CRG L9 - 2019

Corporate Restructuring
& Governance
BUSI 3101
Lecture 9
Dr. Young Un Kim
2016 CRRC International Talent Development Programme

Announcements
• Seminar 2 starts next week
>> Attend your designated seminar time.. please
You are required to:
– Read the article of Jiangsu Glass provided on Moodle
under seminar 2.
– Prepare answers to the questions asked in the document
seminar 1 assignment on Moodle under seminar 1.
Copyright 2019 © Nottingham University Business School China. All Rights Reserved 2
Today’s Lecture
• Takeover defences
• Governance and bid resistance
• Forms of takeover defences
• Effects of takeover defences
• Empirical evidence
Copyright 2019 © Nottingham University Business School China. All Rights Reserved
Key aspects
• Takeovers may be an important mechanism to
reconcile/align the interests of shareholders and
managers.
• If managers underperform and internal
governance is not effective, takeovers give
external pressure to managers to improve
performance.
• What is the role of takeover defences: do they
protect shareholder interests or do they mainly
safeguard managers’ interests?
Takeover Defences: tactics to make targets less
attractive
Takeover defences
Two conflicting explanations for takeover defences
/ resistance towards takeover bids
(1) It may represent manager-shareholder
alignment: management acts to maximise
shareholder wealth during the takeover process
(2) It may represent management entrenchment:
managers acting in their own interest
Takeover defences
Two conflicting explanations for takeover defences
/ resistance towards takeover bids
- Discuss reasons why shareholder-managerial
alignment may occur in defending against a
takeover;
- Discuss reasons why management entrenchment
may occur in defending against a takeover
Reasons Underlying Presence of
Takeover Defences
• Managerial • Shareholder interest

