CORPORATE CONTROL EVENTS EB434 ENTERPRISE GOVERNANCE

Transcription

1 CORPORATE CONTROL EVENTS 16 EB434 ENTERPRISE GOVERNANCE

2 corporate control events Open market purchases on the stock market Tender offer offer made directly to shareholders (often by law, to all shareholders at the same price) Share swap typically negotiated & agreed by both boards Friendly takeover Hostile takeover bids (often involving proxy contests)

3 control events II Leveraged buy-outs (LBOs) often currently associated with private equity Management buy-outs (MBOS): often highly-leveraged (ie. Lots of debt) to finance buying of the firm s shares by its management team, typically resulting in delisting from the stock exchange Recapitalizations changing share status, voting rights, new issues, share buybacks, share splits etc Spin-offs shifting assets to new corporate vehicle, often for sale

4 costs of control events? Benefits to shareholders (albeit at costs to managements, some employees and suppliers) revealed by the significant premium for control paid in such hostile control events (often 30-50%) The overall efficiencies in capital allocation that arise when business activities come under more efficient management When debt is used for a takeover it must be serviced and the premium for control usually paid means debt-equity ratio in cases of LBOs often go from 20% to 80-90% This imposes a discipline on firms, but may hamper long-term oriented investment

5 hostile takeovers Hostile takeovers may reduce managerial agency costs (ie. when managers don t act fully in shareholders interests) The share price of mismanaged firms will fall Allowing other firms or entrepreneurs to buy the stock more easily Then they will improve firm operations and profitability, leading to a rising share price They either hold the shares for a paper gain or cash out (exit at a profit) through selling the shares, often to diverse shareholders through on-market sell downs proxy fights voting shares at general meetings can also change managerial teams

6 rules + defenses fair price provisions (sometimes required by law) : to make sure that all shareholders get access to an offer priced to secure control (that is, not just those shareholders who sell first, giving acquirer a majority stake & hence control stops 2 tier offers) Compulsory offer & acquisition rules must make a tender when going above a certain % of shares controlled Poison pill: triggers share option to other shareholders except unwelcome would-be acquirer of control, diluting its stake White knight: friendly acquirer in response to hostile bid Management may buy off bidder (as some greenmail ploys anticipate but which highlight poor quality of management)

7 recent private equity Resurgence in LBOs before global financial crisis (GFC) of ; typically with deals initiated by leading specialist investment banks; factors being: low cost of capital demand for higher returns from institutional investors which take stakes in such private equity deals in turn reflecting the huge pool of baby boomer retirement savings tax effectiveness of debt, and rules which allow transfer of the debt of acquiring entity to the target firm s balance sheet when a certain majority stake is held GFC negatively impacted private equity deals RECENTLY: new strategic merger & acquisition wave as companies tap ready credit to acquire domestic rivals or foreign firms that complement business strategy

8 management duty When facing a bid for control of a firm (by private equity, or another public firm offering cash, a share swap or a mix of both) management must act in the interests of the firm, its shareholders, and (more controversially), other stakeholders. Management should not act in its own interests (eg. as embodied in concept of omnipresent specter ; making a recommendation to shareholders about whether the offer represents fair value or not. Share repurchases raise the share price, return un-needed capital to existing shareholders Share repurchases can be open market, fixed price offers to all shareholders (to a certain volume), or, more controversially, through negotiation with some shareholders eg. greenmail case