Sei sulla pagina 1di 42

CORPORATE GOVERNANCE

Kenneth Kim, John Nofsinger & Derek Mohr 3rd Edition Pearson Prentice Hall

CHAPTER

Investment Banks and Securities 5 Analysts

Why we can no longer trust investment bankers to monitor.


2

One important role of investment banking is that they bring new debt and equity securities to the market. The process of selling securities to the market:
The bank needs to submit a preliminary prospectus to the SEC. The bank distributes the final prospectus to investors. Road show: The marketing campaign done by bankers to generate interest and to market the issue.

NOTE: Investment bankers are potentially an important source of information and monitoring of a public company.

However,
3

While investment banks are expected to offer quality companies to investors, beginning with the greed era of the 1990s, banks began to bring inferior companies to the market. Pets.com initial public offering
In 1999, the firm had only $5.8 million in revenue and reported an operating loss of $61.8 million. Merrill Lynch launched the Pets.com IPO in February 2000 (raised $66 million). Ten months later, Pets.com filed for bankruptcy and folded.

Facebook
Did Morgan Stanley knowingly set the IPO price too high to take advantage of the hype surrounding the IPO?

More bad news about investment banks.


4

Structured deals
If a firm has trouble raising capital due to its questionable economic viability, investments banks sometime work with those firms to figure out clever ways to help the firm to issue additional shares. Would you want to buy those shares?

Why we were never able to trust securities analysts to monitor.


5

Analysts generally fall into two categories:


Buy-side analysts
Analysts hired by institutional investors.

Sell-side analysts
Analysts employed at brokerage houses who analyze stocks to help investors (shareholders) makes investing decisions. Sell-side analysts should be part of the corporate monitoring system!

Sell-side analysts job


6

A sell-side analyst will assess the following:


Firms operating and financial conditions. Firms immediate and long-term future prospects. Effectiveness of firms management team. General outlook of the industry in which a firm belongs.

Based on her analyses:


She will make earnings predictions (e.g., EPS). She will make investing recommendations (e.g., buy/sell/hold). And she will update her recommendations frequently.

Quality of Analysts Recommendations


7

Analysts are supposed to evaluate firms and their managers on behalf of investors. However, analysts cannot do a good job analyzing firms unless those firms managers help them! So, analysts work with managers, not for shareholders. Example: Analysts will make slightly beatable earnings predictions so managers can beat them and look good.

Analysts ability to recommend stocks


8

Are analysts good at picking stocks? Most stocks carry a buy recommendation.
Not surprising: Analysts need investors to buy stocks to make money. So, a buy recommendation should be viewed with caution.

However, when a stock carries a sell recommendation, it often turns out to be a good recommendation.

Analysts Working at Investment Banks


9

Can you trust an analyst who works at an investment bank?


She may not give a firms stock a sell recommendation if the firm is a former client of the bank. She may not give a firms stock a sell recommendation if the bank wants the firms business.

But yet investment banks in many countries are still allowed to offer brokerage services.

CORPORATE GOVERNANCE
Kenneth Kim, John Nofsinger & Derek Mohr 3rd Edition Pearson Prentice Hall

Creditors And Credit Rating Agencies CHAPTER 6

11

The Existence of Corporate Debt


The existence of corporate debt creates three important corporate system monitors or devices:
Debt, in and of itself, can be a disciplinary mechanism. Monitoring by institutional lenders. Monitoring and debt ratings by credit agencies.

12

Debt As a Disciplinary Mechanism


Because interest payments represent fixed and regular obligations of the firm, debt actually imposes discipline on to the firms management. Interest expense also discourages superfluous spending by management. Other covenants can be written into the debt contracts. In brief, debt in a firms capital structure potentially provides protection to investors.

Institutional Lenders As Corporate Monitors


13

Many firms borrow lots of money from banks. Many of these same firms develop close relationships with banks and oftentimes these firms divulge private information to banks to obtain favorable interest rates. Therefore, creditors often know what is going on in client firms more than shareholders do. Banks can monitor firms effectively!

But why should creditors care about stockholders?


14

Creditors claims have seniority over stock holders claims.


Creditors get their money (from earnings, from liquidations) before stockholders.

Therefore, creditors are usually inactive monitors of firms due to their lack of incentive.

Credit Rating Agencies


15

Credit rating agencies rate bonds (e.g., AAA, Aaa, BBB, Baa) for potential bond investors. A rating grade informs investors about the risk of a bond and thus the firm.

Why Credit Rating Agencies are not perfect monitors.


16

There are only a few credit rating agencies (its a regulated industry), so there is little competition. Rating agencies have become consultants.
Being both consultants and credit raters creates a conflict of interest.

In many countries, credit rating agencies have the right to secrecy.


They dont have to divulge what they know about a firm.

CORPORATE GOVERNANCE
Kenneth Kim, John Nofsinger & Derek Mohr 3rd Edition Pearson Prentice Hall

CHAPTER

Shareholders and Shareholder 7 Activism

What Is Shareholder Activism?


18

Active shareholders - shareholders who express their opinions to try to affect/influence management. Three kinds of shareholders:
Individual (minority) shareholders. Large shareholders. Institutional shareholders (which can also be large shareholders).

Activism by Individual Shareholders


19

An individual investor with only a modest number of shares is able to:


Attend shareholder meetings. Submit proposals to be voted on at shareholder meeting.
You have to have a minimum amount of shares to do this, but this amount is tiny.

Vote at shareholder meetings.

Activism by Individual Shareholders in Practice


20

Most shareholder proposals submitted by individual investors do not pass. Two reasons are: It is difficult and expensive for one shareholder to communicate with all other shareholders. Most passive shareholders are reluctant to vote against the firms management.

