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Session 1, 2017
FINS 3626
International Corporate Governance
Week 9
Market for Corporate Control (Takeover Threat)
Market for Corporate Control
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Acquisition to GDP ratio (1968-1998)
Corporate governance and merger activity in the US: Making sense of the 1980s and 1990s , Holmstrom and Kaplan
(2001),
Journal of Economic Perspective
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Acquisition to total market capitalization
Corporate governance and merger activity in the US: Making sense of the 1980s and 1990s , Holmstrom and Kaplan
(2001),
Journal of Economic Perspective
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Contested tender offers as % of total tender offers
Corporate governance and merger activity in the US: Making sense of the 1980s and 1990s , Holmstrom and Kaplan
(2001),
Journal of Economic Perspective
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Trends in takeovers in the US
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Mergers & Acquisitions: Some Basic Definitions
Merger (of equals): the union of two companies under single
ownership, through the direct acquisition by one company of the assets
and liabilities of the other; typically friendly.
Acquisition / Takeover: the purchase of one company (target) by another
company (acquirer / bidder), with the latter becomes the new owner of
the combined new entity; can be friendly or hostile.
Tender offer: one type of hostile takeover, which involves the bidder
soliciting share purchase intentions directed at shareholder of the target.
Leveraged buyout (LBO): purchase of a company (target) by an investor
(or, a group of investors), where the deal relies heavily on the use of
financial leverage (borrowing) and the company is typically taken private;
often involves existing management team.
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Takeovers in 1980s
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Junk bond volume offers as % of total market cap
Corporate governance and merger activity in the US: Making sense of the 1980s and 1990s , Holmstrom and Kaplan
(2001),
Journal of Economic Perspective
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The demise of LBO in the late 1980s
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Gains from LBO
1. Many studies reported that the firm performance improved after LBO
Kaplan (1989): cash flows increased by 20% during 1980-86
Muscarella and Vetsuypens (1990): increased by 23.5% during 1976-87
2. The gains from LBO tend to decrease in the late 1980s
Opler (1993): cash flows increased by 8.8% in 1986-89
Kaplan and Stein (1993): relative to LBOs initiated in the early 1980s, the
LBOs
initiated in the late 1980s are more likely to default
3. Is the performance improvement of LBO firms evidence of managerial
disciplinary effect of LBO?
There is strong evidence of productivity gains from LBO
Alternatively, it may be the evidence that the investment group selects
the target firms that have promising business
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Market for Corporate Control
The problem of entrenched managers:
Managers have a natural desire to protect their jobs and private
benefits derived from running their companies;
Managers can set up barriers against outsiders actions by:
Executive power (e.g. influence on the board) and anti-takeover
defense tactics
Important governance mechanisms to challenge
excessive managerial control:
Boards and shareholders
Proxy contests
Product market competition & takeover threat
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Market for Corporate Control (cont.)
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Takeover Process
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Example: Bear Hug
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Takeover Process (Cont.)
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Takeover Process (Cont.)
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Takeovers in Australia
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Key Regulatory Bodies
ASIC:
Supervises the operation of companies and securities laws
including takeover law;
Review documents issued by parties involved in a
takeover;
Monitors compliance with takeover law;
The Takeover Panel:
The principal forum for resolving disputes relating to a
takeover during a bid;
ACCC:
May get involved in a takeover if the acquisition would
substantially lessen competition;
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Key Regulatory Bodies (cont.)
ASX:
May get involved in a takeover if it is concerned that its
rules are not being complied with by the parties involved
in the takeover;
Review documents and provide timely information;
FIRB:
May get involved if an acquirer is foreign and, in certain
cases, the proposed takeovers must also be approved by
the Treasury on the advice of the FIRB.
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Key Regulatory Bodies: Some Examples
ACCC:
In April 2013, ACCC approved the acquisition of Tiger
Airways by Virgin Australia;
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Common Methods in Australia
The most common ways of acquiring an interest in more
than 20% of the voting shares in a listed target company in
Australia:
Off-market bid;
On-market bid;
A court approved scheme of arrangements.
Off-market bid;
A bid makes identical offers to all shareholders of the target
company;
Quite often are made conditional upon the satisfaction of a
number of conditions, such as reaching a minimum level of
acceptance (50.1%, or 90%).
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Common Methods in Australia (cont.)
On-market bid:
Shares of target firm are acquired through the ASX, rather
than through off-market acceptance;
Must be cash-only and unconditional;
All regulatory approvals must be obtained prior to
announcement.
Scheme of arrangement;
A formal merger implementation agreement (MIA) setting out
the terms upon which a scheme will be proposed to target
firms shareholders and supported by target firms directors;
A popular means of effecting friendly mergers and
acquisitions in Australia.
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Off-market Bid: An Indicative Timeline
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Hostile Takeovers (cont.)
