1、The Corporate Takeover MarketCommon Takeover Tactics,Takeover Defenses,and Corporate GovernanceTreat a person as he is,and he will remain as he is.Treat him as he could be,and he will become what he should be.Jimmy JohnsonExhibit 1:Course Layout:Mergers,Acquisitions,and Other Restructuring Activitie
2、sPart IV:Deal Structuring and FinancingPart II:M&A ProcessPart I:M&A EnvironmentCh.11:Payment and Legal ConsiderationsCh.7:Discounted Cash Flow ValuationCh.9:Financial Modeling TechniquesCh.6:M&A Postclosing IntegrationCh.4:Business and Acquisition PlansCh.5:Search through Closing ActivitiesPart V:A
3、lternative Business and Restructuring Strategies Ch.12:Accounting&Tax ConsiderationsCh.15:Business AlliancesCh.16:Divestitures,Spin-Offs,Split-Offs,and Equity Carve-OutsCh.17:Bankruptcy and LiquidationCh.2:Regulatory ConsiderationsCh.1:Motivations for M&APart III:M&A Valuation and Modeling Ch.3:Take
4、over Tactics,Defenses,and Corporate GovernanceCh.13:Financing the Deal Ch.8:Relative Valuation MethodologiesCh.18:Cross-Border TransactionsCh.14:Valuing Highly Leveraged Transactions Ch.10:Private Company Valuation Current Lecture Learning ObjectivesProviding students with an understanding of Corpor
5、ate 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 wh
6、en and why they are used.Alternative Models of Corporate ControlMarket model applies when:Capital markets are liquid Equity ownership is widely dispersed Board members are largely independent Ownership&control are separate Financial disclosure is high Shareholder focus more on short-term gainsPreval
7、ent In U.S.and U.K.Control model applies when:Capital markets are illiquid Ownership is heavily concentrated Board members are largely“insiders”Ownership&control overlap Financial disclosure limited Shareholder focus more on long-term gainsPrevalent in Europe,Asia,&Latin AmericaFactors Affecting Cor
8、porate Governance:Market Model Perspective Internal to FirmBoard of DirectorsManagementInternal Controls Incentive SystemsCorporate Culture&ValuesTakeover DefensesBond CovenantsExternal to Firm External to Firm External to Firm External to Firm Legislation:1933-34 Securities Acts Dodd-Frank Act of 2
9、010 Sherman Anti-Trust ActRegulators:SEC Justice Department FTC Institutional Activism:Pension Funds(Calpers)Mutual Funds Hedge FundsMarket for Corporate Control:Proxy Contests Hostile TakeoversInternal Factors:Board of Directors and Management Board responsibilities include:-Review management propo
10、sals/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 compensat
11、ion committeesInternal Factors:Controls&Incentive Systems Dodd-Frank Act(2010):-Gives shareholders of public firms nonbinding right to vote on executive compensation packages-Public firms must have mechanism for recovering compensation 3-yrs prior to earnings restatement Alternative ways to align ma
12、nagement and shareholder objectives Link stock option exercise prices to firms stock price performance relative to the overall market Key managers should own a significant portion of the firms outstanding sharesInternal Factors:Corporate Culture&Values Corporate culture refers to a common set of val
13、ues,traditions,and beliefs that influence management and employee behavior within a firm.The desired culture for the new organization can be promoted through Clear and consistent communication to all employees of what is appropriate and what is not Senior management consistently displaying the desir
14、ed behaviors Reward systems that foster desired behaviors while penalizing undesirable conduct Trust in a new organization is undermined when there is ambiguity about the new organizations culture/identity.External Factors:Legislation Federal and state securities laws Securities Acts of 1933 and 193
15、4 Williams Act(1968)Insider trading laws Anti-trust laws Sherman Act(1890)Clayton Act(1914)Hart-Scott-Rodino Act(1976)Dodd-Frank Act(2010)External Factors:Regulators Securities and Exchange Commission(SEC)Justice Department Federal Trade Commission(FTC)Public Company Accounting Oversight Board (PCAO
16、B)Financial Accounting Standards Board(FASB)Financial Stability Oversight Council(FSOC)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 por
17、tfolios(e.g.,TIAA-CREF,California Employee Pension Fund)can exert significant influence Recent trend has been for institutional investors to simply withhold their votesExternal Factors:Market for Corporate ControlChanges in control can result from hostile takeovers or proxy contestsManagement may re
18、sist takeover bids to Increase the purchase price(Shareholders Interests Theory)or Ensure their longevity with the firm(Management Entrenchment Theory)Takeovers may Minimize“agency costs”and Transfer control to those who can more efficiently manage the acquired assetsDiscussion Questions1.Do you bel
19、ieve corporate governance should be narrowly defined to encompass shareholders only or more broadly to incorporate all stakeholders?Explain your answer.2.Of the external factors impacting corporate governance,which do you believe is likely to be the most important?Be specific.Market for Corporate Co
20、ntrol:Alternative Takeover1 Tactics Friendly deals(Target board supports bid)Hostile deals(Target board contests bid).Rare due to Target board flexibility in setting up defenses Impact on bid premiums Impact on postclosing integration The threat of hostile bids often moves target boards toward negot
21、iated settlements.1A corporate takeover refers to a transfer of control from one investor group to another.Market for Corporate Control:“Friendly”Takeover TacticsPotential acquirer obtains support from the targets board and management early in the takeover process before proceeding to a negotiated s
22、ettlement.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 break-up fee from the target firm.Such takeovers are desirable as they avoid an auction environment.If the bidder i
23、s 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.11The permitted reporting delay between first exceeding the 5%ownership stake threshold and the filin
24、g of a 13D allowed Vornado Realty Trust to accumulate 27%of J.C.Pennys outstanding shares before making their holdings public.Market for Corporate Control:Hostile Takeover Tactics Limiting the targets actions through a“bear hug”Proxy contests in support of a takeover Purchasing target stock in the o
25、pen market Circumventing the targets board through a tender offer Litigation Using multiple tactics concurrentlyAlcoa Aluminum Easily Overwhelms Reynolds Takeover DefensesAlcoas offer to Reynolds Metals consisted of$4.3 billion in cash plus the assumption of$1.5 billion in Reynolds outstanding debt.
