FINANCE 7311 Review & Financial Statement Analysis Dr. Ashvin VibhakarFall 2000.
Finance 7311
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Transcript of Finance 7311
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Finance 7311Finance 7311
Market for Corporate Control
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TerminologyTerminology
Target– Potential takeover candidate
Acquirer (Bidder)– Firm doing the ‘taking over’
Merger– Friendly combination of two firms
Tender Offer (Hostile Takeover)– Opposed by target management
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Terminology, cont.Terminology, cont.
Leveraged Buyout– Takeover in a highly leveraged transaction– Advantages
Concentrates ownership in fewer hands Takes cash out of management hands Tax advantage of debt
– Disadvantages Effect of economic downturn
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Terminology, cont.Terminology, cont.
Management Buyout– Same as LBO, except existing management is major
shareholder
Proxy Contest– Voting by S/H on major corporate transactions
Restructuring– Significant change in allocation of corporate
resources– Current management stays on
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Defensive TacticsDefensive Tactics
Methods used by management to avoid being taken over
Poison Pill White Knight Greenmail Just Say No Supermajority Voting Courts: OK if only one ‘bidder’
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Selecting and Valuing a TargetSelecting and Valuing a TargetBusiness Plan or Objective
– Vertical Integration– Excess Capacity
Product ==> Distribution Distribution ==> Product
– (Time Warner; Paramount, previously)
– (AOL, Time Warner)
– Strategic: Enter a new market for example– Diversification (Later)
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ValuationValuation
PVt = PV of target (stand alone)
PVa = PV of acquiring firm (stand alone)
PVc = PV of combined firm
TP = tender price
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Synergy ==> Value CreatedSynergy ==> Value Created
PVc - (PVa - PVt) = Total Synergy
NPV of acquisition to acquiring firm:
PVc - (Pva + PVt) - (TP - PVt)
= total synergy - synergy to target
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SynergySynergy
Sources of Synergy?
– Economies of Scale in Production Distribution Management/Administration
– Strategic– Management: better allocation of resources
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Calculation of SynergyCalculation of Synergy
Estimate ‘combined’ cash flows and subtract sum of the parts
Estimate the change in cash flows
Must identify the source of value
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AcquisitionAcquisition
What is reflected in Target’s current price?– Value ‘as is’– Value with expected changes (current mgmt)– Value ‘in play’
How much of a ‘change in control’ premium is already reflected in price?
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AcquisitionAcquisition
Acquirer must offer a Premium to induce S/H to tender
Must bid less than total value; (Neg NPV)Do other Bidders exist? Is source of value
generic or specific?– Provision of ‘information’ to market– If value highest to you, you can win
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Acquisition, cont.Acquisition, cont.
Strategy: Bid high enough to deter potential bidders, but low enough to retain value
Avoid Winner’s Curse
Target:– Defensive Tactics
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Motives or ReasonsMotives or Reasons
Corporate Raiding– Raider buying company for less than value– Premiums average 30%
Creation of Monopoly Power– Hard to test; others should benefit
Wealth Transfer from other parties– Not much evidence
Taxes: May support economics
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Motives, cont.Motives, cont.
Market Inefficiency– Firm is Undervalued by Market– Information to market
Unsuccessful takeovers– Target value goes back to preoffer price– No perm. Reevaluation of firm– Value created in combination
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DiversificationDiversification
Reduce Risk - may obtain better terms and/or better relationships from:– Employees– Suppliers– Customers– Analagous to ‘too much debt’ before
Management - much human risk and human capital tied up in firm; S/H?
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Diversification EvidenceDiversification Evidence
Comment & Jarrell (‘95 JFE)– Firm performance is increasing in firm focus
Lang & Stulz (‘94 JPE)– Firms diversify when growth opportunities
within industry exhausted– Such diversification does not benefit S/H
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Diversification EvidenceDiversification Evidence
Berger & Ofek (‘95 JFE)– Compare stand-alone value of diversified
firm segments to specialized firms– Diversified firm worth 13% - 15% less than
sum of stand alone components
Day (‘95 JFE)– Examines motives for risk reduction
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Day, cont.Day, cont.
Firms pursue equity variance reducing activities:
– Higher levels of personal wealth in firm– More years invested w/ firm– The poorer previous performance– CEO specialists invest in similar specialties
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Performance ChangesPerformance Changes
Dennis & Denis (‘95 JFE)– Turnover
Forced Normal
– Forced: Operating Income/Assets decreases in 3 years prior & increases following
– Normal: Little difference prior; small improvement afterward
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Dennis & Dennis, cont.Dennis & Dennis, cont.
Forced resignations are rare– 68% preceded by active monitoring by large
s/h, b/h or potential acquirers– 56% are the target of some form of control
activity
Boards not so effective in isolationModern Trend: Outside Directors