takeover

What is takeover

Transfer of control of a firm from one group of shareholders to another

Explain the different types of takeovers by type of industrial organization

Horizontal - Acquirer and target are in the same industry and at the same stages of the production process (coke acquires Pepsi

Vertical - Acquirer and target are in the same industry and at the different stages of the production process (Starbucks acquires a coffee beam supplier

Conglomerate - acquirer and target are in different industries (Amazon acquiring a grocery store)

What are synergies? In what ways do takeovers create synergies?

Synergies - value created or destroyed by mergers

How they create synergies

• Higher revenues (better marketing, greater market power, entering new markets)

• Lower costs (horizontal and vertical integration)

• Saving in investment (they need less working capital combined and less fixed assets)

• Lowering taxes (more debt = more tax savings)

• Improving financing (larger size = lower cost of borrowing)

• Enhancing management decisions (run the business more efficiently)

Explain how different types of acquisitions work

Mergers or consolidations - the acquirer firm and target firm become a single firm

• It is friendly

• Negotiated between the managers of both firm

• Required approval of both firm’s shareholders

• Allows a lower premium to the target’s price

Merger - the target firm ceases to exist

Acquisition - both firm ceases to exist and create a new one

Acquisition of stock

• Less friendly

• One firm acquired the stock of another

• Doesn’t require approval from the targets shareholders

• Requires a higher premium to the target’s market price

• The bidder acquires majority ownership of the target and replaces its board with new board who approves a merger

Acquisitions of assets

• Acquirer buys assets directly from the target

• requires approval of the target’s shareholders

• Legal process of transferring title is costly

Should acquisitions be paid for in cash or stock? What are the main considerations

Main considerations

• Taxes

• Sharing of future gains and losses

• Relative valuation

Taxes

• Cash - is taxable and they must realize capital gains immediately

• Stock - non-taxable or tax-deferred because target shareholders just exchange shares

Sharing future gains and losses

• Cash - acquirer gets 100% of the company, target shareholders are out after the deal

• Stock - target shareholders remain owners in the combined firm and share in the future value

Relative valuation

• If acquirers stock is overvalued, it’s cheaper to use stock

• If acquirers stock is undervalued, it’s better to pay in cash to avoid giving up too much value

What is a proxy contest

Common shareholders try to take control of a company by convincing other shareholders to vote for their choice of directors instead of current management

What is corporate governance? What is good and bad corporate governance?

Managers act in the interests of shareholders rather than their own interest

Explain the forces that discipline managers

Bpit bm - bop it bob Marley

Board of directors - once they are independent

Product market competition - poorly managed firms go out of business

Managerial labour market competition - bad managers are fired and can’t get rehired anywhere else

Incentive compensation contracts - cash bonuses, stock and options

Block holders - shareholders who own more than 5% can fire bad managers

Takeovers

Are golden parachutes good or bad? Why?

Golden parachutes - target firms shareholders pay their bad managers to go away

Good

• Reduces resistance to mergers

• Less likely to block the takeover because they get paid anyway

Bad

• Expensive for shareholders

• Managers get a lot of money for poorly managing

Describe the measures that managers of a target firm can use to defend themselves against a bidder? Are they good or bad for the target shareholders?

Keep it PGV

Poison pills

• automatically dilutes the ownership of many shareholder whose stakes exceed 20%

• All other shareholders are given more shares to buy

Greenmail (targeted repurchases)

• Buy back its own shares at a premium

• Bidder agrees not to acquire the target for a fixed period of time

Voting restrictions

• Classified boards - the bidder can only replace a fraction of directors each year rather than all of them at once