Académique Documents
Professionnel Documents
Culture Documents
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1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Non-US
US
0.2
Preannouncement
information
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0.1
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-0.05
US TARGETS
UK TARGETS
Bidder Premium
Why are premiums smaller for bidders in
mergers?
Could be that bidders know that tender offers are
more expensive, higher premia required.
Greater chance of competition.
Higher legal/investment banking fees.
So they only pursue deals that are likely to have large
potential gains.
There are some deals that remain profitable as mergers that
would not be as hostile tender offers, so the samples are not
comparable
Gains: Improved Managerial
Efficiency
Market for corporate control assumes that
managers act in the interest of the
shareholders. Firms that do not maximize
shareholder value are targets for takeover.
Prediction:
Target share prices experience significant
declines prior to the merger or tender offer.
Managers of target firms are fired after the
takeover.
Synergy Gains: Horizontal
Mergers
Firms producing similar products in similar
markets (i.e., the same industry).
Monopolistic pricing: could be gains from
reducing competition:
Reduce output, and increase profits
Demand curve facing the firm becomes less elastic
Antitrust Division of the Justice Department &
the Federal Trade Commission worry about
horizontal mergers.
Monopoly pricing makes consumers worse off
Efficiency increasing mergers make consumers better
off: more output at lower prices.
Synergy Gains: Vertical Mergers
Upstream firm buys a downstream firm (or visa
versa)
If one firm has a monopoly, can the merged firm
increase profits by charging monopoly prices at
both levels?
NO.
Are there efficiency gains from internal rather
than external contracting?
It depends there is still an important transfer pricing
problem.
Synergy Gains: Conglomerate
Mergers
Firms in totally different industries
Perhaps there are efficiencies in
management or some centralized service,
but is doubtful today.
May have been more important when
centralized information systems first came
into being (1960s)
Conglomerate Mergers
Diversification
At first sight diversification may create
value.
Who benefits from diversification?
Not stockholders (at least directly). They
could do it on their own account by buying the
stock of the two companies, avoiding paying a
premium. Better yet, their holdings wouldnt
have to be in fixed proportions.
May benefit indirectly.
Diversification: Employees
Other stakeholders
They are forced to hold undiversified
portfolios of the stock of the bidder/target firm.
It is hard for them to diversify on their own
accounts.
Employees cannot diversify their human capital.
They may be willing to accept a lower salary
and/or have a larger commitment to the company if
they take less risk.
May ultimately benefit shareholders.
Diversification: Bondholders
Maybe the combined firm becomes safer.
But bondholders do not have any decision
power!
The firms debt capacity will be increased if the firm is
more diversified.
Lenders care about total risk, not just systematic beta
risk.
To the extent that there are advantages with
debt financing, shareholders will benefit.
Diversification: Executives
Managers in small firms may be undiversified for
control purposes, and become too risk averse.
Hence, both inside and outside shareholders
may benefit through diversification.
A merger always changes control in at least one
of the firms.
Good or bad depending on who is losing out and why.
Fired: Bad if you are the one being dismissed.
Retired: Good if you are the one being bought out.
Diversification Benefits the
Evidence
Acquirers in diversifying mergers have negative
abnormal returns (-2%) in the 80s.
Not in the 90s, instead earn about 0%.
Acquirers in related businesses experience
positive returns of 2%, on average.
Targets of hostile bids in late 80s are often
broken up and sold to companies in related
businesses
No evidence that there exists a large advantage
from diversification.
Conglomerate Mergers: Hubris
Hypothesis
Managers commit errors of over-optimism
in evaluating merger opportunities due to
excessive pride, animal spirits or hubris.
Summary
From a policy perspective, gains come from either
efficiency gains (good), or from monopolization (bad).
Management shouldnt care, except that the probability
of antitrust problems increase if the gains come from
monopoly pricing.
Always ask yourself whether it is necessary to merge to
capture the efficiency/pricing gains. Are other
contracting methods better than paying a premium to
buy control?
Diversification by itself should not increase firm value.
Since corporate control always changes, this may be the
common factor explaining the gains
Managers of target firms are often fired after the takeover.
Takeover Defenses
Successful takeovers:
Target Stockholders gain 20-35% or more
Unsuccessful takeover:
Target stockholders gain little if not eventually
taken over.
Why defend a firm from a takeover?
Defense: Entrenchment or What?
Why it might not be entrenchment.
Target management may try to get a higher
bid from bidder.
Sometimes such negotiations cause a deal to fail.
Target management may defend the firm
while searching for another bidder willing to
pay more.
The delay may inadvertently cause the deal to fail.
Why it might be entrenchment.
You know what they say about ducks!
Takeover Defenses: Charter
Amendments
Supermajority Rules.
67% or more of votes necessary to approve
control change can be avoided by board.
However, it can be avoided by board ("board
out")
Fair-Price: supermajority clause can be
avoided if price is high enough (P/E or P/B).
Staggered Board.
Only 1/K of board is elected each year, so it
takes K years to turnover board completely.
Charter Amendments: Poison Pills
Securities that provide shareholder (except acquirer) with special
rights, following the occurrence of a triggering event such as a
tender offer.
They 'poison' the acquirer if it swallows the pill.
Poison pills do not have to be approved by shareholders.
Flip over plans:
Shareholders have the right to buy the shares of the target at a premium
above the market.
In case of a merger they flip-over: the shareholders have then the right to
buy the shares of the bidder at a substantial discount below market.
Ownership flip-in plans:
If the bidder acquires a threshold, shareholders (except the bidder) have the
right to purchase shares of the target firm at a discount.
Back-end right plans:
If the bidder acquires a threshold, shareholders (excluding bidder) can
exchange a right plus a share for cash equal to a back-end price set by the
board of directors of the issuing firm.
Thus, back-end price will then becomes the minimum effective bid price.
Defenses: Voting Plans
If a party acquires a substantial block of
the firm's stock, the other shareholders
receive more voting rights.
Legal/Regulatory Defenses
State corporation/anti-takeover laws
impose rules that are similar to stringent
charter amendments for all corporations
chartered in that state.
Inter-firm litigation can be effective.
Target charges that bidder failed to disclose
something material in SEC filings.
Asset Restructuring Defense
Crown Jewel defense
Contract to sell attractive assets to a third
bidder contingent on hostile bid
Pac Man defense
Make competing tender offer for shares of
bidder.
Other Defenses
Leverage Recapitalization.
Partial LBO leaving equity holders with much riskier claims.
ESOPs
Employees get equity claim in the firm, but management votes
the shares of the stock in the ESOP.
Golden Parachutes
Lump sum payments to target management if fired due to
takeover.
Usually small relative to size of deal, so probably not much
deterrence effect.
Aligns the interests of target management with shareholders.
Other Defenses Continued
Greenmail
Buy back stock (at a premium above the
market price) from large stockholders who
may pose a threat.
Often liked with standstill agreements.
Shareholders bought out (through greenmail)
agree not to make further investments in the target
company.
Should greenmail be outlawed?
Valuing Acquisitions
Evaluating a potential acquisition is similar in
most respects to analyzing the NPV of any other
investment project a firm may be considering.
Some subtle differences:
The value of potential synergies must be added to
the value of the target firm's cash flows.
The target firm's stock price will exceed the present
value of the firm's future cash flows, if it reflects the
possibility that the firm may eventually be taken over
at a premium.