© 2012 McGraw-Hill Ryerson LimitedChapter 23 -1 There are four ways to change the management: Proxy Contests: Outsiders compete with management for shareholders’

© 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