Download - 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.