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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
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Billions
0
2,000
4,000
6,000
8,000
10,000
12,000
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%
15%
20%
25%
30%
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.