Chapter 11

Question 1

The market for corporate control

Answer 1

external governance mechanism consisting of a set of potential owners seeking to acquire undervalued firms and earn above-average returns on their investment

• becomes active when a firm’s internal control fails
  -less precise than internal governance systems

Question 2

Need for external mechanism

Answer 2

• address internal corporate failure
• corrects suboptimal performance relative to competitors
• discipline ineffective and opportunities managers

Question 3

Manne’s thesis

Answer 3

• the lower the stock price to it’s potential, the more attractive the takeover becomes
• rather than removing an executive, the board might decide to sell it to people who can manage assets better

Question 4

financial synergies

Answer 4

• the logic of a strategic buyer
• the buyer believes that it can increase profits through revenue improvement, cost reduction or vertical integration

Question 5

diversification + congolomate structure

Answer 5

two businesses whose earnings are uncorrelated can benefit by relying on the capital generated when one business is thriving to help the other when it is struggling. Larger entities have reduced risk profiles

Question 6

change in ownership + private equity buyer

Answer 6

new owner may have superior access to capital, managerial expertise, and technology

Question 7

Economics of scale + startegic buyer

Answer 7

the new firm may have increased profits by selling more goods and at a higher volume

Question 8

Economies of scope

Answer 8

utilizing the marketing and distribution capabilities of a broader product offering –> logic behind a strategic buyer

Question 9

Human capital and Intellectual property + strategic buyer

Answer 9

new owner may have desire human ideas and capabilities

Question 10

Empire building (non strategic)

Answer 10

buying mainly for the sake of managing a larger enterprise

Question 11

Hubris (non startegic)

Answer 11

overconfidence on management that it will be managed more efficiently than its owners

Question 12

Herding behaviour (non-strategic)

Answer 12

senior managers pursue acquisition because a competitor has purchased an acquisition

Question 13

Compensation initiatives

Answer 13

only agrees because it stands to receive a large payment upon change in control

CEO receive 29 million in cash and accelerated equity when there is a change in control

Question 14

Three acquisition process

Answer 14

Merger

Solicited Takeover (friendly and negotiated)

Unsolicited takeover (Hostile)

Question 15

Acquiror process

Answer 15

Board approval
valuation work in advance
Fairness opinion from an investment bank

Question 16

Target Process (Merger)

Answer 16

• create legal entity ( a new name)
• exclusive and private negotiation
• negotiation by both management team
• supported by the board and fairness opinion to complete fiduciary responsibilities
• approval of shareholder by a proxy vote
• shareholders of merged companies are offered equal holdings
• small to no premium vs prior market price
• management is combine
• existing shares delisted and replaced with new shares in the combined company

Question 17

Solicited Takeover

Answer 17

• seller requests bid through a broad and narrow auction process, run by an investment bank
• auction fulfils the boards fiduciary duties
• management negotiated with one or more bidder
• target management receives compensation (golden parachute)
• board accepts and recommends the bid providing the greatest shareholder value
• shareholders vote accept or not

Question 18

Unsolicited (Hostile)

Answer 18

• bidder makes an offer directly to the shareholders against the wishes of management
• target management and board usually reject bid after evaluating it and may deploy takeover defences - white knight search, poison pills
• target must legally supply bidder with shareholders list so that bidder can mail offer directly to shareholder s
• if successful bidder takes over corporation - delist stocks, corporation usually becomes owned subsidiary, fires management and replaces the board
• unsuccessful, bidder can raise its offer or negotiate higher price and terms to turn the deal friendly

Question 19

BCE case

Answer 19

director’s fiduciary duty is owed to the corporation as a whole rather than any particular shareholder, other, rejecting revlon

directors have a duty to understand other stakeholders and its interest

affirmed business judgement rule applies to directors

Question 20

Revlon duties and Unocal case

Answer 20

revlon duties: if a change in control occur then directors must seek highest value for shareholders

Unocal case: when a board takes defensive actions, the actions can not be coercive or designed to preclude a deal

Question 21

Board duties in take over-process

Answer 21

a) disclose conflicts: common law, statute and MBO case
b) corporate opportunities: Canaro and Peso silver cases: opportunities are owned by the corporation but fact-specific
c) Duty to confidentiality: keep secrets of the corporation: insider trading
d) duty to disclose: don’t keep secrets from the corporation

Question 22

when is a takeover hostile?

Answer 22

• if the board rejects it and the person keeps pursuing it
• if the bidder makes an offer without informing the board prior
• changes in control can result from hostile takeover or proxy contests
• major issue for the bidder is lack of inside information to accurately value the target

Question 23

why would managers reject takeover?

Answer 23

• increase purchase price (shareholder’s interest theory)
• ensure their longevity with the firm (management entrenchment theory)

Question 24

Takeovers may

Answer 24

• minimize cost
• transfer control to those who can manage it better

Question 25

when does acquisition become a threat?

Answer 25

- weak financial performance - stock has been underperforming the peer group for 2 years - managers who don't hold any stock in the firm - underutilized assets - low debt levels - high merger industry

Question 26

why don't we see HT as often now

Answer 26

- damage to reputation due to public fights - more expensive (premium costs) - too many effective defenses in place - Ht bidder may always loose to a white night bidder found by the target - post-deal integration is a big problem - lack of inside information and lack of due-diligence

Question 27

Value of Takeover

Answer 27

US takeover has shown that the incremental value of an acquisition always flows to the target that the acquirer Acquirer also realize less value following there merge

Question 28

The target value

Answer 28

- receives double-digit premium take over (20% returns of shareholders) - experiences greater excess in hostile deals (returns of 30-35%) -experiences greater excess return in all-cash deals

Question 29

the acquirer value

Answer 29

- no excess return or even negative returns - negative excess in hostile - experience greater decline if equity-financing bid

Question 30

problems acquirer face after takeover

Answer 30

- underperforms for 1-3 years - performs worse if financed with equity -decreases investment in working capital and cap-ex - disruptive and require high management attention - elevated turnover rates for up to 10 years following

Question 31

Anti-takeover defenses

Answer 31

are designed to pursue long term value creation without threat of takeover - enhance bargaining power to secure higher bid - raise overall cost of the takeover - increase time required for the acquirer to complete the transaction to the give the target enough time to develop anti-takeover strategy

Question 32

Poison pills

Answer 32

rights offering to existing shareholders that makes the deal so expensive that bidder walks away allows company shares to be purchased at discounted price and triggered if shareholders accumulate an ownership positions above a threshold not as common because security regulations has to approve a deal within 105 days which eliminates the main objective of buying time

Question 33

Staggered boards

Answer 33

- official board members make proxy fights to chang the board difficult - elected in three year term - 1996 to 200, no corporate raider gained control of a staggered board through proxy contest - do not receive a higher takeover premium 54% v 0%

Question 34

white knights

Answer 34

look for other friendly acquirer

Question 35

white squire

Answer 35

passive investors purchase blocks of stocks to frustrate bidding

Question 36

dual class share

Answer 36

different classes of shares with different number of votes per share Wedge: economic interest and voting interest - low governance - more negative to acquisitions - negative to large capital expenditures - CEO comp is higher

Question 37

Recapitalization

Answer 37

change the capital structure, usually with debt

Question 38

golden parachute

Answer 38

extremely lucrative severance packages and only works for small companies

Question 39

regulatory approval

Answer 39

fight the deal on regulatory level