entrenchment hypothesis
hypothesis – Defence reflects
shareholder interests
– Defence reflects managers
– Increase bargaining
interests power
– Managers trying to save – Promote auctions
their jobs at the expense of – Avoid short-terminism
shareholder wealth gains
– Stability and continuity
– Managers use defences – Encourage firm-specific
because a takeover signals human capital
failure investments
– ‘Uninformed’ shareholders – Management (BoD)
acting to maximise
shareholder wealth
Takeover Defences
May be put in place to stop a hostile bid occurring
(preventive, pre-bid) or used to fight off a bid once
it has happened (reactive, post-bid).
Commonly used measures include:
• Dual-class Recapitalization Assess which of
• Staggered board of directors the takeover
• Poison Pills
defences can be
• Greenmail/targeted repurchases
• Litigation considered
• Golden Parachutes preventive and
• Defensive Corporate Restructuring which ones
• White knight/white squire
• Pacman defence
reactive.
Microsoft’s Acquisition attempt of Yahoo
• On February 1, 2008, after its friendly takeover offer was rebuffed by Yahoo!, Microsoft made an
unsolicited takeover bid to buy Yahoo! for $44.6 billion in cash and stock. Days later, Yahoo! considered
alternatives to the merger with Microsoft, including a merger with Internet giant Google[51] or a potential
transaction with News Corp.[52] However, on February 11, 2008, Yahoo! decided to reject Microsoft's offer
as "substantially undervaluing" Yahoo!'s brand, audience, investments, and growth prospects.
• On February 22, two Detroit-based pension companies sued Yahoo! and its board of directors for
allegedly breaching their duty to shareholders by opposing Microsoft's takeover bid and pursuing "value
destructive" third-party deals.[54] In early March, Google CEO Eric Schmidt went on record saying that he
was concerned that a potential Microsoft-Yahoo! merger might hurt the internet by compromising its
openness. The value of Microsoft's cash and stock offer declined with Microsoft's stock price, falling to
$42.2 billion by April 4.On April 5, Microsoft CEO Steve Ballmer sent a letter to Yahoo!'s board of
directors stating that if within three weeks they had not accepted the deal, Microsoft would approach
shareholders directly in hopes of electing a new board and moving forward with merger talks (a hostile
takeover).In response, Yahoo! stated on April 7 that they were not against a merger, but that they wanted
a better offer. In addition, they stated that Microsoft's "aggressive" approach was worsening their
relationship and the chances of a "friendly" merger. Later the same day, Yahoo! stated that the original
$44.6 billion offer was not acceptable.]
• On May 3, 2008, Microsoft withdrew the offer. During a meeting between Ballmer and Yang, Microsoft
had offered to raise its offer by $5 billion to $33 per share, while Yahoo! demanded $37 per share. One of
Ballmer's lieutenants suggested that Yang would implement a poison pill to make the takeover as difficult
as possible, saying "They are going to burn the furniture if we go hostile. They are going to destroy the
place.
• On May 5, 2008, following Microsoft's withdrawal, Yahoo!'s stock plunged some 15% lower to $23.02 per
share in Monday trading and trimmed about $6 billion off of its market capitalization.
• 2009 – Jerry Yang resigns from CEO position
Dual-Class Recapitalization
• Restructure equity of firm into two classes with
different voting rights
 exchange preferred stock (shares with higher
dividends but limited or no voting rights) for
common stock
• Inside managers with small equity holdings can
increase their voting power without increasing their
equity stake by not participating in the exchange
• Jarrell and Poulsen (1989) find evidence of negative
ARs at the announcement of a dual class
recapitalisation
Tenure voting system
• On matters involving change of control,
shareholders who have owned the stock for
more than four years get 10 votes per ordinary
share
• Ex) JM Smucker – a family firm with 3 Smuckers on the
board and one is CEO.
Staggered board of director
elections
• Board classified into 3 groups with each group elected in
a different year
• Proponents argue it ensures continuity of experience
and strategy
• Critics argue that it makes it difficult for a hostile bidder
to gain control of the Board, even with a majority
ownership stake
• No effect on stock price (Ruback, 1987)
Poison pill (shareholder rights plan)
• A general term for any contractual arrangement that increases
the cost of takeover
• In the US it refers to target shareholders owning shares with
special rights that are triggered by an event
 Flip-over – provide for purchase of bidders shares at a
discount after a successful takeover
 Flip-in – provide for purchase of target’s shares at a
discount by existing shareholders (except the bidder)
before takeover
Existing shareholders get instant profit, so have an incentive to
purchase
Dilutes shareholding of acquirer
• Evidence they do not deter takeovers and are associated with
higher takeover premiums (Comment and Schwert, 1995)
Safeway adopts poison pill to prevent takeover
• WSJ September 18, 2013
NEW YORK (AP) — Safeway adopted a plan to prevent a hostile takeover after learning of a
significant accumulation of its stock by an investor.
So-called "poison pill" plans allow existing shareholders to acquire more stock at a discounted
rate to discourage a takeover by an outside entity. In a filing with the Securities and Exchange
Commission later Tuesday, Jana Partners disclosed that it had amassed a 6.2 percent stake in
Safeway's outstanding shares.
It said it "believes the shares are undervalued and represent and attractive investment
opportunity." The hedge fund said it has held and "may continue to have" talks with Safeway's
management regarding strategic alternatives, including a review of the markets where it
operates and exiting lower-margin regions.
Safeway's defensive plan becomes exercisable if a person or group acquires 10 percent or
more of the company's common stock, or 15 percent by an institutional investor.
Greenmail / targeted
repurchases
• The target firm buys shares from a potential bidder at a
premium
• Often accompanied with a ‘standstill’ agreement where
the shareholder that is bought out agrees not to buy
more shares over a specified period
• When greenmail used to buy off a potential bidder, it
protects under-performing managers
• Between April 1983 and April 1984 alone, companies
paid over US$4 billion in greenmail
Example
• One famous example involved Goodyear Company and Sir James

