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© 2012 McGraw-Hill Ryerson Limited Chapter 23 -1
There are four ways to change the management: Proxy Contests: Outsiders compete with management for
shareholders’ votes in order to take control of the company. Also called proxy fight
Mergers & acquisitions: Combination of the assets and liabilities of two firms into one – a takeover
Leveraged Buyouts: Acquisition of the firm by a private group using substantial borrowed funds
Divestitures and Spin-offs: Instead of acquiring, sometimes corporations also sell full or part of a business
LO4
© 2012 McGraw-Hill Ryerson Limited Chapter 23 -2
Tools Used To Acquire Companies
Tender Offer
Merger
Management Buy-Out
Leveraged Buy-Out
Acquisition
Proxy Contest
LO4
A proxy is the right to vote another shareholder’s shares
In a proxy contest, the dissident shareholders attempt to obtain enough proxies to elect their own slate to the board of directors
Once elected the new board is in control and can replace management
© 2012 McGraw-Hill Ryerson Limited Chapter 6-3LO4
Poison Pill: Measure taken by a target firm to avoid acquisition; for example, the right for existing shareholders to buy additional shares at an attractive price if a bidder acquires a large holding.
White Knight: Friendly potential acquirer sought by a target company threatened by an unwelcome suitor
Shark Repellent: Amendments to a company charter made to forestall takeover attempts
© 2012 McGraw-Hill Ryerson Limited Chapter 6-4LO4, LO5
© 2012 McGraw-Hill Ryerson Limited Chapter 23 -5
An LBO involves the acquisition of a firm by a private group using substantial borrowed funds
The LBO group then takes the firm private so its shares no longer trade in the securities markets
If the investor group is led by the management of the firm, then the takeover is called a management buyout (MBO)
LO4, LO6
© 2012 McGraw-Hill Ryerson Limited Chapter 23 -6
LBOs are different from ordinary acquisition A large portion of the purchase price is debt
financed If the target company was publicly traded, after
the LBO, the shares no longer trade on the open market. Remaining equities in the LBO are privately held by a small group of investors known as private equity investors
LBOs can generate value: ◦ The junk bond market◦ Leverage and taxes◦ Other stakeholders◦ Leverage and incentives◦ Free cash flow
LO4, LO6
A company can sell part of its business to another firm – divestiture
A company may spin-off a business by separating it from the parent. This is done by distributing stock in the newly independent company to the shareholders of the parent company
Equity carve-out – shares in the new company are sold in a public offering
© 2012 McGraw-Hill Ryerson Limited Chapter 6-7LO4