The Corporate Takeover Market

Common Takeover Tactics, Anti-Takeover Defenses, and

Corporate Governance

C om m on TakeoverTac tic s an d

D efen ses

M otiva tion sfo r M & A

M & AE n viron m en t

S earch Th rou g hC los in g A c tivit ies

B u s in ess &A cq u is it ion P lan s

M & A P rocess

Tax & A ccou n tin gIssu es

A lte rn a tiveS tru c tu res

F in an c ia lM od e lin g

Tech n iq u es

P u b lic &P riva te C om p an y

V a lu a tion

D ea lS tru c tu rin g

B an k ru p tcy &L iq u id a tion

D ives titu res ,S p in -O ffs , &C arve-O u ts

A lte rn a tiveR es tru c tu rin g

S tra teg ies

M & A an d O th erR es tru c tu rin g

A c tivit ies

Course Layout

Current Lecture Learning Objectives

Providing students with an understanding of• Corporate 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 when and why they are used.

Factors Affecting Governance

Legislation

Internal to Firm•Board of Directors•Management•Internal Controls •Incentive Systems•Takeover Defenses

Market for Corporate Control

Institutional Activism

Regulators

External to Firm

External to Firm

External to Firm

External to Firm

Internal Factors: Board of Directors and Management

• Board responsibilities include:

--Review management proposals/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

compensation committees

Internal Factors: Controls & Incentive Systems

• The challenge is to align management and shareholder objectives– Link stock option exercise prices to firm’s

stock price performance relative to the overall market

– Key managers should own a significant portion of the firm’s outstanding shares

External Factors: Legislation

• Federal and state securities laws– Securities Acts of 1933 and 1934– Williams Act (1968)

• Insider trading laws

• Anti-trust laws– Sherman Act (1890)– Clayton Act (1914)– Hart-Scott-Rodino Act (1976)

External Factors: Regulators

• Securities and Exchange Commission

• Justice Department

• Federal Trade Commission

• Public Company Accounting Oversight Board

• Financial Accounting Standards Board

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 portfolios (e.g., TIAA-CREF, California Employee Pension Fund) can exert significant influence

• Recent trend has been for institutional investors to simply withhold their votes

External Factors: Market for Corporate Control

• Changes in control can result from hostile takeovers or proxy contests

• Management may resist takeover bids to– Increase the purchase price (Shareholders’

Interests Theory) or– Ensure their longevity with the firm

(Management Entrenchment Theory)

Market for Corporate Control: Alternative Takeover Tactics

• Friendly

• Hostile

Market for Corporate Control: “Friendly” Takeover Tactics

• Potential acquirer obtains support from the target’s board and management early in the takeover process before proceeding to a negotiated settlement– 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 fee from the target firm.

• Such takeovers are desirable as they avoid an auction environment

• If the bidder is 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

Market for Corporate Control: Hostile Takeover Tactics

• Limiting the target’s actions through a “bear hug”• Proxy contests in support of a takeover• Purchasing target stock in the open market• Circumventing the target’s board through a

tender offer• Litigation• Using multiple tactics concurrently

Market for Corporate Control: Pre-Bid Takeover Defenses

• Poison pills to raise the cost of takeover• Shark repellants to strengthen the target board’s defenses

– Staggered or classified board elections

– Cumulative voting rights

– Limiting when can remove directors

• Shark repellants to limit shareholder actions– Limitations on calling special meetings

– Limiting consent solicitations

– Advance notice and super-majority provisions

• Other shark repellants– Anti-greenmail and fair price provisions

– Super-voting stock, re-incorporation, and golden parachutes

Market for Corporate Control: Post-Bid Takeover Defenses

• Greenmail• Standstill agreement• Pac-man defense• White knights and white squires• Employee stock ownership plans• Recapitalization• Share buy-back plans• Corporate restructuring• Litigation• “Just say no”

Impact on Shareholder Value

• Friendly transactions result in average abnormal returns to target shareholders of 20%

• Hostile transactions result in average abnormal returns to target shareholders of 30-35%

• Bidders’ shareholders earn average abnormal returns or 2-3%

• While mixed, empirical studies generally indicate that takeover defenses have no significant impact on abnormal shareholder returns

Things to remember...

• Hostile takeover attempts and proxy contests affect governance through the market for corporate control

• Hostile takeover attempts tend to benefit target shareholders substantially more than the acquirer’s shareholders by putting the target into “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 acquirer’s

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.