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Mergers and Acquisitions 合併與購併

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What is Corporate Governance?

Corporate StructurePrincipal Agent Relationship

Stockholder

Board of directors

Mangers

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Board of Directors

• Definition

• Purpose and Duties

• How do you become a Member?

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Executive Compensation

• Definition

• Purposes

• Who Sets Compensation?

• Today Typical Package

• Examples of Compensation and Firm Value

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• The textbook answer to corporate control is that shareholders elect a board of directors who appoint management. Management is thus an agent of shareholders and all corporate decisions should be made with the best interests of the shareholders in mind.

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• The concept that management makes all decisions based on shareholder wishes is considered the socially optimal corporate governance rule. The basic concept is that since shareholders are the residual claimant of corporate assets (i.e. get paid last), any decision that benefits shareholders, by definition, benefits other stakeholders in the corporation.

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• There is a large body of empirical evidence that management acts in its own best interest (note, so does everyone else). However, shareholders (through the board of directors) have some control over management compensation. Therefore, shareholders can usually design a compensation system that causes management to usually act in the shareholders best interest.

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• Corporate control ultimately depends on controlling enough votes (usually 51%) to elect a board of directors. A firm must also produce a proper return on its assets to avoid the takeover market. Thus corporate control, for various reasons (SEC rule, cost of a takeover), usually is in the hands of a dominant shareholder, or by default, management.

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• The group controlling the corporation can do things to increase its control either through corporate charter amendments, capital structure changes, and the accumulation of shareholder clienteles.

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Takeover -acquisition -merger or consolidation

-acquisition by stock

-acquisition by assets

-proxy contest

-going private

Corporate control 公司控制

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• Takeover is a general term referring to the transfer of control of a firm from one group of shareholders to another.

• Merger: A merger refers to the complete absorption of one firm by another. The acquiring firm retains its identity and the acquired firm ceases to exists as a separate business entity.

• Bidder: the acquiring firm

• Target firm: the firm is to be acquired.

• Consolidation: A consolidation is the same as a merger except that an entirely new firm is created. Old firm cease to exist.

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Reasons for merger and acquisition

• Synergy:

The acquisition is said to generate synergy.

• Revenue enhancement

*Marketing gains: advertisement, channel, and product mix

*Strategic benefits;

*market power

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• Cost reduction: more efficiently.

*Economy of scale.

*Economies of vertical integration

*Complementary resources

• Lower taxes

* net operating loses

* unused debt capacity: Acquiring some firms that do not use as much debt as they are able.

* Surplus funds: free cash flow can be used for investment project

• Reductions in capital needs: A merger may reduce the combined investment needed by the two firms.

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• Acquisition by assets. A firm effectively acquires another firm by

buying most or all of its assets. This type of acquisition requires a

formal vote of the shareholders of the selling firm.

• Acquisition by stock: To acquire a firm by purchasing the firm’s

voting stocks in exchange for cash , shares of stocks, or other

securities.

• Tender offers is a public offer to buy shares by one firm directly from

the shareholders of another firm. The tender offer is communicated to

the target firm’s shareholders by public announcement.

方法

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• 1.In an acquisition by stock, no shareholder meeting have to be held and no vote is required.

• 2.The target firm’s management and board of directors are bypassed.

• 3.Acquisition by stock is occasionally friendly. Resistance by the target firm’s management often makes the cost of acquisition by stock higher than that of a merger.

• 4.Many acquisitions by stock end up with a formal merger later.

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Acquisition classifications

• Horizontal acquisition: same industry, same business.

• Vertical acquisition: involves firms at different steps of the

production process.

• Conglomerate acquisition: two firms are not related.

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Proxy contest

• An attempt to gain control of a firm by soliciting a

sufficient number of stockholders votes to replace existing

management. Proxy contest occurs when a group attempts

to gain controlling seta on the board of directors by voting

in new directors.

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Going private transaction

• An publicly owned stocks in a firm are purchased by a sma

ll group of investors. Usually the group includes member

s of incumbent management . A large percentage of money

needed to buy up stocks is usually borrowed. So such tran

sactions are known as leveraged buyouts(LBOs). LBOs to

ok place often in the 1980’s in USA.

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Taxes and acquisition

• Taxable acquisition: the shareholders of the target firm are considered to have sold their shares, and their capital gains needed to be taxed. The general requirement for tax-free states are that the acquisition be for a business purpose, and that there be a continuity of equity interest. i.e. the shareholders in the target firm must retain an equity interest in the bidder.

• Like cash→stock: taxable

• stock→stock: tax-free

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Accounting for acquisitions

• Two methods:

1. the purchase method

Example:

Firm A Firm B

B/S B/S

Working 4 Equity 20 Working 2 Equity 10

capital capital

Fixed 16 Fixed 8

assets assets

Total 20 Total 20 Total 10 Total 10

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• A pays B 18 million in cash. A+B=38. Market value of

B’s fixed assets is 14 million.

• Goodwill must be amortized over a period of time (max. 40 years) The amortization is a deduct from income. The combination of lower reported income and large market value of assets results in lower ROA and ROE.

Firm

AB

B/S

Working

capital

6 Debt 18

Fixed

assets

30 Equity 20

Goodwill 2

Total 38 Total 38

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2. Pooling of interests

• The balance sheets are just added together.

Firm AB

B/S

working capital 6 Equity 30

Fixed assets 24

Total 30 Total 30

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Defensive tactics

Target firm managers frequently resist takeover attempts

* The company charts: The company charts establishes the condition that allows for a takeover. Firms frequently amend corporate charts to make acquiring more difficult.

e.q. change voting ration from 2/3 to 90%. This is called supermajority amendment. Stock price response is negative.

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Repurchase / standstill agreements: Standstill agreements are contracts where the bidding firms agree to limit its holding in the target firm. A targeted stock repurchase happens that payments are made to potential bidders to eliminate

unfriendly takeover attempts. This is greenmail. Stock price response: Negative

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Poison Pills

• A plan that allows current shareholders (but not any of the “new” shareholders) the right to buy additional shares of stock in case of a tender offer announcement, at half the price.

• The shareholdings of current shareholders increase, reducing value of raider’s shares.

• Stock price response: Negative.

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Golden Parachutes

• Compensation promise to top-level management in case they exit because of a merger.

• Stock price response: Positive

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Scorched Earth

• A conditional sale of the crown jewels to a friendly third party in case of a takeover.

• Stock price response: Negative

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White Knights and Whitemail

• A white knight is a friendly firm who comes to the rescue of a target being pursued by a hostile raider.

• Whitemail is any concession given to the white knight to attract it.

• Stock price response: Positive.

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Leveraged Recaps

• An attempt by the firm to become its own white knight by taking a huge amount of debt, or selling assets, and paying out a large special dividend to its shareholders.

• Stock price response: Positive.

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* Exclusionary self-tender is the opposite of a target repurcha

se. A firm makes a tender offer for a given amount of its o

wn stock while excluding targeted stockholders.

* Going private and leveraged buyouts

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Empirical evidence of takeover activities

• Empirical evidence of takeover activitiesTakeover target bidder

tender offer 30% 4%

merger 20% 0

proxy contest 8% na

• 1.tender: unfriendly, cost is high

• 2.target firm. Gain is high.

• 3.bidder: To bidding is not for shareholders, but for managers. Gain for bidder firm is low. Another reason for low gain for bidding firm is because the competition is intensive, gain will not by high.