Takeover's, M&A's: Causes Flashcards
Explain how agency theory explains why firms become takeover targets
Management not focussing on shareholder value maximisation, correct strategy etc causing high agency costs between Owners and “Agents” i.e. managers.
When agency costs are not controlled by the Internal Governance mechanisms e.g. BOD, Exec compensation, Perf metrics.
This leads to firm under-performance.
Hence, Takeovers are a remedy to the failure of the internal control systems in the target firm!
Why are takeovers regarded as natural selection?
Because takeovers are a remedy to underperforming firms.
How does this statement from Manne, 1965 explain why takeovers happen?
“Management teams compete for corporate resources in the market for corporate control.”
When management teams are not performing it then entices other management teams to come in and takeover hence controlling those corporate assets.
Overall notion: Only the better-performing firms/managers prosper.
Explain how Agency theory explains why firms, with weak CG mechanisms, become acquirers
Managers pursue their own utility from managing a bigger company/ meeting pay objectives which may not be in shareholders interest.
Thus leading to unprofitable takeovers due to failure of internal CG mechanisms such as proper BOD scrutiny of proposed takeover.
This leads to huge agency cost as it goes against shareholder value maximisation if it is unprofitable.
Explain why a weak pay-performance or dysfunctional BOD may lead to underperforming managers staying at firms?
Managers are not being punished in their compensation package for bad performance enough leading to overall underperformance.
Dysfunctional BOD means managers don’t get proper scrutiny needed to reduce agency costs and keep managers aligned to shareholders interests.
State some Business and Strategic motives for M&A
1) Exploiting scale and scope of economies - mostly spreading fixed costs between companies.
2) Synergies - Firm assets are complementary hence greater firm value if Merger takes place. e.g. Pixar/Disney
3) Market power - Getting more power with supply chains by being a bigger customer thus lowering costs
4) Reducing transaction costs - resolving hold-up problems to get an investment across finish line due to incomplete contracts
Explain vertical integration and motivations
Vertical integration is a merger of firms operating at different stages of production process
Motivations:
- Disney film and Pixar animations used within films.
- Resolve hold-up problem e.g. Brewery and pub chain
- Control whole production and co-ordination of product i.e. Esso owns drilling, refining and retail.
Explain horizontal integration and motivations
Horizontal integration is when firms merger that operate in the same business activity
Motivations;
- Exploit economies of scale and scope
- Increase market power
- Exploit synergies between complementary assets
- Reduce business risk with unrelated diversification
- Consolidation
