dealing with pressure

7/31/2019 Dealing With Pressure

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Dealing with Pressure

(Internal, External)


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Internal and External Pressure

Corporate governance - internal and external pressures on

management to make decisions in the interest of the stakeholders

of the firm.

Internal pressure- the general assembly of shareholders, the

workers' councils, and internal audits

External pressure - the market for managerial labor and the capital

market as the market for corporate control, where firms are sold

and bought.

Company has to deal with both types of pressure


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Case on Multinational Corporations-

Automotive Industry

MNCs should find balance between internal andexternal pressure:

The corporate governance system in the host country ofthe subsidiary, under the legal framework and all itsconstraints

The demands and expectations from international capitalmarkets and the home country of the mother company

Market forces, new regulations etc. which require constant

strategy realignment and restructuring The competitive advantage of the MNC across customers,

partners, and suppliers

The forces towards globalization


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Balance between internal and external pressure


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Pressure Makers:

Shareholders

Market

Regulator

Stakeholder


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Shareholders Pressure

Shareholders can express their activism through

Demand for full disclosures

Proxy fights

Derivative Law Suit

Class Actions


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Demand for full Disclosures

Demand of full disclosure can be made by

different groups. Institutional shareholders

General shareholders

Minority shareholders

Disclosure should be in certain standard

determined by legal system.


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Proxy Fights

When the Board members or the CEO do not

work as per the interest of the shareholders,

some active shareholders collects number of

proxy and make themselves eligible for theposition of the director and try to enforce

their idea.


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Derivative Law Suit

Shareholders file a suit against directors on behalf ofthe company.

Burden of proof lies with shareholders

Award paid to the company, not to shareholders. Legal cost should be paid by the shareholders.

If shareholders win, the cost can be claimed against thecompany. If shareholders lose, shareholders have to pay.

Management is friendly to defendant director. No action taken even when plaintiff wins.

Possibility of lawsuit is no credible threat.


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Markets Pressure

Market can create pressure to any company

through: Competition (domestic & international)

Progress of competitor

Friendly mergers

Acquisition

Hostile takeover


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Pressure from Regulator

Prudent regulation

Changes in regulatory regime

Determination of extra criteria Demand of more disclosures

Punitive actions


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Pressure from Stakeholders

Employee unions

Creditors

Customers Suppliers

Professional associations

Activist group


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Common Definitions

Shareholder Activism A way in which

shareholders can assert their power as owners of

the company to influence its behavior.

Shareholder activist A person who attempts to

use his or her rights as a shareholder of a publicly-

traded corporation to bring about social change.


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Types of shareholder

Large shareholders

Minority(individual)

Institutional shareholders:

1. Banks

2. Insurance companies

3. Retirement or pension funds

4. Investment advisors


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Aspects of Shareholder Activism

Proxy voting

Dialogue

Resolutions

Divestment


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Reasons for Shareholder Activism

1. To make a quick profit

2. To create long-term value3. Wish for changes

4. To slow down too high managers

activity

5. Just for fun


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EXTERNAL EVENTS AND BOD MEMBERSHIP

o Board Retrenchment: Poor performance by the board and the company can lead tooutside pressures to reform the governance of the company. Such pressures can lead to

effective reform (if received well) or board retrenchment if received defensively.

o Restructuring due to mergers or acquisitions: Acquiring another company of similar size

or market values typically leads to downsizing of the combined board members by half

since the resultant organization would not need all the members. This is affected by thefollowings issues:

Many of the decisions on which director will be retained follow from the

perceptions of their relative experience and expertise.

The CEO of the surviving entity will want majority of directors on whom he/she can

depend on for support in building the new company and implementing the new

strategy.

Directors and CEOs views of potential mergers or acquisitions would be tempered

by their perceptions of their likely positions in the hierarchy of directors that would

result after the merger.

The actual structure of the new board for the newly merged company is usually

stipulated in the merger or acquisition documents.


