Takeover by alicejenny


									Mergers and Acquisitions 合併與購併

What is Corporate Governance?
Corporate Structure
Principal Agent Relationship


                           Board of directors


Board of Directors

•   Definition

•   Purpose and Duties

•   How do you become a Member?

Executive Compensation
•      Definition
•      Purposes
•      Who Sets Compensation?
•      Today Typical Package
•      Examples of Compensation and Firm

• The textbook answer to corporate control is
  that shareholders elect a board of directors
  who appoint management. Management is
  thus an agent of shareholders and all
  corporate decisions should be made with the
  best interests of the shareholders in mind.

• The concept that management makes all
  decisions based on shareholder wishes is
  considered the socially optimal corporate
  governance rule. The basic concept is that
  since shareholders are the residual claimant
  of corporate assets (i.e. get paid last), any
  decision that benefits shareholders, by
  definition, benefits other stakeholders in the
  corporation.                                  6
• There is a large body of empirical evidence
  that management acts in its own best
  interest (note, so does everyone else).
  However, shareholders (through the board
  of directors) have some control over
  management compensation. Therefore,
  shareholders can usually design a
  compensation system that causes
  management to usually act in the
  shareholders best interest.                 7
• Corporate control ultimately depends on
  controlling enough votes (usually 51%) to
  elect a board of directors. A firm must also
  produce a proper return on its assets to
  avoid the takeover market. Thus corporate
  control, for various reasons (SEC rule, cost
  of a takeover), usually is in the hands of a
  dominant shareholder, or by default,

• The group controlling the corporation can
  do things to increase its control either
  through corporate charter amendments,
  capital structure changes, and the
  accumulation of shareholder clienteles.

  Corporate control 公司控制

Takeover   -acquisition     -merger or consolidation
                            -acquisition by stock
                            -acquisition by assets
           -proxy contest
           -going private

• Takeover is a general term referring to the transfer of
  control of a firm from one group of shareholders to another.
• Merger: A merger refers to the complete absorption of one
  firm by another. The acquiring firm retains its identity and
  the acquired firm ceases to exists as a separate business
• Bidder: the acquiring firm
• Target firm: the firm is to be acquired.
• Consolidation: A consolidation is the same as a merger
  except that an entirely new firm is created. Old firm cease
  to exist.

Reasons for merger and acquisition

• Synergy:
      The acquisition is said to generate synergy.
• Revenue enhancement
      *Marketing gains: advertisement, channel, and
  product mix
      *Strategic benefits;
      *market power

• Cost reduction: more efficiently.
      *Economy of scale.
      *Economies of vertical integration
      *Complementary resources
• Lower taxes
      * net operating loses
      * unused debt capacity: Acquiring some firms that do
        not use as much debt as they are able.
      * Surplus funds: free cash flow can be used for
        investment project
• Reductions in capital needs: A merger may reduce the
  combined investment needed by the two firms.


• Acquisition by assets. A firm effectively acquires another firm by
   buying most or all of its assets. This type of acquisition requires a
   formal vote of the shareholders of the selling firm.
• Acquisition by stock: To acquire a firm by purchasing the firm’s
   voting stocks in exchange for cash , shares of stocks, or other securities.
• Tender offers is a public offer to buy shares by one firm directly from
   the shareholders of another firm. The tender offer is communicated to
   the target firm’s shareholders by public announcement.

• 1.In an acquisition by stock, no shareholder meeting have
  to be held and no vote is required.
• 2.The target firm’s management and board of directors are
• 3.Acquisition by stock is occasionally friendly. Resistance
  by the target firm’s management often makes the cost of
  acquisition by stock higher than that of a merger.
• 4.Many acquisitions by stock end up with a formal merger

Acquisition classifications
• Horizontal acquisition: same industry, same business.
• Vertical acquisition: involves firms at different steps of the
  production process.
• Conglomerate acquisition: two firms are not related.

