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Abdul Rauf Tabani (z5129206)

Santiago Rodrguez Mndez (z5126977)

Shubnam Suresh Bumb (z5145966)

Ahmed Abdur Rehman (z5103006)

Babak Shafaee (Z5148294)


In order to evaluate the corporate governance of Galaxy Resources, one needs to take into

consideration a multitude of factors ranging from board representation to the presence of

institutional investors.

Mr. Martin Rowley, who is the chairman of the board, is an independent and non-executive

director. This signals good corporate governance as it makes the executive head (CEO) of the

company accountable to an independent chairperson. However, he is the only independent

director in the committee of 4 members which can be an impediment to accountability and

monitoring of employees. The members are paid for their services and the respective amount is

decided by an independent remuneration committee. It was decided in 2007 that they will also be

offered stock-based compensation to align their interests with shareholders. Almost all members

of the committee have served at relevant positions and possess tremendous industry experience.

However, the company usually elects members for their successive terms and this may lead to

impartiality in their decision-making. Currently, two members are serving their successive term.

This can, partially, be attributable to the fact that the company still does not have an independent

nomination committee, which is responsible for electing board members (Financial Staements).

The management has established an internal audit committee, which is responsible for ensuring

that effective mechanisms are put in place to ensure true and fair reporting. The company also

hires an independent audit committee on yearly-basis to verify the financial statements. The

recommendations of audit committee are made public and this reduces information asymmetry

for stakeholders.
The presence of institutional investors signals good corporate governance and increased firm

value (Chang et al). Top 6 institutional investors roughly own 35% of shares of the company. With

such a large stake in the company, these institutions will monitor the company, offer strategic

advice to the company and act as a check on the actions of executives. Usually, the presence of

such investors has an effect of monitoring and signals good corporate governance.

The presence of anti-takeover provisions in the by-laws of the company has the effect of

entrenching managers and reducing the overall operating and takeover performance of the

company. These options have the effect of insulating managers from external monitoring and

checks. When looking at galaxy resources, the company does not have mechanisms in place to

entrench managers and signals a sound corporate governance.

b) To measure the benefits of takeover for the parties involved, one can measure the abnormal

returns earned by the shares and the operating performance of the companies.

The markets reaction can be measured using the abnormal return. It allows to measure the

portion of ACQs stock return attributable to the takeover announcement. The abnormal return is

the differential between the observed return and the return predicted by Capital Asset Pricing

Model. The following assumptions were made to calculate the expected return of the stock:
1. Risk free rate Average US Treasury 10 years rate during period observed

2. Expected market return Average return of S&P/ASX 200 during period observed.

3. Beta Using the formula of Beta during the period observed.

According to Bloomberg, the announcement of the takeover was released in May 30th of 2016

and the completion was in Sep 5th of 2016.

The calculation of abnormal return was done using three periods of time.:

The first one was between the date of announcement and completion of the takeover.

The second between the date of announcement until one year after the announcement.

The last period after the completion until one year after the announcement.

The calculation of abnormal returns is established in the following table:

Date Trading days Rf (Treasury 10y) S&P/ASX200 Expected (GXY) Observed (GXY) Abnormal return
(30/05/2016 - 5/09/2016) 70 1,57% 0,01% 0,97 0,06% 0,13% 0,07%
(30/05/2016 -30/05/2017) 254 2,05% 0,02% 1,33 -0,64% 0,04% 0,69%
(5/09/2016 - 30/05/2017) 184 2,22% 0,04% 1,50 -1,06% 0,03% 1,09%

It is evident that the takeover created value for the company. Positive values for excess return

were even observed

In addition, operating performance of a company had been measured to see if the takeover

created value for the company. The operating performance of a company considers the calculation

of return on assets (ROA). The ROA of the company is calculated by the EBIT/the assets for the

period. Growth in ROA is an important factor to analyse the operating performance of the

company. The following data was taken into consideration while calculation the ROA:

Revenue of the company during and after the year of takeover

Profit before taxation during and after the year

Total assets of the company during and after the year of takeover

Time EBIT Assets ROA

Before the takeover -33,13,800.00 22,12,12,698.00 -0.014%


During the year of -38,88,000.00 55,42,84,000.00 -0.007%


One year after the -40,35,000.00 58,22,47,000.00 -0.006%



As we can see the ROA of the company after the takeover announcement shows a difference of

0.007% which gives an evidence that the takeover did create value as the operating performance

of the company was improved by 50%.

Some other reasons that created value in this takeover:

1. The takeover eliminated competition as together both the companies acquired a larger

market share in the industry.

2. It diversified their business focus which resulted in improved performance of the


Q2) Empirical studies demonstrate that market will react negatively to this specific announcement

as the result of pure stock-exchange bidding firms show that their stockholders experience

significant losses at the announcement of the takeover proposal. Now we discuss why market

shows such reaction to the news:

One of the reasons is stock exchange offers are associated with negative abnormal returns

regardless of the outcome of the bid. This evidence is supported by regression analysis of the

announcement-period abnormal returns on the proportion of acquisition which financed with

common stock. Financing a takeover through exchange of common stock conveys the negative

information that the bidding firm is overvalued. Recent studies on new stock offerings report an

average drop of approximately 3% in stock prices at the announcement of stock-for-stock

acquisition. (Travlos 1987) Ronald W. Masulis found that issuer exchange offers that involve the

issuance of common stock are associated with average announcement period stock returns of

9.91%. (Masulis 1983) As a result bidding firms suffer significant losses in pure stock exchange

acquisitions, but they experience normal returns in cash offers. Evidences provided as supporting

arguments are consistent with the recent findings provided by the empirical literature on new

offering of common stock.

Market participants interpret a cash offer as good news and a common stock exchange offer as

bad news about the bidding firms true value. Therefore because of the importance of such
information, the bidding firms stock price change at the proposals announcement will reflect on

the gain from the takeover.

In summary, we can clarify that the method of payment employed to finance a takeover has an

impact on the announcement-period common stock returns of bidding firms. Common stock

financing is expected to have a negative impact (due to signalling and co-insurance effects) on

common stock returns.


Corporate Takeover Bids, Methods of Payment, and Bidding Firms' Stock Returns


September 1987

The Impact of Capital Structure Change on Firm Value: Some Estimates


March 1983

Block Holder Trading



Financial Statements

Galaxy Resources Limited