Transcript CG Lecture 18.ppt

By: 1. Kenneth A. Kim
John R. Nofsinger
And
2. A. C. Fernando
Lesson 18
◦ Last Lecture Review
 Corporate Governance and Employees
 Trade unions, Co-Determination (Employee representation,
Profit sharing, Earning sharing, and Team production solution.
 Corporate Governance and Customers
 Corporate Governance and Institutional Investors
 Corporate Governance and Creditors
 Corporate Governance and the Community
 Corporate Governance and the Government

Lecture Outlines
◦ Definition
◦ What are mergers and acquisitions?
◦ Importance of discussing M & A in corporate
governance.
◦ General process: Acquisition
◦ General process: Merger
◦ Characteristics of M & A
 Type (vertical/horizontal)
 The valuation of firm involved
 The payment (Cash, Newly created stocks)
 The new corporate structure
 The legal issue
◦ Brief overview of M & A
 Strategic Reason
 To reduce cost
 To get new business
 Synergistic Reason
 To have combined efforts rather than individual efforts
 Diversification
◦ Are corporate takeovers good for shareholders?

Definition
◦ A corporate action where an acquiring company makes a
bid for an acquiree.
◦ Assumption of control of another (usually smaller) firm
through purchase of 51 percent or more of its voting
shares or stock.
◦ Normally, takeover is also termed as “acquisitions”

What are “mergers” and “acquisitions”?
◦ Mergers:
 Combination of two firms into one
◦ Acquisition:
 One business buy another

Importance of discussing M & A in Corporate
Governance
◦ Firing the target firm’s top corrupt and incompetent
managers
◦ These type of takeovers are often referred to as
“hostile takeovers”.
◦ Such hostile takeovers are sometimes known as
“disciplinary takeovers” because they represent one
process in which “bad” managers and/or “bad”
operating procedures can be eliminated once their
firms are taken over.
General Process; Acquisitions
1. Initial contacts between management teams.
2. Tender offer by acquirer to target company
stockholders.
3. Stockholders required to vote approval.
4. Acquirer purchases majority or complete interest.
General Process; Merger
1. Initial contacts between management teams.
2. Negotiations as to new name, management team.
3. Stock exchange details negotiated.
4. Merger proposal goes to stockholders for vote.
5. If stockholders approve, deal consummated when
stock changes hands.



So, Mergers and Acquisitions (M & A) are
significant and dramatic events.
Through M & A, companies can monitor as
well as solve the governance issues.
Stockholders has got this biggest tool to deal
with the governance problems in the
company.

Examples of M & A
◦ American Online acquire Time Warners in 2001.
◦ Pfizer bought Warner-Lambert in the 2000.
◦ Exxon and Mobile merged in 1999.
◦ SBC Communication merged with Ameritech in
1999.
◦ Vodafone’s (UK) acquisition of AirTouch (US) and
less than 1 year, Vodafone AirTouch acquired
Mannesmann (Germany)

Characteristics of M & A
There are many characteristics associated
with M & A. These are;
◦ The Type
 The merger type could be between firms in the same
industry (Horizontal merger) or different industries
(Vertical merger)
◦ The Valuation of the firm involved:
 Participants negotiate over what is a “fair” price when a
firm is trying to acquire another firm.
 Investors in a company that are aiming to take over
another one must determine whether the purchase will
be beneficial to them. In order to do so, they must ask
themselves how much the company being acquired is
really worth.
◦ Naturally, both sides of an M & A deal will have different
ideas about the worth of a target company: its seller will
tend to value the company at as high of a price as
possible, while the buyer will try to get the lowest price
that he can.
◦ There are, however, many legitimate ways to value
companies. The most common method is to look at
comparable companies in an industry
◦ The payment:
 Payments can be made in the following manners
 Cash
 The form of payment generally preferred by the
shareholders of the acquiree is cash. It is particularly
appreciated by shareholders
 Newly created stocks
 In a stock-for-stock exchange, the shareholders of the
selling entity swap their shares for the shares of the
acquirer
◦ The New Corporate Structure
 Who will be in charged?
 Which managers or business lines will be retained?
(Comparing acquirer and acquiree firm’s situation both
in M & A)
◦ The Legal Issues:
 Government agencies try to determine if a merger or
acquisition significantly reduces competition, in which
case
it
may
be
deemed
illegal,
and
therefore
challenged, by the federal government.
 So, M & A encourages monopoly and discourages
competition.

Summary
◦ Definition
◦ What are mergers and acquisitions?
◦ Importance of discussing M & A in corporate
governance.
◦ General process: Acquisition
◦ General process: Merger
◦ Characteristics of M & A
 Type (vertical/horizontal)
 The valuation of firm involved
 The payment (Cash, Newly created stocks)
 The new corporate structure
 The legal issue