Goldsmith. In 1986, Sir James Goldsmith held an 11.5% stake (at an
average of $42.20 per share) in Goodyear Company and threatened
to take over the company for $4.7 billion ($49 per share).
• In response, Goodyear agreed to repurchase the existing shares
from Sir James for $49.50 per share ($620.7 million) contingent that
Sir James refrain from purchasing any Goodyear stock for 5 years.
In the end, Sir James made about $93 million in profit.
• Additionally, to prevent another takeover attempt in the future,
Goodyear offered to repurchase 40 million shares, with 109 million
shares outstanding, at $50 per share in an open offer to all
shareholders. Ultimately, the purchase of 40 million shares cost
Goodyear $2.6 billion.
Litigation
• Charges against bidders are filed on grounds of
fraud, antitrust, or securities violation
• Delays bid, allowing time for the entry of a competing
bid
• Encourages bidder to raise price in return for litigation
being dropped
• Might discourage bids for inefficient firms but delay
could increase shareholder wealth if auction is
created (Franks and Harris, 1986)
Golden Parachutes
• Provisions in an employment contract which pays
a specified amount of monetary compensation to
senior executives in the event of a control
change.
• Supporters argue they encourage managers to
accept change of control - which can be in
shareholders interests
• Opponents argue that they: (1) increase costs of
takeover, (2) reward managers for failure and (3)
if payments are excessive, managers not
incentivised to negotiate a high bid offer
• Evidence of a positive AR on announcement of a
golden parachute (Lambert and Larker, 1985)
Defensive Corporate Restructuring
• Financial restructuring
Issue new shares and sell to investors that support
current management
Leveraged recapitalisation (issue debt and
purchase equity / pay large dividend) – the high
leverage makes the firm a less attractive takeover
target
• Asset restructuring
Divest assets that bidder wants
Buy assets bidder does not want
Restructure firms assets in the same way the
bidder intends
White knight / white squire
• White knight – solicit a bid from another firm that

agrees not to break up the target or target
management believe there is a better ‘fit’ with
the other firm
• White squire – solicit bid from an investor that
does not take control but supports current
management against a hostile bid
Copyright 2019 © Nottingham University Business School China. All Rights Reserved 23
Holl and Kyriazis (1997)
Journal of Business Finance and Accounting, 24
• Investigated the effectiveness of post-bid

defences
• The Study
– sample of UK bids 1978-1989
Hostile - Target management engaged in one or more
costly post-bid activity
Identified 15 types of post-bid defence grouped into:
-- defensive restructuring -- use of law
-- poison pill --white knight
Journal of Business Finance and Accounting, 24
• Study examines:
– effects of introducing post-bid defences on shareholder wealth
– effects of post-bid defences on the probability of success
• Major findings:
– all defences except recourse to law and attempts to justify strategy
increase target shareholder returns [consistent with promotion of
s/holder wealth]
– all defences except white knight defences significantly lower the
probability of success [consistent with promotion of interests of
managers]
– Increased dividends improve shareholder welfare. Recourse to law
has the opposite effect
– White knight defences promote managers’ interests less than do
other defences
Journal of Business Finance and
Accounting, 24
• Wealth gains generated by bid resistance persist
for in excess of two years after a bid has failed
• WHY?
– Could be that it prompts much needed restructuring
– Market may revalue the company especially where
restructuring has already been taking place but which
had not before been signalled to the market (Parkinson
and Dobbins, 1993)
– The company may still be considered in play so that
premia remain high in anticipation of another bid
• Other studies provide mixed results
Concluding Remarks
• A variety of takeover defences exist - often used in
combination
• Motivations for their adoption may vary
• Questions the effectiveness of the market for
corporate control in disciplining managers further
entrenching under-performing managers
• The majority of give some support for the managerial
entrenchment hypothesis, but still controversial.
• Some evidence that with corporate governance
mechanisms in place, bid resistance and takeover
defences serve shareholder interests.
Next Lecture
• Focus on Corporate Restructuring and Governance in
China
• Read core readings for lectures 10
THANK YOU

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Corporate Restructuring

Dr. Young Un Kim

2016 CRRC International Talent Development Programme

• Managerial • Shareholder interest

• One famous example involved Goodyear Company and Sir James

• White knight – solicit a bid from another firm that

• Investigated the effectiveness of post-bid

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