Spring 2022 End-of-semester Exam on Hostile Takeover Bids- Finance, Washington State University
Use these accurate solutions as a guide on how to answer exam questions on tactics companies can take during hostile takeover bids. These are questions from the Spring 2022 end of semester exam done at Washington State University. Incase you are struggling with other finance exams, you can pick one of our competent finance exam solvers to take your test for you. Send us your exam requirements and we will help you score an excellent grade.
Exam Question
List three tactics a company can take after the announcement of a hostile takeover bid
Exam Solution
These measures are applicable only after the announcement of a hostile bid, in other words, short-term tactical moves designed to combat a specific threat. After its announcement, an offer can be opposed in three broad ways:
- Releasing positive new information.
- Attacking the terms of the bid and the bidder.
- Taking actions designed to block or frustrate the bid.
A skillful bidder is likely to time his move at a time when it is difficult for the target to release encouraging news, for example just after an announcement of poor results has been made or following warning remarks on prospects by management.
The attack is often the best form of defense. It is a rare bid and bidder that have no Achilles heel.
The third category involves not chiefly a debate on the pluses and minuses of the bid but spoiling tactics which can be applied almost equally well whether the bid is essentially good or bad.
Exam Question
In a bid to defend itself against a hostile takeover bid, a company may employ the tactic of releasing new positive information. State and explain the main areas in which shareholders and investors will expect to hear from
Exam solution
The main areas on which shareholders and investors generally will expect to hear the company's views are:
- Profit and dividend forecast
- Revaluation of assets
- Other positive developments
If increased profits and dividends can be forecast this serves not only to make the offer priced look less attractive but also underlines the good performance of current management. In some countries, such forecasts must be reported on by the company's auditors and financial advisors. A past record of good growth and achieved targets assists in establishing the credibility of a forecast in circum- stances where the directors would like to show an encouraging increase in profits.
If significant assets have been carried on the company's books at cost for a number of years, a revaluation may disclose a substantial surplus over book values which would tend to make the offer price appear less generous. Some allowance should be made for any tax which might be incurred on the disposal of assets at the valuation price.
A company may have projects on hand which can be announced at an important moment to bolster shareholder confidence in the future of the company. Such announcements might include promising new products and orders, contracts which are being signed or negotiated, hiring of new management, and other similar items.
A target company must be aware that the release of positive new information may be a double-edged sword in circumstances where the aggressor has considerable financial strength. The first offer may be a 'sighting shot' to force disclosure of information on the basis of which an increased offer can be justified. Management should therefore carefully consider how much new information it needs to release in order to repulse a particular offer There may be arguments in favor of releasing information step by step saving the best until fairly late in the process so that it is difficult for a bidder to react with substantial.
Exam Question
Which are the possible vulnerable points that the company may attack with regards to the bid and bidder during a hostile takeover bid as a defense mechanism?
Exam solution
Possible vulnerable points include:
- Value and type of consideration
- Commercial and timing arguments
- Motives of the bidder
An obvious tactic is to argue that the offer is not high enough, specifically that it does not adequately reflect the profits, dividends, assets, and prospects of the company. Shareholders may be subject to taxation through a forced disposal of their shares, which will reduce the face value of the offer. An analysis of past share price performance may show that the offer price is below the market price at some period.
If the bid is not all in cash, the value of the securities being offered in exchange may be attacked. The bidder's shares may be vulnerable to the same type of criticisms as can be advanced against a target company.
If other more complicated types of security are being offered such as convertible or unsecured loan stock, the consideration may be attacked as funny money. In a closely-matched contest, shareholders may through familiarity prefer to keep shares deliberately purchased rather than to accept shares in another company offered in exchange.
If a bid is on paper, the contribution of the two companies to the earnings and assets of the enlarged group may show that the shareholders of the target company are being 'short-changed in some respect. Indeed, unless the bid is over-generous to the target, some disadvantage to the target company is inevitable and can be highlighted
Often a bid can be attacked as being opportunist, taking advantage of some period of weakness in the target which may be temporary. Indeed, the bidder is unlikely to be motivated by pure altruism. The commercial and industrial logic of the transaction may be questioned, although strictly speaking this may be of little to a shareholder offered cash or a considerable proportion of cash in exchange for his shares.
The argument may be put forward that if the company is as bad as the bidder makes out then why does he want it at all? Alternatively, if a company is good, why should the bidder reap the benefits and not the existing shareholders? Sometimes the tables can be turned and pressure brought to bear on the shareholders of the bidding company to prevent that company from making a high bid. If a bid is so attractive, in some sense it must penalize the bidder's existing shareholders.
Contested takeovers may rapidly become personalized, and the more so the longer the bid continues. It tends to be seen as a duel between the two chairmen or other prominent executives of the companies. Public exchanges between the two sides can degenerate into mere abuse and personal attacks. A common tactic is to question the motives of the controlling shareholder or chief executive of a bidder. suggesting that the bid is made for reasons of ego or empire-building and that such a person is unfit to manage the target company.
Exam Question
What are some of the actions by a company that can block or frustrate a takeover bid?
Exam Solution
- Legal/regulatory
- Market purchases
- Publicity and appeals to other factors
- White knight
In the US, a major part of the defense to a hostile bid is a resort to the courts for injunctions to delay or block the takeover, including attacks on both the bidder and his associates and financial advisors and backers for misleading or inadequate disclosure and violations of procedure. Takeovers may also be subject to government or other regulatory approvals, particularly as regards anti-monopoly rules so lobbying for such approval to be withheld is a possible tactic
Whether a bid is vulnerable to such obstacles will depend primarily on size, the sensitivity of the industry, and the political clout of the bidder and the target. It may also depend on the political climate of the time. Most countries, for example, have restrictions on foreign control of local companies. How these restrictions are interpreted and enforced may vary with the attitude of the government of the day towards foreign investors. Equally, the strength of a domestic lobby at a particular time, for example, the trade unions, may make the employment consequences of a particular bid a more sensitive factor than it otherwise would be.
In the closing stages of a bid, perhaps the most critical factor will be whether the market price is at a premium to the value of the offer. A program of share purchases in the market by associates of the target company will help to achieve this In some countries, it is necessary to be able to demonstrate that the company has not provided any financial support for share purchases.
Management will send circulars and other material to shareholders containing information helpful to their case Newspaper advertisements may also be taken out The help of related parties such as stockbrokers may also be enlisted to prepare and send positive circulars to major clients who are shareholders or potential shareholders of the company.
Management can often appeal to a sense of loyalty in its shareholders particularly if the business has a long history and tradition. Companies with well-known products or brand names may be able to rouse the support of customers and suppliers. Employees who may be anxious about the effect of a change of control on their jobs can also be recruited.
If management feels that the other moves open to it are unlikely to prevent the success of a hostile bid it may seek another suitor, commonly referred to as a white knight. By gathering a consortium of institutional backers, management can become its own white knight through a management buy-out.
With the encouragement and support of existing management, a white knight knows that there is a high chance of success. In addition, an appropriate white knight will often have some interest in preventing the rival merger which may lead, for example, to a powerful competitive group being formed. These factors appear sufficient to guarantee no shortage of eager white knights, despite the fact that their late entry into the fray involves the payment of a price which they sometimes live to regret.
Blocking tactics may prove highly effective and are attractive in the heat of the battle. However, it may be questioned whether some moves, particularly legal and other technical steps which may be taken to block an otherwise attractive offer, are genuinely in the interests of the shareholders or whether their main effect is to the power of entrenched management.