ppt corporate control

8/13/2019 Ppt Corporate Control

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Corporate Finance:Capital structure and corporatecontrol

Yossi SpiegelRecanati School of Business


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Grossman and Hart, BJE 1980

Takeover Bids, the Free-RiderProblem, and the Theory of theCorporation


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Corporate Finance 3

The free rider problemThe timing:

Consider an individual equityholder with equity participation

Let Y be the prob. that the raid succeeds if the equityholder tenders andand N if he does not tender. The equityholder will tender iff

Period 1 Period 2

The firm is establishedby an entrepreneur andis worth X

A raider appears andcan increase valueby R; the raider makes

a tender offer X+P

( ) ( )[ ] ( ) ( )[ ]4 4 4 4 34 4 4 4 214 4 4 4 34 4 4 4 21

t tenderDon'Tender

11 X R X X P X N N Y Y ++++


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Corporate Finance 6

DilutionIf the takeover succeeds, the raider can

steal from the firm ( is implied by thefirms charter)

The condition for tendering:

The raiders payoff

The takeover will succeed iff > C

( ) ( )[ ] ( ) ( )[ ] { 3214 4 4 4 34 4 4 4 214 4 4 34 4 4 21t tenderDon'Tendert tenderDon'Tender

11 ++++ RP X R X X P X

( ) C C R X R X =++ 43421321

Paymentpayoff postEx


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Corporate Finance 7

Probabilistic CSuppose that C ~ [0, ) according to

F(C)

The takeover succeeds with prob. F( )

The firms value ex ante:

( ) ( )( ) ( )( ) ( ){

+=++= R

PF X X F P X F V 1


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Corporate Finance 8

The optimal choice of F.O.C for :

( ) ( )( ) ( ){( )( )( ) 10'

PdecreasedfromcostMarginal

takeoverof probincreasedfrom

benefitMarginal===

RF

f F R f V 43421

1

* R

( )( )( ) RF f


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Stulz, JFE 1988

Managerial Control of Voting Rights:Financing Policies and the Market forCorporate Control


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Corporate Finance 10

The modelThe timing:

The raider has benefits of control B~[0, )

To take over the firm the raider needs of the equity

The raider can try to acquire shares from outsiders. Thesupply of shares is (1- )S(p), where S(p) > 0 (moreoutsiders submit shares when p is higher)

Stage 0 Stage 2

The firm is established,the entrepreneur keepsequity and issues 1- to outsiders

A raider shows up andmay offer p to acquire of the shares

Stage 1

Cash flow X isrealizedirrespective ofthe takeover


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TakeoverTo induce a takeover, p needs to be

p( ) > 0: p

1/2

p

(1- )S(p)

P( )

( ) ( ) ( ) p p pS == 21

1


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TakeoverThe raider will take over iff B p( )

the prob. of takeover is 1-F(p( ))

The entrepreneurs payoff:

( ) {

( )( ) ( ) ( )( )( ) ( )[ ]

( )( ) ( ) ( )( )( ) ( )

p pF pF B X

p pF X pF B X Y

E

E

++=

+++=

11

11sharesSoldbenefitsPrivatesharesRetained

4 4 4 4 4 34 4 4 4 4 2143421


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The optimal choice of F.O.C for :

When , then (1- )S(p) = iff S(p) 1 p and F(p) 1:

( ) ( ) ( )[ ] ( )( ) ( )

( ) ( )( )( ) ( ) ( )( )( ) ( )

0

1'11

'1'

effectQuantitysharessoldof priceon theEffect

takeoverof prob.on theEffect

=

+

=

4 4 4 34 4 4 214 4 4 4 34 4 4 4 21

4 4 4 4 4 34 4 4 4 4 21

p pF p pF

p p f p BY E

( ) ( ) ( )( ) ( ) 021'212

2121'


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The optimal choice of When = 0:

If p(0) > p(0) then y(0) > 0 so * > 0

( ) ( )[ ] ( )( ) ( ) ( )( )( ) ( ) ( )( )( ) ( )

( )[ ] ( )( ) ( ) ( )( )( ) ( ) ( )( )00'010'00

0010'010'000'effectOwnershipeffectPricetakeoverof prob.on theEffect

p p pF p p f p B

p pF p pF p p f p BY

E

E

+=

+=4 4 34 4 214 4 4 34 4 4 214 4 4 4 34 4 4 4 21


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Israel, JF 1991

Capital Structure and the Marketfor Corporate Control: TheDefensive Role of Debt Financing


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The modelThe timing:

The value of the firm under the entrepreneur is 0

The value of the firm under the raider is R ~[0, ) with mean ER

If a takeover takes place, R is split between the entrepreneurand the raider in proportions and 1-

Stage 0 Stage 2

The firm is establishedby an entrepreneurand issues debt withface value D

A raider shows up andmay takeover the firm

Stage 1

Cash flow X isrealized anddebt is due


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The choice of debtThe value of the firm:

The f.o.c for D:

( ) ( ) ( ) ( )434214 4 34 4 21

DebtEquity

+= D D

R DdF RdF D R DV

( ) ( ) ( ) ( )

( ) ( )( ) ( )0

11

'

=+=

++=

D Df DF

D Df RdF RdF DV D D


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The choice of debtRewriting f.o.c:

At the optimum,

D* > 0D* <

Comparative stats: D

( )( ) ( ) = 11 D DH DF D Df


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Illustrating the first-order conditions

D

DH(D)

1-

D*


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Illustrating the model

R1

Rf(R)

Df(R)

D

Rf(R)

ppt corporate control

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