This document discusses mergers and acquisitions (M&As) in corporate America. It notes that M&A activity spiked in the mid-1980s and 1990s due to availability of financing, and decreased in the early 2000s during an economic recession. The types and reasons for M&As are described, including improving synergies, diversifying, increasing market power and growth. Takeovers can be friendly or hostile. Defensive strategies by target firms against takeovers are also outlined, including poison pills and antitakeover laws. While takeovers may discipline underperforming managers, defenses can also benefit shareholders by increasing bid prices.

1. Chapter 8
Corporate Takeovers: A government
Mechanism?

2. Mergers and acquisition (M&A) are dramatic events yet
they are relatively usual in corporate America.
 Specially in the recent years wherein US has
undergone the largest M&A ever.
 Mid-1980s: The number of acquisitions in the US
spiked because of the wide availability of junk debt to
finance corporate acquisition.
 1990s: dramatic rise in M&A activity.
 Early 2000s: decrease in M&A activity due to
recession.
 1990s-2000s: United Kingdom had its own merger
wave.

3. Mergers can be characterized by:
 The type;
 The valuation of the firms involved;
 The payment;
 The new corporate structure; and
 The legal issues.
Merger is when two firms combine their operations into
a single firm.
 Acquirer - The firm that is buying.
 Target - the firm being sold.
 Friendly Merger – both the acquirer and the target’s firm
management and board agree to the deal.
 Hostile Takeover - the attempt to take over the control of
the target if the target firm management and board does
not want to be acquired.

4.  Merger may be deemed illegal by the federal
government.
 General issue of costs and benefits of conducting
M&A.
 But in 1980s , “bad” firms were acquired by other
corporations, or sometimes by individual investors,
and subsequently imposed dramatic changes that
helped improve these “bad” firms’ profitability.
 Merger= a combination of two firms
 Acquisitions= one firm buying another
REASONS FOR MERGER & ACQUISITIONS
1. To improve operational or financial synergies
Ex. Exxon acquired Mobil
2. To diversify by expanding into new
businesses

5. 3. Can be both synergetic and diversifying
Ex. Morgan Stanley and Dean Witter
4. Diversifying merger can be extreme
Ex. General Electric and NBC television company
5. For growth and for increase market power
Ex. Oracle & PeopleSoft, Hewlett Packard &
Compaq
NationsBank & Bank of America
Building Empire=when managers want to take
over companies simply to increase their empire

6. Target Firm or Acquisition
Define
 A corporate action in which a company buys
most, if not all, of the target company's ownership
stakes in order to assume control of the target
firm.
 Acquisitions are often made as part of a
company's growth strategy whereby it is more
beneficial to take over an existing firm's
operations and niche compared to expanding on
its own.
 Acquisitions are often paid in cash, the acquiring
company's stock or a combination of both.

7.  - There are large firm or rich investors in terms of
monetary,. buying the company or shares(if not
all) in other large company or loosing company to
acquire control to the company in order to revived
it using the establish company name to profitable
cost because they believe that they not
performing its full potential. they buy the shares of
the company to re-organized or some removing
bad managers in the company in order to retain
the companies capacity to operate and gain profit
again.
 Ex. Microsoft to Yahoo.

8. Notion of Disciplinary Takeover
Disciplinary Takeover
 The takeover of a business or firm that is
performing poorly.
 It aims at correcting the non-value maximizing
practices of managers of the target firm. The
reasons of which may be because:
 Manager is bad at managing
 Manager is abusing his managerial discretion (Using
power for self-serving ends)
 If the firm is taken over, the manager is usually
fired
 By getting rid of bad managers, they also enjoyed
a profit.

9. • The fear of a potential disciplinary takeover
represent as a powerful disciplinary mechanism
to make sure that:
 Managers perform to the best of their abilities
 Managerial Discretion is controlled
Why takeovers may not be an effective governance
mechanism.
 The acquirer may pay too much for a target
 Takeover may occur for the wrong reasons
 Although paid at a “fair” price, amount is still
significant

10. Corporate raiders
 Those who obtain enough shares of a firm in
order to force management to make changes.
 Takeover type is clearly disciplinary
 Often cut jobs to control costs
Reasons why disciplinary takeovers are not
done
 High stock price which were artificially created by
current management (cooking the books)
 It is costly to buy a firm
 There are too many defenses existing against
takeovers

11. Takeover Defenses
 For the U.S., we can place takeover defenses into two
categories; those at the firm-level and those at the
US state-level
Two types of firm-level defenses:
1. Firm-Level Pre-emptive Takeover defenses – try to prevent
takeovers.
 Poison Pill – represents any strategy that makes a target firm less
attractive immediately after it is taken over.
 Blank-check Preferred – the company gives the board the right to
issue preferred stock at any time with any voting rights the board
determines.
 Golden Parachute – an automatic payment made to managers if
their firm gets taken over.
 Supermajority Rules – other takeover defenses where two-thirds,
or even 90%, of the shareholders have to approve a hand-over in
control.
 Reactionary Defenses – are enacted after a takeover attempt has

12. 2. State-Level Antitakeover Laws
There are 5 common State-Level Antitakeover Laws:
 Freeze-out Laws – stipulate a length of time (usually about
three years) that a bidder that gains control has to wait to merge
the target with its own assets.
 Fair Price Laws – make sure that the shareholders who sell
their shares during a later stage of an acquisition get the same
price as any other shareholder who sold their shares to the
acquirer earlier.
 Poison Pill Endorsement Laws – protect the firm’s rights to
adopt poison pills.
 Control Share Acquisition Laws – requires shareholder
approval before a bidder can vote his shares.
 Constituency Statute – allows managers to include non-
shareholders’ (such as employees or creditors) interest in
defending against takeovers.
 Sherman Act & Clayton Act – federal acts that prevent mergers
that would significantly reduce competition.

13. ASSESSMENTS OF TAKEOVER DEFENSES
Are Takeover Defenses Bad for the Governance
System?
 Firm-level defenses and state-level antitakeover laws
were invented and implemented during the mid-to-late
1980s
 Takeover defenses contributed to the end of
disciplinary takeovers.
 Takeover defenses prevent disciplinary takeovers that
cause us to be left with one less governance system.
 Takeover defenses are bad for the governance
system.
 When a firm adopts an antitakeover mechanism, their
firm’s stock price declines on the news.
 Corporate raiders are often looking for quick profits;
we generally encourage managers and investors to

14.  Corporate raiders as heartless villains.
 Some antitakeover devices appear only to benefit
managers.
 On the other hand, many firms with takeover
defenses do eventually agree to be acquired.
 When they do the acquisition price tends to be
much higher than the original offer.
 Therefore fighting against the merger for a while
may cause the bid price to increase, thereby
increasing wealth to the target firm’s
shareholders.