Lecture 6 Flashcards
(18 cards)
Mergers vs acquisitions meaning
Mergers - between two equals
Acquisitions - takeover of weaker company
Hostile takeover meaning
acquisition against the wishes of the target company’s management
Factors affecting the likelihood of hostile takeover
-Firm performance (not achieving targets, slow growth)
-Ownership by management and board (Higher management ownership lowers agency costs and more costly to takeover)
-Ownership by blockholders (High ownership by unaffiliated blockholders, more likely to take over)
Costs of hostile takeover
-Identification and bidding costs
-Competition from white knight
-Competition from incumbent management
White knight meaning
a friendly company that a target
firm seeks out to avoid a hostile takeover. The
white knight offers a more favorable acquisition
deal compared to the hostile bidder
Poison pill meaning
issuing extra shares at discount to existing shareholders
Greenmail meaning
buying enough shares in a company to threaten a hostile takeover so that the target company will instead repurchase its shares at a premium
Golden parachute meaning
high compensation for existing management in case of firing after hostile takeover
Staggered/classified board meaning
Board can be replaced only a part at once
Company financial defense against hostile takeover
-Pay dividend
-Update financial forecast
-Disposal or revaluation of assets
-Invite a white knight
The Dutch poison pill meaning
in case of hostile takeover managers have the right to call option right for continuity foundation to acquire 50% of the company
Continuity foundation meaning
separate legal entity (a foundation) that can be granted call options to buy preference shares in the company. This allows the foundation to temporarily gain voting control of the company, making it much harder or impossible for a hostile party to take over.
Economic rationales of the bidder for hostile takeovers
-Exploit synergy effect and economies of scale
-Create/enforce market power
-Discipline and replace incompetent management
-Creative destruction
-Diversify portfolio
-Acquire expertise and brand name
-Save tax
Creative destruction meaning
New innovations replace older innovations because a company didn’t keep up with the changes
Corporate governance indices (G-index) meaning
how many provisions the company has (the lower the better)
Democratic vs Dictator companies
Democratic have few provisions, while dictator a lot
Entrenchment index (E-index) meaning
The higher the index, the more entrenched the management is, thus worse for shareholders. Higher index - worse financial performance
Provisions that matter for entrenchment of management
-Staggered board
-Limits to amend bylaws
-Limits to amend charter
-Supermajority
-Golden parachutes
-Poison pills
