Wk 6 - M&A continued

Question 1

what is the issue with a more hostile takeover

Answer 1

Hostile:
- More costly - ^ offer price / bid premium

Question 2

Issue of separation of Ownership and Control

Answer 2

Agency problem
Shareholding structure becomes more spread out and complex
Managers appointed to represent:
- Shareholder interest
- Maximise Firms Value

Question 3

Residual Claims vs Fixed Payments

Answer 3

Shareholders appoint agents (CEOs) to make decisions that maximise firm value
- CEOs receive fixed payments (salary / remuneration package)
- Shareholders have Equity (residual claims on value of firm)
Shareholders bear risk of decisions made by CEOs
AIM:
To keep agents incentivised from taking risks

Question 4

Incentive Misalignment

Answer 4

Separation of ownership and control leads to incentive alignment or agency problems
Inefficient monitoring can lead to conflict of interest

Question 5

Bad Bidders = Good Targets

Answer 5

If firm A acquires firm B and subsequently, their value decreases (bad M&A decision)
Firm C may acquire firm A

Question 6

Market for Corporate Control Summary

Answer 6

Takeovers allow buy/sell of corporate control
- Demand ^ when firms appear undervalued (result of inefficient management)

Separation of ownership and control
- Enables CEO to take risks (bigger payouts)
- Makes CEO insensitive to value destruction

Problem: If CEO at constant risk from MCC
- Why take risks / innovate / invest R&D etc

Question 7

What is Takeover defence

Answer 7

They act as a buffer to the MCC

Question 8

What are the Takeover defence options

Answer 8

AKA Anti-Takeover Provisions (ATPs)

Pre-emptive - put in place in response to a concern of potential takeover attempt

Deal-Embedded defences - intended to raise ante for an intruder (against interference)

Reactive defences