Mergers, Acquisitions, and Corporate Control. VENTURE CAPITAL CONSULTANTS Course VCC / MCCI060107. Corporate Control. Corporate control: monitoring, supervising and directing a corporation or other business organization. Acquisitions (purchase of additional resources by business enterprise):
VENTURE CAPITAL CONSULTANTS
Course VCC / MCCI060107
Corporate control: monitoring, supervising and directing a corporation or other business organization
Changes in corporate control occur through:
“Going private” transactions
Divestiture: resources of a subsidiary or division are sold to another organization.
Spin-off and split-off: a new company is created from a division or subsidiary.
Equity carve-outs: sale of partial interest in a subsidiary
Split-up: sale of all subsidiaries. Company ceases to exist
Bust-up: takeover of a company that is subsequently split-up
Open market purchases
Open market purchases, tender offers and proxy fights can be combined to launch a “surprise attack.”
Method of payment used to finance a transaction
Attitude of target management to a takeover attempt
Accounting treatment used for recording a merger
Current assets $10,000,000
Restated fixed assets $65,000,000
Less liabilities $30,000,000
Net asset value $45,000,000
Goodwill will remain on the balance sheet as long as the firm can demonstrate that it is fairly valued.
Shareholders of target firm experience significant wealth gains in case of merger.
Jensen and Ruback survey: average 29.1% premiums for tender offers and 15.9% for mergers
On average, positive returns result for tender offers and zero returns for successful mergers.
Negative trend in acquirer returns over time attributed to adoption of Williams Act.
Mode of payment
Returns to other stakeholders
Geographic (internal and international) expansion
Synergy, market power, and strategic mergers
Managerial synergies and market power
Other strategic reasons for mergers
Agency problems: management’s (disguised) personal interests are often drivers of mergers and acquisitions.
Free cash flow theory
Five merger waves in the U.S. history
Merger waves positively related to high economic growth
Concentrated in industries undergoing changes
Regulatory regime determines types of mergers in each wave.
Usually ends with large declines in stock market values
First wave (1897-1904)
Second wave (1916-1929)
Third wave (1965-1969)
Fourth wave (1981-1989)
Fifth wave (1993 – 2001)
1800Determination of Anti-Competitiveness
Enacted in 1968 for fuller disclosure and tender offers regulation
Section 13-d must be filed within 10 days of acquiring 5% of shares of publicly traded companies.
Section 14 regulates tender offer process for both acquirer and target.
Section 14 provides structural rules and restrictions on the tender offer process in addition to disclosure requirements.
Section 14-d-1 for acquirer and section 14-d-9 by target company
SEC rule 10-b-5 outlaws material misrepresentation of information for sale or purchase of securities.
Rule 14-e-3 addresses trading on inside information in tender offers.
The Insider Trading Sanctions Act, 1984 awards triple damages.
Section 16 of Securities and Exchange Act establishes a monitoring facility for corporate insiders.
Target shareholders almost always win, but acquirers’ return are mixed.
Managers have either value-maximizing or non-value maximizing motives for pursuing mergers.
Merger activity occurs in waves.