Lecture 8a: Takeovers

Question 1

What is a control premium in takeovers. What is control premium also known as

Answer 1

Amount paid by bidder for control over-and-above the value operating as an independent entity

Also known as Net Cost

Question 2

What are the 3 types of takeovers. Are the reasons for the 3 types of takeover different?

Answer 2

1. ) Horizontal: Same Line of Business (Uber & Grab)
2. ) Vertical: Same line; Different Points (One supplier; other consumer)
3. ) Conglomerate: Unrelated (Westfarmers)

Yes. Different takeovers dictate different motives

Question 3

What are the 3 payment methods in takeovers

Answer 3

1. ) Cash (sometimes purchased at a premium)
2. ) Shares in COMBINED company
3. ) Combination of cash and shares in combined company

Question 4

What are some legal regulations in takeovers. What is the implication of regulations

Answer 4

1. ) Takeover Panel: Peer-body to review acquisitions
2. ) ACCC: Prevents mergers which substantially lessens competitions and which might create monopoly (Protects consumers)
3. ) FIRB: Foreign bidders who want >15% of shares must obtain approval of treasurer
4. ) Other industry-specific bodies

It often dictates who wins/loses from a takeover

Question 5

What firm are regulations biased towards in takeovers

Answer 5

Biased towards the target firms

Question 6

What is the purpose of The Corporations Act (2001) in Takeovers

Answer 6

To ensure takeovers take place ECI

1. ) Efficiently (Informed)
2. ) Competitively: Everyone gets a chance to participate and all shareholders in the target company have a reasonable and equal offer to participate
3. ) Informed

(It does not PREVENT takeovers)
(To make the bidder behave!)

Question 7

What does The Corporations Act (2001) mean by ensuring takeovers are Informed

Answer 7

Shareholders of Target Company must:

a. ) know Bidder’s identity
b. ) be given reasonable time to consider proposal/merits of takeover

Question 8

What is the process like for takeover (In percentages) based on The Corporations Act (2001)

Answer 8

0-5%: Okay
5% - 20%: For each 1% change, it must be declared (Ensure target shareholders are informed)
20% - 90%: Off-market/On-market/Scheme/Creeping
>90%: Compulsory Acquisition

Question 9

Who does a compulsory acquisition benefit

Answer 9

It benefits all parties (Bidding and Target company shareholders)

Question 10

20% - 90%: Off-market Bid and Properties

Answer 10

Bidding makes an offer to all target company shareholder (Cash/Shares/Combination)

1. ) Time: 1 Month < Offer < 12 months
2. ) 100%/ Proportion of each shareholders shares in target company specified
3. ) Can increase price BUT increased price must be paid to all shareholders

Question 11

20% - 90%: On-market Bid and Properties

Answer 11

Bidding makes an offer to stock exchange (Cash) (Not possible to swap shares)

1. ) Time: 1 Month < Offer < 12 months
2. ) No Conditions
3. ) Can increase price AND increased price need NOT be paid to all shareholders

Question 12

What is the option intuition behind On/Off-market Bids

Answer 12

The bidding company provides a put option to target company shareholders.

Bidding has an OBLIGATION to buy shares and target SHs have a RIGHT to sell.

Question 13

What are some disclosure requirements for the bidder in an on-market/off-market bid

Answer 13

1. ) Identity
2. ) Intentions
3. ) Details of how cash offered for shares will be financed
4. ) Price paid by bidder to acquire target company shares in the last 4 months (reasonableness of price)
5. (Off-Market Only): Bidding Voting Power
6. ) Any other information

Question 14

What are some disclosure requirements for the target in an on-market/off-market bid

Answer 14

1. ) Recommendations with respect to the bid (Accept/Reject)

2. ) Give reasons for the acceptance/rejection

Question 15

20% - 90%: Scheme of Arrangement and Requirements for it

Answer 15

Court approved arrangement - requires 100% acquisition.

Must have at least >75% of voting shares and 50% of members vote for this to take place (1/2 members with 3/4 of votes)

Question 16

20% - 90%: Scheme of Arrangement and disadvantages

Answer 16

1. ) Time Consuming

2. ) Costly

Question 17

20% - 90%: Creeping Bid and Properties

Answer 17

Acquire 3% every 6 months without public statements

Question 18

20% - 90%: Creeping Bid and Disadvantages

Answer 18

1. ) Time Consuming (Takes 5 years to go from 20% to 50%)

2. ) Little commercial significance

Question 19

What are the 5 takeover defenses and what is the defense predicated upon

Answer 19

It is predicated on - Directors have a FIDUCIARY DUTY to shareholders (MUST act in SH’s best interest)

1. ) Poison Pill
2. ) Golden Parachute
3. ) White Knights
4. ) Response to Target’s Disclosure Statement
5. ) Appeals

Question 20

Takeover Defence 1: Poison Pill. Elaborate. One Example

Answer 20

Target company makes itself less attractive (disposing asset/change ownership structure)

E.g.

• Liberty Media announced 17% of News Corporation. - - News Corporations Defence: Gives all shareholders (other than Liberty Media) to purchase new share at half price
• Dilute value and ownership of Liberty Media.

Question 21

Takeover Defence 2: Golden Parachute and Caveat

Answer 21

Employment agreement provides large payments if agreement is terminated»_space; Target less attractive

However, it is limited as court may declare void if deemed unfair (Manager reap benefits, not shareholders)

Question 22

Takeover Defence 3: White Knights. What is it akin to. Pros and Cons

Answer 22

Akin to Private Placement (Invite third party to acquire shares)

Pros: Dilute ownership of bidding company.
Cons: White knights often turn into black knights by selling their shares to bidding company.

Question 23

Takeover Defence 4: Response to Target’s Disclosure Statement

Answer 23

Convince target shareholders, through their statement, that bid undervalues their company (i.e. release of publicly good statement in response to bidding’s negative statement)

Question 24

Takeover Defence 5: Appeals

Answer 24

Appeal to ACCC, Takeover Panels, Target Shareholder Loyalty

Question 25

How do we Financial Valuate a Takeover: Gains, NPV, Net Cost

Answer 25

Synergy/Gain = VBT - (VT + VB) NPV/Gain to Bidding = Gain - Net Cost Net Cost = Cash - VT/ (%)(Shares in COMBINED) - VT

Question 26

What is net cost also known as... Who captures the net cost

Answer 26

Control premium. The target company catches these costs (to check)