finance 7311
DESCRIPTION
Finance 7311. Market for Corporate Control. Terminology. 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. Terminology, cont. Leveraged Buyout - PowerPoint PPT PresentationTRANSCRIPT
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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