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Provisions Relating to Amalgamation,

Merger and Upgrading

Section 79 of the Nepal Rastra Bank Act, 2002

purchase / sales of shares is blocked

capital structure change decision made shall be provided within

forty-five days

in the case of additional statement ordocument is asked, decision made shall be

provided within additional fifteen days


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Recent Example

Microsoft's recent bid to take over rival Yahoo

board of directors (Yahoo) said "No thanks

The Kraft successful hostile takeover of

Cadbury

completed in April 2010 for 13.8bn


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Mergers & Acquisitions-Definitions

The phrase mergers and acquisitions (abbreviated M&A) refers

to the aspect of Corporate Strategy, Corporate Finance andManagement dealing with the buying, selling and combining of

different Companies that can aid, finance, or help a growing

company in a given industry to grow rapidly without having to

create another business entity.

In Business or in Economics a Merger is a combination of two

Companies into one larger company.

Such actions are commonly voluntary and involve Stock Swap or

cash payment to the target. Stock swap is often used as it allows

the shareholders of the two companies to share the risk

involved in the deal.


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Acquisitions When one company takes over another and clearly established

itself as the new owner, the purchase is called an Acquisition.

From a legal point of view, the Target company ceases to exist,

the buyer "swallows" the business and the buyer's stock

continues to be traded.

In practice, however, actual mergers of equals don't happen

very often. Usually, one company will buy another and, as part

of the deal's terms, simply allow the acquired firm to proclaim

that the action is a merger of equals, even if it's technically an

Acquisition. Being bought out often carries negative

connotations, therefore, by describing the deal as a merger,

deal makers and top managers try to make the takeover more

palatable


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Acquisitions

A purchase deal will also be called a merger when both CEOs

agree that joining together is in the best interest of both oftheir companies. But when the deal is unfriendly and is

hostile, i.e. the Target Company does not want to be

purchased, then it regarded as Acquisition.

Whether a purchase is considered a Merger or an Acquisition

really depends on whether the purchase is friendly or hostile

and how it is announced. In other words, the real difference

lies in how the purchase is communicated to and received by

the target company's board of directors, employees and

shareholders.


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Motives of mergers and takeovers

Quick way of expansion

Cheaper than internal growth

Costs saving by cross selling

Cash available

Economy of scale

Consolidating market position

Control

Globalization Diversification

PhotoDisc


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Types of merger or acquisition

Figure

PhotoDisc

Backward vertical

Previous stage ofproduction

Types ofacquisition

Forward vertical

Next stage of production

Diversification(different)

Horizontal

The same stage of

Production or thesame line


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Types of mergers and acquisition

Two or more firms

which are exactly in

the same line ofbusiness and the same

stage of production

join together.

Horizontal


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Types of mergers and acquisition

Two or more firms in

the different stage of

production join

together. Backward

integration(merging with

raw materials or

component firms

Forward integration

(distribution firms)

Horizontal

Vertical


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Types of mergers and acquisition Two or more firms with

related goods which do

not completely compete

with each other join

together.

Horizontal

Lateral

Vertical


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Types of mergers and acquisition Two or more firms in

completely different lines

of business join together.

Also called conglomerate

merger

Horizontal

Diversification

Vertical

Lateral


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Motives Cost Savings

External growth may be

cheaper than internal

growth acquiring an

underperforming or young

firm may represent a costeffective method of

growth

Managerial Rewards

External growth maysatisfy managerial

objectives power,

influence, status

Shareholder Value

Improve the value of the

overall business for

shareholders

Asset Stripping Selling off valuable parts

of the business

Economies of Scale

The advantages of largescale production that lead

to lower unit costs


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Motives

Efficiency

Improve technical,

productive or allocate

efficiency

Synergy

The whole is more efficient

than the sum of the parts (2+ 2 = 5!)

Control of Markets

Gain some form of

monopoly power

Control supply Secure outlets

Risk Bearing

Diversification to

spread risks


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Hostile takeover and friendly merger

Hostile takeover : The targeted company

tries to resist the bid.

The targeted firm may

take some measures toresist, such as askinganother firm s bid,forming managementteam, or announcingnew dividend plans, etc.

Friendly Mergers The targeted company

is willing to be acquiredor invite the bid.

Reasons may includethe firm has met withproblems or it thinks itis better under thecontrol of another.


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Hostile takeover and friendly merger

Buying one organization byanother.

It can be friendly takeover orhostile takeover.

Acquisition is less expensive

than merger. Buyers cannot raise their

enough capital.

It is faster and easiertransaction.

