Ch08 Takeovers 2ed

7/31/2019 Ch08 Takeovers 2ed

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Chapter 8

Corporate Takeovers:A GovernanceMechanism?


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Chapter Overview

Brief overview of M&A

The target firmTakeover defenses

Assessments of takeover defenses

International perspective


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U.S. and U.S. Cross-Border M&A

Activity Transactions

$0

$200

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$600

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1980

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Billions

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Deal Value

Number of Deals


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Brief Overview of M&A

A merger is often viewed as a combination oftwo firms.

An acquisition is viewed as one firm buyinganother.

However, almost all mergers are essentially

acquisitions.M&A can be synergistic or disciplinary orboth.


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Synergistic M&A

To improve operational or financial synergies.

e.g., Exxon and Mobil

To diversify by expanding into new businesses.

e.g., the AOL and Time Warner

Most of the recent mergers have occurred for growthand for increased market power.

e.g., Oracle and PeopleSoft, HP and Compaq.

Both synergistic and diversifying.

e.g., the Morgan Stanley and Dean Witter

Extremely diversifyinge.g., General Electrics acquisition of NBC


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The Target Firm

Target firm is the firm to be acquired.

An acquiring firm may want to acquire a targetfirm because it believes the target firm:

Therefore, target firms usually enjoy a share

price increase when its acquisition is

announced to the public.

is not performing up to its full potential.

the target firm could become a better performerunder someone elses control.


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The Acquirers Goals

To takeover the target firm

To make the target firm profitable byCutting the target firms fixed or variable costs

Improving its operational efficiency

Getting rid of its bad managers


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To Acquire a Successful Firm or an

Unsuccessful Firm?

A successful firm An unsuccessful

firmTakeover cost Pay a large sum Pay a relatively

small sum

Subsequent netgains May be limited May besignificantly

positive


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Paying a Significant Premium for

Target Firms

Acquirers almost always end up paying asignificant premium for target firms.

Whether or not the premium paid for targetfirms is ever fully recovered is still underdebate.

The target firms shareholders might like theirfirms are taken over, while the target firmsmanagement team may oppose beingacquired because they might get firedafterwards.


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Hostile Takeover

Hostile takeover happens

First, when the target firms management balks ata takeover bid, acquirer may take their takeover

bid directly to the target firms large shareholders.

Second, an interested acquirer circumvents thetarget firms management and effectively takes

control of the target firm.


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The Notion of the Disciplinary Takeover

Takeovers are viewed as an important

governance mechanism because some firmsthat get taken over are poorly performing

firms.

The fear of a potential takeover might

represent a powerful disciplinary mechanismto make sure that:

Managers perform to the best of their abilities.

Managerial discretion is controlled.


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Are Takeovers an Effective

Governance Mechanism?

It is not clear whether takeovers are an

effective governance mechanism because:An acquirer may have to pay too much for a target.

Takeovers could occur for the wrong reasons (e.g.,

empire building).

Even if the acquirer is able to pay a fair price for a

target, the amount usually is still significant.


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Why Did Many Disciplinary Takeovers

Not Take Place Recently?

Share prices might have been inflated due topoor governance.

Disciplinary takeovers get rid of managerswhose questionable actions lead to low, nothigh, stock prices.

It costs a lot of money to buy a firm.There are too many defenses againsttakeovers.


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Takeover Defenses

There are two categories of takeover

defenses:(1) Firm-level defenses

(2) U.S. state-level defensesstate laws that

regulate and limit takeovers

Pre-emptive defenses

Reactionary defenses


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Firm-level Pre-emptive Takeover

Defenses

Poison pillany strategy that makes a target firmless attractive immediately after it is taken over.

A golden parachutean automatic payment made tomanagers if their firms gets taken over.

Supermajority rulestwo-thirds, or even 90 percent,of the shareholders have to approve a hand-over in

control.

Staggered boardsonly a fraction of the board canget elected each year to multiple-year terms.


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Firm-level Reactionary Takeover

Defenses

Greenmaillike a bribe that prevents

someone from pursuing a takeoverOther reactionary defenses include:

The firms management trying to convince its shareholders

that the offer price is too low.

Raise antitrust issues.Find another acquirer who might not fire management after

the takeover.

Find an investor to buy enough shares so that he/she can

have sufficient power to block the acquisition.


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State-level Anti-takeover Laws

There are five common state-leave anti-

takeover laws:Freeze-out laws

Fair price laws

Poison pill endorsement lawsA control share acquisition law

A constituency statute


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Federal Acts

There are also federal acts that preventmergers that would significantly reducecompetition.

The Bureau of Competition of the FTC andthe Antitrust Division of the DOJ upholdantitrust policy.

These two government agencies focus onanti-competitive business practices andensure a competitive industry environment.


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Assessments of Takeover Defenses

Takeover defenses at least contributed to the

end of disciplinary takeovers.Takeover defenses are bad for the

governance system.

Many firms with takeover defenses do

eventually agree to be acquired.


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International Perspective

The U.K. experiences its own merger wavesince the early 1990s.

In bank-centered financial systems, banksseem to play a significant role in which firmsmerge.

Many Asian governments relaxed the foreignownership restrictions of their firms.

Many countries have their own unique set ofcircumstances that make M&As difficult.


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0%

5%

10%

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20%

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35%

40%

45%

50%

UnitedStates

Unite

dKingdom

France

Germany

N

etherlands

Canada

Bermuda

Italy

Ireland

Japan

Spain

Sweden

Belgium

Bulgaria

Switzerland

Australia

S

outhKorea

China

CzechRepublic

Finland

Other

PercentofTotalDealValue

International Merger Activity


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Summary

M&As have been viewed as a corporate

governance device.Firm-level and state-level takeover defenses

weaken disciplinary takeovers.

Besides the U.S., takeover activity is only

common in the U.K. However, we may see aworld-wide increase in M&A activity in the

near future.

Ch08 Takeovers 2ed

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