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Some Australian Takeover Examples
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Example: AMP vs. GIO
Background:
GIO Australia suffered a string of bad results;
AMP was pursuing an aggressive expansion
strategy.
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Example: AMP vs. GIO
GIOs defense:
The offer was again rejected;
Forecasted a profit of $90 mil (for 1998-1999);
Independent expert report by Grant Samuel &
Associates claimed that GIO offer was under-
valued (the report was paid for by GIOs board);
GIO used a 35 cent special dividend (capital
return) to persuade their shareholders.
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Example: AMP vs. GIO
The fight:
AMP could only obtain 57%, but still majority;
GIOs board was forced out;
Integration costs were $140 mil;
GIOs 1998 results were in fact a loss of $759 mil;
AMP launched a mop-up bid to buy the remaining 43% at $2.75
per share;
Two GIO independent directors finally recommend shareholders
to accept AMPs second offer.
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Example: AMP vs. GIO
The aftermath:
Shareholders who rejected AMP offer lost half of their money;
GIO recorded $1.2 billion loss in 1999;
Class-action lawsuit against GIOs board members;
AMP sold GIO to Suncorp-Metway for $1.6 billion in early 2001.
The proceed was then used for AMPs UK expansion
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Example: Primary vs. Symbion
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Example: Primary vs. Symbion (cont.)
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Example: Primary vs. Symbion (cont.)
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Example: Primary vs. Symbion (cont.)
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Fighting against a Hostile Takeover
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Anti-takeover Provisions/Tactics (ATPs)
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Commonly Used ATPs
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Commonly Used ATPs (Cont.)
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Commonly Used ATPs (Cont.)
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Commonly Used ATPs (Cont.)
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ATPs in Australia
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Example: Lion Nathan vs. Coopers
The offer
From Lion Nathan, Australias 2nd largest brewer;
Initial offer price $260, then raised to $310.
Coopers Brewery pre-existing anti-takeover
mechanisms
4 share classes with different voting rights with respect to
appointment of directors;
Shares largely held by Cooper family;
Pre-emptive rights regime:
Shares offered for sale must be first offered to existing
shareholders, secondly to Coopers employee super funds, thirdly
to Lion Nathan
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Example: Lion Nathan vs. Coopers
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Example: Lion Nathan vs. Coopers
Final result:
The ACCC decided not to oppose Lion Nathans acquisition
of Coopers;
At EGM shareholders vote to remove Lion Nathans pre-
emptive rights;
Majority shareholders voted against the offer.
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Price Impacts of ATPs
At the announcement of an ATP adoption:
Share price declines;
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Governance Implication of Hostile Takeovers
Benefits:
Large price increases on takeover announcements;
Substantial takeover premium paid to target firms shareholder;
Incumbent managers are often dislodged and post-takeover
performance of target firms improves;
Costs:
Other stakeholders interests may be undermined;
Relevance to corporate governance
Deterrence against complacent and entrenched management;
Often the best way for shareholders of badly governed firms.
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Governance Implication of ATPs
Empirical evidence:
There is a significant variation in ATPs across firms;
When an index (the GIM Index), which aggregates different
ATPs, research findings show that investing in low-ATP firms
(democracy firms with stronger shareholder rights)
generates higher returns than investing in high-ATP firms
(dictatorship);
A positive correlation between the level of anti-takeover
defense and the investment (capex or acquisition).
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How do we interpret the result?
Causality: Anti-takeover defense makes the
entrenched manager over-invest in unprofitable
projects
Reverse causality: Underperforming firms are more
likely to have stronger anti-takeover defense
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Role of the Target Firms Board
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Cross-border takeover in the 1990s
Cross-country determinants of merger and acquisitions, Rossi and Volpin (2004), Journal of Finance Economics
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Cross-border takeover and investor
protection
Cross-country determinants of merger and acquisitions, Rossi and Volpin (2004), Journal of Finance Economics
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Cross-border hostile takeover and investor
protection
Cross-country determinants of merger and acquisitions, Rossi and Volpin (2004), Journal of Finance Economics
54
Governance motive in cross-border
takeover
Cross-country determinants of merger and acquisitions, Rossi and Volpin (2004), Journal of Finance Economics
55
Empirical evidence
1. Cross-border takeover is more likely to occur when the country of
target firms has better investor protections
2. Cross-border hostile takeover is more likely to occur when the
country of target firms has better investor protections
3. Cross-border takeover is more likely to occur when the country of
bidder firms has better investor protection than the country of target
firms
4. How do we interpret the results?
Bidding firms prefer the target firms operating in countries with better
investor
protection
Bidding firms may attempt takeover to increase the target firms value by
improving its governance
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Going into the future
For next weeks lecture
Concentrated Ownership & Control
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