The acquirer does notexperience the dilution ofownership

Merging of two organizationin to one.

It is the mutual decision.

Merger is expensive thanacquisition (higher legal

cost). Through merger

shareholders can increasetheir net worth.

It is time consuming and thecompany has to maintain somuch legal issues.

Dilution of ownership occursin merger.


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Treat a person as he is, and he will

remain as he is.

Treat him as he could be,

and he will become what he should be.Jimmy Johnson


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POISION PILL

A poison pill is a strategy: that tries to create a shield against a takeover bid

from another company(Bidder)

by triggering a new, prohibitive cost that must bepaid after the takeover.

is a tactic companies use to thwart hostile

takeoversmakes the target's stock prohibitively expensive

unattractive to an unwanted acquirer.


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deterrent and negotiation tool, buying theircompany time to bargain for a better purchaseprice.

acquiring companies will approach its board ofdirectors, not the shareholders.

Poison pill strategies are also known asshareholders' protection rights plans.


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HOW IT WORKS ? Most poison-pill agreements are triggered

when an outside company or individual acquires enough stock to gain a controllinginterest in the target company.

Flip-over Flip-in

Suicide pill

Poison Debt Put Right Plan


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Flip-over: If a hostile takeover occurs

investors have the option to purchase

the bidders shares at a discount,

thereby devaluing the acquirers stock

diluting its stake in the company.


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Flip-in:

Management offers shares to investors at adiscount if an acquirer merely purchases a certain

percentage of the company. The discount is not available to the acquirer,

so it becomes extremely expensive for thatacquirer to complete the takeover

cost an unwanted bidder, on average, four to fivetimes more to swallow a poison pill in order to

acquire a target.


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SUICIDE PILL self-destructive measures to thwart a hostile takeover.

If a company becomes the target of a hostile takeoverby another company,

it may engage in a self-defeating move

which renders it no longer attractive to the acquiringcompany.

move may be so detrimental to the acquiring company

that it threatens to bankrupt both.

Such a tactic qualifies as an extreme version of a poison pilltactic.

By taking unnecessary loan.


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SUICIDE PILL

If a company decides to confront a hostile

takeover using a suicide pill approach,

it must carefully calculate the effects to its own

long-term well-being.

A takeover is sometimes more attractive thanbankruptcy


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POISION DEBT

The target company

issues debt securities on certain stipulated terms

and conditions

in order to discourage a hostile takeover bid


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PUT RIGHTS" PLAN.

The target company

issues rights to its stockholders in the form ofa dividend.

When an acquirer purchases a specified

percentage ownership in the target company, The target shareholders, excluding the

acquirer, are entitled to sell their common

stock back to the company for a specified sum of cash, debt securities, preferred stock, or some

combination thereof.


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Greenmail

Greenmail :

To protect its self from the shareholder who is

threatening to take control

By paying the money


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Strong Points

defensive tactic

White Knight Vs Black Knight Not only do they fend off unwanted takeover bids, but

boards often argue that the strategy gives the companyan opportunity to find a more, suitable acquiring party,a so-called white knight.

Boards also favor poison pills for the leveragethey bring to the bargaining table.


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EXAMPLES!!! Yahoo, which has one in place that will be

triggered if Microsoft or any other potentialsuitor buys more than 15 percent of thecompany without board approval.

In 2003, enterprise software giant Oracle

attempted to acquire rival PeopleSoft through a$5.1 billion hostile takeover bid. But PeopleSoftspoison pill was set to trigger if Oracle boughtmore than 20 percent of the company. After a

year-long battle, PeopleSoft finally voided itspoison pill and was acquired by Oracle for $10.3billion nearly double Oracles initial offer.


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WEAK PONITS

Since shareholders could gain from a takeover, they often viewmanagements adoption of a poison pill as blatant disregard of investorsinterests.

Accordingly, in some cases investors send a clear message that they dontagree with managements strategy by dumping some of their shares.

Consider the example of oil company Tesoro: When the company adopted apoison pill in November 2007 to defend itself against billionaire KirkKerkorians Tracinda Corp., its stock plummeted almost 14 percent betweenthe week before the announcement and the week after. In March 2008,

Tesoros management dropped its poison pill, with CEO Bruce Smith explainingthat the company wanted to act in the best interests of our stockholders.

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