Common Takeover Tactics and Defenses

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					The Corporate Takeover
        Market
  Common Takeover Tactics,
 Anti-Takeover Defenses, and
    Corporate Governance
Course Layout
                                    M&A and Other
                                     Restructuring
                                       Activities


           M&A           M&A Process              Deal           Alternative
        Environment                            Structuring      Restructuring
                                                                 Strategies


         Motivations      Business &             Public &       Divestitures,
          for M&A       Acquisition Plans    Private Company    Spin-Offs, &
                                                 Valuation      Carve-Outs


      Common Takeover   Search Through          Financial       Bankruptcy &
        Tactics and     Closing Activities      Modeling         Liquidation
         Defenses                              Techniques


                                                Alternative
                                                Structures


                                             Tax & Accounting
                                                  Issues
  Current Lecture Learning Objectives

Providing students with an understanding of
• Corporate governance and its role in protecting
  stakeholders in the firm;
• Factors external and internal to the firm affecting
  corporate governance;
• Common takeover tactics employed in the
  market for corporate control and when and why
  they are used; and
• Common takeover defenses employed by target
  firms and when and why they are used.
Factors Affecting Governance
                    External to Firm

                       Legislation



External to Firm   Internal to Firm      External to Firm
                   •Board of Directors
                   •Management              Market for
 Regulators
                   •Internal Controls    Corporate Control
                   •Incentive Systems
                   •Takeover Defenses

                    External to Firm
                      Institutional
                        Activism
   Internal Factors: Board of Directors and
                 Management
• Board responsibilities include:
  --Review management proposals/advise CEO
  --Hire, fire, and set CEO compensation
  --Oversee management, corporate strategy, and
    financial reports to shareholders
• Good governance practices include:
  --Separation of CEO and Chairman of the Board
  --Boards dominated by independent members
  --Independent members serving on the audit and
    compensation committees
 Internal Factors: Controls & Incentive
                Systems
• The challenge is to align management and
  shareholder objectives
  – Link stock option exercise prices to firm’s
    stock price performance relative to the overall
    market
  – Key managers should own a significant
    portion of the firm’s outstanding shares
  External Factors: Legislation
• Federal and state securities laws
  – Securities Acts of 1933 and 1934
  – Williams Act (1968)
• Insider trading laws
• Anti-trust laws
  – Sherman Act (1890)
  – Clayton Act (1914)
  – Hart-Scott-Rodino Act (1976)
    External Factors: Regulators
• Securities and Exchange Commission
• Justice Department
• Federal Trade Commission
• Public Company Accounting Oversight
  Board
• Financial Accounting Standards Board
    External Factors: Institutional
              Activism
• Pension funds, mutual funds, and insurance
  companies
• Ability to discipline management often limited by
  amount of stock can legally own in a single firm
• Investors with huge portfolios (e.g., TIAA-CREF,
  California Employee Pension Fund) can exert
  significant influence
• Recent trend has been for institutional investors
  to simply withhold their votes
     External Factors: Market for
          Corporate Control
• Changes in control can result from hostile
  takeovers or proxy contests
• Management may resist takeover bids to
  – Increase the purchase price (Shareholders’
    Interests Theory) or
  – Ensure their longevity with the firm
    (Management Entrenchment Theory)
   Market for Corporate Control:
   Alternative Takeover Tactics

• Friendly

• Hostile
   Market for Corporate Control: “Friendly”
              Takeover Tactics
• Potential acquirer obtains support from the target’s board
  and management early in the takeover process before
  proceeding to a negotiated settlement
   – The acquirer and target firms often enter into a
      standstill agreement in which the bidder agrees not to
      make any further investments for a stipulated period
      in exchange for a fee from the target firm.
• Such takeovers are desirable as they avoid an auction
  environment
• If the bidder is rebuffed, the loss of surprise gives the
  target firm time to mount additional takeover defenses
• Rapid takeovers are less likely today due to FTC and
  SEC pre-notification and disclosure requirements
    Market for Corporate Control: Hostile
              Takeover Tactics

• Limiting the target’s actions through a “bear hug”
• Proxy contests in support of a takeover
• Purchasing target stock in the open market
• Circumventing the target’s board through a
  tender offer
• Litigation
• Using multiple tactics concurrently
     Market for Corporate Control: Pre-Bid
              Takeover Defenses
• Poison pills to raise the cost of takeover
• Shark repellants to strengthen the target board’s defenses
    – Staggered or classified board elections
    – Cumulative voting rights
    – Limiting when can remove directors
• Shark repellants to limit shareholder actions
    – Limitations on calling special meetings
    – Limiting consent solicitations
    – Advance notice and super-majority provisions
• Other shark repellants
    – Anti-greenmail and fair price provisions
    – Super-voting stock, re-incorporation, and golden parachutes
    Market for Corporate Control: Post-Bid Takeover
                       Defenses
•   Greenmail
•   Standstill agreement
•   Pac-man defense
•   White knights and white squires
•   Employee stock ownership plans
•   Recapitalization
•   Share buy-back plans
•   Corporate restructuring
•   Litigation
•   “Just say no”
          Impact on Shareholder Value

• Friendly transactions result in average abnormal returns
  to target shareholders of 20%
• Hostile transactions result in average abnormal returns
  to target shareholders of 30-35%
• Bidders’ shareholders earn average abnormal returns or
  2-3%
• While mixed, empirical studies generally indicate that
  takeover defenses have no significant impact on
  abnormal shareholder returns
                Things to remember...
• Hostile takeover attempts and proxy contests affect governance
  through the market for corporate control
• Hostile takeover attempts tend to benefit target shareholders
  substantially more than the acquirer’s shareholders by putting the
  target into “play.” Consequently, acquirers generally consider
  friendly takeovers preferable.
• Anti-takeover measures share two things in common. They are
  designed to
   – Raise the overall cost of the takeover to the acquirer’s
      shareholders and
   – Increase the time required for the acquirer to complete the
      transaction to give the target additional time to develop an anti-
      takeover strategy.