Proxy contest
• An attempt to gain control of a firm by soliciting a
  sufficient number of stockholders votes to replace existing
  management. Proxy contest occurs when a group attempts
  to gain controlling seta on the board of directors by voting
  in new directors.

Going private transaction
• An publicly owned stocks in a firm are purchased by a
  small group of investors. Usually the group includes
  members of incumbent management . A large percentage
  of money needed to buy up stocks is usually borrowed. So
  such transactions are known as leveraged buyouts(LBOs).
  LBOs took place often in the 1980’s in USA.

Taxes and acquisition
• Taxable acquisition: the shareholders of the target firm are
  considered to have sold their shares, and their capital gains
  needed to be taxed. The general requirement for tax-free
  states are that the acquisition be for a business purpose,
  and that there be a continuity of equity interest. i.e. the
  shareholders in the target firm must retain an equity
  interest in the bidder.
• Like cash→stock: taxable
• stock→stock: tax-free

Accounting for acquisitions
• Two methods:
1. the purchase method

          Firm A                                   Firm B
           B/S                                      B/S
Working             4 Equity   20   Working    2 Equity     10
capital                             capital
Fixed              16               Fixed      8
assets                              assets
Total              20 Total    20   Total     10 Total      10

•   A pays B 18 million in cash. A+B=38. Market value of
    B’s fixed assets is 14 million.
    Working            6 Debt     18
    Fixed             30 Equity   20
    Goodwill           2
    Total             38 Total    38

• Goodwill must be amortized over a period of time (max. 40 years)
  The amortization is a deduct from income. The combination of lower
  reported income and large market value of assets results in lower ROA
  and ROE.
2. Pooling of interests

• The balance sheets are just added together.

                        Firm AB
      working capital          6 Equity   30
      Fixed assets            24
      Total                   30 Total    30

Defensive tactics
Target firm managers frequently resist takeover attempts
* The company charts: The company charts establishes the
   condition that allows for a takeover. Firms frequently
   amend corporate charts to make acquiring more difficult.
    e.q. change voting ration from 2/3 to 90%. This is called
      supermajority amendment. Stock price response is

Repurchase / standstill agreements: Standstill agreements are
  contracts where the bidding firms agree to limit its holding
  in the target firm. A targeted stock repurchase happens
  that payments are made to potential bidders to eliminate
  unfriendly takeover attempts. This is greenmail. Stock
  price response: Negative

               Poison Pills
• A plan that allows current shareholders (but
  not any of the “new” shareholders) the right
  to buy additional shares of stock in case of a
  tender offer announcement, at half the price.
• The shareholdings of current shareholders
  increase, reducing value of raider’s shares.
• Stock price response: Negative.

         Golden Parachutes
• Compensation promise to top-level
  management in case they exit because of a
• Stock price response: Positive

            Scorched Earth
• A conditional sale of the crown jewels to a
  friendly third party in case of a takeover.
• Stock price response: Negative

  White Knights and Whitemail
• A white knight is a friendly firm who comes
  to the rescue of a target being pursued by a
  hostile raider.
• Whitemail is any concession given to the
  white knight to attract it.
• Stock price response: Positive.

          Leveraged Recaps
• An attempt by the firm to become its own
  white knight by taking a huge amount of
  debt, or selling assets, and paying out a
  large special dividend to its shareholders.
• Stock price response: Positive.

* Exclusionary self-tender is the opposite of a target
  repurchase. A firm makes a tender offer for a given
  amount of its own stock while excluding targeted
* Going private and leveraged buyouts

Empirical evidence of takeover activities

• Empirical evidence of takeover activities
       Takeover     target   bidder
       tender offer 30%      4%
       merger         20%     0
       proxy contest 8%       na
• 1.tender: unfriendly, cost is high
• 2.target firm. Gain is high.
• 3.bidder: To bidding is not for shareholders, but for
  managers. Gain for bidder firm is low. Another reason for
  low gain for bidding firm is because the competition is
  intensive, gain will not by high.


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