21

Monitoring by Large Shareholders


Large shareholders are active monitors of the firm.
They have a financial incentive to be active owners.

Minority shareholders like the existence of large shareholders (i.e., minority shareholders can free-ride on large shareholder monitoring), while managers may not like it.

22

Inside and Outside Large Shareholders


The existence of a large inside shareholder minimizes the agency problem.
Interest of inside shareholder/manager is aligned with outside minority shareholders.

The existence of a large outside shareholder may exacerbate the agency problem.
There may be lots of fights between a large outside shareholder (e.g, Kirk Kerkorian, Warren Buffet) and managers.

Minority shareholders benefit in both cases.

Why do many firms not have large shareholders?


23

Some public firms can be so large that it would take a lot of wealth to own a significant fraction of it. Many investors (including inside shareholders) want to diversify their portfolios. It is not clear whether the existence of a large shareholder leads to higher firm values.

Institutional Shareholders
Institutional shareholders have become more active in monitoring the companies.
As large shareholders, they have the financial incentive to be active monitors.

Public pension funds often lead the way with regard to institutional shareholder activism.

24

Shareholders of Stocks by Investor Type

1970

2002

25

Does Institutional Shareholder Activism Work?


26

Some research suggest that institutional activism works.


Some institutions will threaten targeted bad firms by warning them they will sell their shares.

Some other studies show little evidence that institutional activism works.
Threats from institutions dont carry much sway.

It is still under debate whether institutional shareholder activism works or not.

Potential Roadblocks to Effective Institutional Shareholder Activism


27

The short-term view of some institutional shareholders limits their motivation to be activists. Private pension advisors face a big conflict of interests (they are employed by firms). The regulatory and political environment also hinder large institutional shareholders from being activists.
We generally dont like institutions to become too powerful and rich, BUT this makes institutions less active.

CORPORATE GOVERNANCE
Kenneth Kim, John Nofsinger & Derek Mohr 3rd Edition Pearson Prentice Hall

CHAPTER

Corporate Takeovers: A Governance 8 Mechanism?

U.S. and U.S. Cross-Border M&A Activity Transactions


29 $1,600 14,000

$1,400
Deal Value

12,000

$1,200 10,000
Number of Deals

$1,000 8,000

Billions

$800 6,000 $600 4,000 $400 2,000

$200

$0

1983

1990

1980

1981

1982

1984

1985

1986

1987

1988

1989

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Brief Overview of M&A


30

A merger is often viewed as a combination of two firms. An acquisition is viewed as one firm buying another. However, almost all mergers are essentially acquisitions. M&A can be synergistic/diversifying or disciplinary or both.

M&A for synergy/diversification


31

To improve operational or financial synergies.


e.g., Exxon and Mobil

To diversify by expanding into new businesses.


e.g., AOL and Time Warner

Both synergistic and diversifying


e.g., Morgan Stanley and Dean Witter

Extremely diversifying
e.g., GE and NBC

Many recent mergers have occurred for growth and for increased market power.
e.g., Oracle and PeopleSoft, HP and Compaq.

The Target Firm


32

Target firm is the firm to be acquired. An acquiring firm may want to acquire a target firm because it believes:
Target firm is not performing up to its full potential. Target firm could become a better performer under someone elses control.

Therefore, target firms usually enjoy a share price increase when its acquisition is announced to the public.

The Acquirers Goals


33

To take over the target firm and make it more profitable by:
Cutting target firms fixed or variable costs. Improving target firms operational efficiency. Getting rid of target firms bad managers.

To Acquire a Successful Firm or an Unsuccessful Firm?

Takeover cost Subsequent net gains

A successful firm An unsuccessful firm Pay a large sum Pay a relatively small sum May be limited May be significantly positive

34

Paying a Significant Premium for Target Firms


35

Acquirers almost always end up paying a significant premium for target firms. Whether or not the premium paid for target firms is ever fully recovered is still contentious. The target firms shareholders might like their firms are taken over, while the target firms management team may oppose being acquired because they might get fired afterwards.

Hostile Takeover
36

A hostile takeover happens when the target firms management rejects a takeover bid. Then, acquirer may take its takeover bid directly to the target firms large shareholders to buy the firm.

37

The Notion of the Disciplinary Takeover


Takeovers are viewed as an important governance mechanism because some firms that get taken over are poorly performing firms. The fear of a potential takeover might represent a powerful disciplinary mechanism over bad managers.
When bad firms are taken over, the bad managers of those firms are fired.
So, to avoid being taken over, managers perform to the best of their abilities.

Why we may not be able to rely on takeovers to discipline managers.


38

It costs a lot of money to buy a firm. There are too many defenses/regulations against takeovers.

Takeover Regulations
39

Freeze-out laws Fair price laws Poison pill endorsement laws Control share acquisition law Constituency statute There are also antitrust laws (to ensure competition and prevent monopolies).

Firm-level Pre-emptive Takeover Defenses


40

Poison pillany strategy that makes a target firm less attractive immediately after it is taken over. A golden parachutean automatic payment made to managers if their firms gets taken over. Supermajority rulestwo-thirds, or even 90 percent, of the shareholders have to approve a hand-over in control. Staggered boardsonly a fraction of the board can get elected each year to multiple-

Firm-level Reactionary Takeover Defenses


41

Greenmaillike a bribe that prevents someone from pursuing a takeover. Other reactionary defenses include:
The firms management trying to convince its shareholders that the offer price is too low. Raise antitrust issues. Find another acquirer who might not fire management after the takeover. Find an investor to buy enough shares so that he/she can have sufficient power to block the acquisition.

42

Assessments of Takeover Defenses


Takeover defenses at least contributed to the end of disciplinary takeovers. Takeover defenses are bad for the governance system.

Potrebbero piacerti anche