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Transcript
MN50324 Spring 2010 M and A: Game-theoretic Approaches: •Grossman and Hart 1982 •Garvey and Hanka 1996 Capital Structure and Takeovers • Garvey and Hanka: • Waves of takeovers in US in 1980’s/1990’s. • Increase in hostile takeovers => increase in debt as a defensive mechanism. • Decrease in hostile takeovers => decrease in debt as a defensive mechanism. Garvey and Hanka (continued) • Trade-off: Tax shields/effort levels/FCF/ efficiency/signalling Vs financial distress V • D/E D/E* • Garvey and Hanka: Management of Corporate Capital Structure. • - Hostile takeovers, and US antitakeover laws of 1980’s. • - dynamic defensive capital structure model. • -Results• A. When takeover is easy => manager defends, increasing leverage => increases firm value => reduces takeover threat. • B. When takeover is more difficult => manager reduces leverage to reduce financial distress. • Optimal debt level maximises firm value. • - Manager’s optimal debt level minimises the threat of financial distress and minimises takeover threat. • - Investors’ Optimal debt level D*, maximises firm value. • - Firm has single terminal Cashflow: R • If no takeover threat, manager chooses D < R • - no financial distress. • As takeover threat increases, manager increases D towards D* => V increases => reduces takeover threat. • • • • • • • • • Take-over Bids and the Freerider Problem (Grossman and Hart (1982). - Market value per share under current management = Q. - Market value per share under optimal management = V. Price per share offered by raider = P, with Q < P V. Freerider problem - If shareholder accepts offer, he gets P. If shareholder refuses, but bid succeeds, he gets V. Therefore, all shareholders refuse - bid fails. Eg: Q = 10, V = 100. P = 20. Each shareholder will not tender for anything less than 100 -raid fails. • • • • • • • • • Dilution - allows raider to take some of the firm’s value if successful. Eg: dilution = 10 (lump sum payment to raider). Successful raid: net value to shareholders = 100 - 10 = 90. Tender offer = 91. Bid succeeds. Implication of Garvey and Hanka, and Grossman and Hart. -Corporate Governance (disciplining) role of Takeovers. - Takeovers increase firm value (socially desirable). - Takeovers may be difficult to achieve due to defensive strategy, or freerider price ‘run-ups’. - Successful takeovers - most of the gains go to the target shareholders. Effects of takeovers on stock prices of bidder and target. • Successful Bids Unsuccessful Bids Takeover Target Technique Tender 30% Offer Merger 20% Bidders Proxy Contest n.a 8% 4% 0 Jensen and Ruback JOFE 1983 Takeover Target Technique Tender -3% Offer Merger -3% Bidders Proxy Contest n.a 8% -1% -5%