26、Alcoas offer letter,which it made public,from its chief executive to the Reynolds CEO indicated that it wanted to pursue a friendly deal but that it would pursue a hostile bid if the two sides could not begin discussions within a week.Reynolds appeared to be highly vulnerable because of its ongoing
27、poor financial performance and because of its weak takeover defenses.Despite pressure from institutional shareholders,the Reynolds board rejected Alcoas bid as inadequate.Alcoas response was to say that it would make a formal offer directly to the Reynolds shareholders and simultaneously solicit sha
28、reholder support for replacing the Reynolds board and dismantling Reynolds takeover defenses.Reynolds capitulated within two weeks from receipt of the initial solicitation and agreed to be acquired by Alcoa.The agreement contained a thirty-day window during which Reynolds could entertain other bids.
29、However,if Reynolds should choose to go with another offer,it would have to pay Alcoa a$100 million break-up fee.1.What was the dollar value of the purchase price Alcoa offered to pay for Reynolds?2.Speculate as to why Alcoa wanted to pursue initially a friendly rather than hostile approach?3.Descri
30、be the various takeover tactics Alcoa employed(or threatened)in its successful takeover of Reynolds.Speculate as to why these tactics may have been employed(or threatened)by Alcoa?4.Why did the Reynolds board reject the initial offer only to accept the bid two weeks later?5.What is the purpose of th
31、e breakup fee?Market for Corporate Control:Pre-Offer Takeover DefensesPoison pills to raise the cost of takeover1Shark repellants to strengthen the target boards defenses Staggered or classified board elections Limiting conditions when directors can be removedShark repellants to limit shareholder ac
32、tions Limitations on calling special meetings Limiting consent solicitations Advance notice and super-majority provisionsOther shark repellants Anti-greenmail and fair price provisions Super-voting stock,re-incorporation,and golden parachutes1Note that poison pills could also be classified as post-o
33、ffer defenses as they may be issued by the board as dividends without shareholder approval.Poison Pill:Cash for Share PurchaseP1=Pre-offer equilibrium price/target shareP2=Poison pill conversion price/target shareP3=Offer price/target shareQ1=Pre-offer target shares outstandingQ2=Target shares outst
34、anding following poison pill conversionABCD=Incremental acquirer cash outlay due to poison pill conversionQ1 Q2 Target Shares OutstandingTarget Price Share D S1 S2DP3P1P2Target shareholder Profit/Share on Poison Pill ConversionA BC DDD reflects relationship between shares outstanding and price/share
35、 for given level of expected earnings&interest rates.Poison Pills:Share for Share ExchangeAcquirer Shareholder Ownership Dilution Due to Poison PillNew Company Shares Outstanding1Ownership Distribution in New Company(%)Without PillWith PillWithout PillWith PillTarget Firm Shareholders Shares Outstan
36、ding Total Shares Outstanding1,000,0001,000,0002,000,0002,000,00050673Acquiring Firm Shareholders Shares Outstanding New Shares Issued Total Shares Outstanding41,000,0001,000,0002,000,0001,000,0002,000,00023,000,00050331Acquirer agrees to exchange one share of acquirer stock for each share of target
37、 stock.2Poison pill provisions enable each target shareholder to buy one share of target stock at a nominal price for each share they own.Assume all target shareholders exercise their rights to do so.32,000,000/3,000,0004Target shares are cancelled upon completion of transaction.Market for Corporate
38、 Control:Post-Offer Takeover Defenses Greenmail Standstill agreement Pac-man defense White knights Employee stock ownership plans Recapitalization Share buy-back plans Corporate restructuring Litigation“Just say no”Discussion Questions1.Discuss the advantages and disadvantages of the friendly versus
39、 hostile approaches to corporate takeovers.Be specific.2.Do you believe that corporate takeover defenses are more motivated by the targets managers attempting to entrench themselves or to negotiate a higher price for their shareholders?Be specific.Impact on Shareholder Value Friendly transactions re
40、alized abnormal returns to target shareholders of about 25%during the 2000s Hostile transactions often result in even larger average abnormal returns to target shareholders Acquirers shareholders earn average abnormal returns of 1%to 1.5%;however,they may be negative for deals involving large public
41、 firms and those using stock to pay for the deal Recent studies suggest Takeover defenses have small negative impact on abnormal target shareholder returns Defenses put in place prior to an IPO may benefit target shareholders Bondholders in firms with ineffective defenses(i.e.,vulnerable to takeover
42、)may lose valueThings to remember.Hostile takeover attempts and proxy contests affect governance through the market for corporate control Although relatively rare,hostile takeover attempts tend to benefit target shareholders substantially more than the acquirers shareholders by putting the target in
43、to“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 acquirers 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.
