with the explanation that returns to acquirers can be disguised when target companies are small.
returns to acquirers were smaller when the bid was opposed by target management, and were lower after changes in regulation that favoured competing bidders.
Outline the main findings of empirical research on the effects of takeovers on shareholders’ wealth
why may takeovers be poor investments?
the evidence on returns to acquiring company shareholders is much less conclusive.
Outline the main findings of empirical research on the effects of takeovers on shareholders’ wealth
why may takeovers be poor investments?
Bradley, Desai and Kim (1988) found
They found an average gain of $117 million, or 7.4 per cent, in the combined wealth of shareholders.
takeovers yield real, synergistic gains and do not support Roll’s ‘wealth transfer’ hypothesis.
Outline the main findings of empirical research on the effects of takeovers on shareholders’ wealth
distinguishing between poor and good takeovers
3 reasons why the managers of acquiring companies might pay more than targets are worth.
- Roll’s hubris hypothesis suggests that managers pay too much for target companies because they overestimate their ability to run them.
- acquiring companies do systematically pay too much in takeovers in which the benefits for managers are particularly large. –> free cash flow
- Some managers may make unprofitable takeovers simply because they are poor managers,
Da Silva Rosa and Walter (2004) drew the following conclusions after surveying vast evidence
- Takeovers are initiated by companies that are high performers and are seeking to continue to perform well.
- Target shareholders enjoy significant gains when their company is subject to a takeover bid, but these gains tend to dissipate where the bid is unsuccessful and no follow-up bid is launched.
- Shares in acquiring companies tend to underperform in the market following acquisition. This is at least partly due to the relatively high costs incurred by acquirers as a consequence of the Australian regulatory environment in the market for corporate control
- Following acquisition, the analysis of the long-run performance of combined entities indicates that the anticipated benefits from the acquisition often fail to materialise.
While takeovers generate net benefits for shareholders on average, there is evidence that some types of takeover consistently harm the shareholders of acquiring companies.
how?
Such takeovers may serve the objectives of managers and are a ‘problem’ for investors, but the market for corporate control can also provide a ‘solution’ in that many unprofitable takeovers are later reversed.
Comparing Gains and Costs
The amount of the cash consideration
nThe amount of the cash consideration determines how the total gain is divided between the two sets of shareholders.
- Every additional dollar paid to the target’s shareholders means a dollar less for the acquirer’s shareholders
A stock-swap merger is a positive-NPV investment for the acquiring shareholders if
nthe share price of the merged firm exceeds the pre-merger price of the acquiring firm.
Valuation Based on Earnings
this involves
nThe bidder values the target by first estimating the future earnings per share (EPS) of the target.
PV = EPS/ r = EPS x P/E = P
The EPS figure is then multiplied by an ‘appropriate’ price/earnings (P/E) ratio to obtain an implied price (valuation) of the target.
Valuation Based on Assets
nA company’s equity can be valued by deducting its total liabilities from the sum of the market values of its assets.
Valuation Based on Assets
may be appropriate when
nMay be appropriate where a bidder intends to sell many of the target’s assets, or where the company has been operating at a loss.
what other legislations, apart from Corporations Act affect takeovers?
Trade Practices Act.
Foreign Acquisitions and Takeovers Act.
Industry-related legislation.
ASX listing rules — secrecy during takeover discussions, or apply for trading halt, shares cannot be placed (via a private placement) for 3 months after receiving a takeover offer.
Tax Effects of Takeovers
what legislation governs this?
nThe New Business Tax System (Capital Gains Tax) Act 1999.
Tax Effects of Takeovers
what kind of takeover offers are more favourable?
Scrip-based takeover offers are treated more favourably than cash offers.
Tax Effects of Takeovers
difference between cash and share exchange takeover?
he shares received when a bid is accepted are not subject to capital gains tax (CGT) until they are sold.
Unlike cash received in a takeover.
Tax Effects of Takeovers
what was historically argued?
Argued that, historically, bidders had to pay a CGT premium when making cash bids, inhibiting M & A activity
Defence measures are of two basic types
¡Pre-emptive measures aimed at discouraging bids.
¡Strategies employed after a bid is received.
takeover defences
example of poison pill
¡News Corp. provides a recent example.
November 2004, established a ‘shareholders rights plan’.
Offer of shares to existing shareholders (other than bidder) at half-price — effectively halve the bidders shareholding
takeover defences
what are stagger boards? (classic boards)
In many public companies, a board of directors whose 3 year terms are staggered so that only 1/3 of the directors are up for election each year.
¡A bidder’s candidate would have to win a proxy fight two years in a row before the bidder had a majority presence on the target board.
takeover defences
describe recapitalization
na company changes its capital structure to make itself less attractive as a target.
e.g. issue more debt and then use the proceeds to pay a dividend or repurchase stock.
Other Defensive Strategies
nA firm can
- Require a supermajority (sometimes as much as 80%) of votes to approve a merger
- Restrict the voting rights of very large shareholders
- Require that a “fair” price be paid for the company, where the determination of what is “fair” is up to the board of directors or senior management
nEffects of takeover defences
nDirectors are faced with a conflict of interest.
¡Resistance can extract additional value for shareholders but can be in interests of directors maintaining position.
¡¡Empirical evidence suggest worst managers are most likely to resist — hard to find a new job.
¡¡Golden parachutes
The Free Rider Problem
Often times the target firm is poorly managed, resulting in a low share price
If the corporate raider can take control of the firm and replace management, the value of the firm (and the raider’s wealth) will increase.
example of free rider problem
current price of the target firm is $45 per share and the potential price if the firm is taken over is $75 per share.
If the corporate raider makes a tender offer of $60 per share,
how much do tendering shareholders gain?
tendering shareholders gain $15 per share: $60 – $45 = $15
example of free rider problem
current price of the target firm is $45 per share and the potential price if the firm is taken over is $75 per share.
If the corporate raider makes a tender offer of $60 per share,
what about non-tender shareholders?
non-tendering shareholders can “free ride.”
- By not tendering, these shareholders will receive the $75 per share or a gain of $30 per share. 75-45= 30
- However, if all the shareholders feel that the potential price is $75, they will not tender their shares and the deal will not go through
example of free rider problem
non-tendering shareholders can “free ride.”
- By not tendering, these shareholders will receive the $75 per share or a gain of $30 per share. 75-45= 30
what if all shareholders feel that the potential price is 75? what shall we do?
they will not tender their shares and the deal will not go through
The only way to persuade shareholders to tender their shares is to offer them at least $75 per share, which removes any profit opportunity for the corporate raider.
example of free rider problem
what is the problem?
existing shareholders do not have to invest time and effort, but still participate in all the gains from the takeover that the corporate raider generates, hence the term “free rider problem.”
- the corporate raider is forced to give up substantial profits and thus will likely choose not to bother at all.
nSpin-offs
¡A single organisational structure is replaced by two separate units under essentially the same ownership.
The Leveraged Buyout
give example
corporate raider announces a tender offer for half the outstanding shares of a firm.
¡Instead of using his own cash to pay for these shares, he borrows the money and pledges the shares themselves as collateral on the loan.
Because the only time he will need the money is if the tender offer succeeds, the banks lending the money can be certain that he will have control of the collateral.
The Leveraged Buyout
If the tender offer succeeds?
, the corporate raider now has control of the company.
The Leveraged Buyout
nIf the tender offer succeeds, the corporate raider now has control of the company.
The law allows the corporate raider to
attach the loans directly to the corporation
- At the end of this process the corporate raider still owns half the shares, but the corporation is responsible for repaying the loan.
- The corporate raider has effectively gotten half the shares without paying for them!
