AIMST UNIVERSITY

FACULTY OF BUSINESS AND MANAGEMENT

MERGERS, ACQUISITIONS AND CORPORATE RESTUCTURING

CLASSROOM EXERCISE 4:

1. State the advantages and disadvantages of joint ventures.

Advantages:

- Risk sharing, complementarity.

- Reduce investment costs of entering risky new areas.

- Benefits of economics of scale, critical mass learning curve effects.

- Acquisition of knowledge.

- Entry in new, expanded, foreign markets.

- Provides financing for small companies with ideas but no cash.

- Acquire managerial/technical expertise from larger firms.

- More favorable tax/political treatment.

Disadvantages

- Inflexibility problems similar to other long-term contracts.

- After a while, partners may not work as hard as at the beginning.

- Possible disagreements between parties.

- Conflict with firm’s long-term strategies.

- Create new competitors.

2. Distinguish between a joint venture and a strategic alliance.

 Joint ventures

- Two or more companies combine certain assets and work toward jointly achieving a
business objective.

- Two types of joint ventures: i) incorporated – there is a separate legal personality, it

can enter into contracts and hold property under its own name; ii) unincorporated –
parties hold specific shares in the joint venture depending on the agreement but does
not hold a separate legal existence.

- The objective of a joint venture is to mitigate risk by working together to carry out a
business objective.

Strategic alliances

- It is an informal agreement between parties to reach a mutually beneficial goal by

sharing resources.

- The objective of a strategic alliance is to maximize returns and generate profit by

working together to increase the performance of the parties.

- Parties work together but operates separately and independently.

- In a strategic alliance, the two or more parties agree to terms and can “seal the deal”
with no more than a handshake.

- A strategic alliance is usually managed by representatives of both companies.

3. Describe the critical requirements for a successful strategic alliance.

- Unity objective to reach the business goals.

- A good communication among the parties.

- Lead by a knowledgeable and disciplined management team.

4. Differentiate the motives of joint venture and mergers.

Motives of joint venture

- To create new business ideas, innovations of products and venture to new marketing
areas.
 - To share knowledge and management skills.

Motivations of mergers

- To increase market share, revenue and customer base. Expand their marketing areas
and diversify their business.

- To reach economic of scale/scope. Reduction of costs can be done by increasing the

efficiency of their business operation and size of firm.

5. Elaborate the four ways to carry out a share repurchase.

- Fixed price tenders offers

- Dutch Auction Repurchases

- Transferable Put Rights

- Open Market Repurchases

6. Explain the three types of antitakeover amendments, and how do they work to defend a
target from an unwelcome takeover.

- Supermajority amendments

- Fair-price amendments

- Staggered or Classified boards

- Authorizations of preferred stock

7. Elaborate any FIVE (5) Corporate Takeover Defenses.

a. Shareholders Rights Plan/Poison Pill

- Under such plans, shareholders can purchase additional company stock at an

attractively discounted price, making it far more difficult for the acquirer to take
control. It can also discourage the average, well-intentioned investors and drag down
share prices.

- While the poison pill defense may help ward off unwanted acquirer, it also makes it
more difficult for shareholders to profit from the announcement of a takeover.
- Rights issued to existing shareholders can effectively prevent a takeover by diluting
the acquirer’s ownership percentage, making a takeover more expensive and preventing
or delaying control of the board and the company.

- But shareholders are often exposed to losses when their stock drops after a company
adds a poison pill clause and they are unable to gain profits from a successful takeover.

b. Voting Right Plans

- Targeted companies may also implement a voting rights plan, which separates certain
shareholders from their full voting powers at a predetermined point.

- Example: Shareholders who already own 20% of a company may lose their ability to
vote on such issues as the acceptance or rejection of a takeover bid. Or the requirement
of 80% of shareholders to approve a merger.

- Can make it difficult – If not impossible – for an acquirer to gain control of a

company.

- It is very difficult for management to convince shareholders that voter-rights clauses

benefit them and the addition of such clauses is a drop in stock price.

c. Staggered Board of Directors

- A staggered Board of Directors, in which groups of directors are elected at different

times for multiyear terms, can challenge the prospective acquirer.

- The acquirer now has to win multiple proxy fight over time and deal with successive
shareholder meetings in order to successfully take over the company.

- It holds no direct shareholder benefits.

d. Greenmail

- A company may not pursue the greenmail option by buying back its recently acquired
stock from the acquirer at a higher price in order to avoid a takeover.
- It typically comes with the requirement that the acquirer not pursue another takeover
attempt.

- Because the shares must be purchased at a premium over the takeover price, this
“payout” strategy is prime example of how shareholders can lose out even while
avoiding a hostile takeover.

e. Acquiring the Acquirer – Pac Man Defense

- Pac Man defense, so named after the popular video game in which character try to eat
each other before they are eaten themselves, is one of the more colorful defenses
employed by target companies.

- A takeover defense that has been successful in the past, albert rarely, is to turn the
tables on the the acquirer and mount a bid to take over the acquirer.

- This requires resources and shareholders support, and it removes the possibility of
activating the other defensive strategies.

- It occurs when the target makes an offer to buy the acquirer in response to the
acquirer’s bid for the target.

- Because of extreme nature, the defense is considered a “doomsday machine”.

-Often threaten but it is seldom used.

f. Making an Acquisition

- Perhaps a better strategy for target shareholders is for the company to make an
acquisition, preferably through stock swaps or a combination of stock and debt.

- This has the effect of diluting the acquirer’s ownership percentage and makes the
takeover significantly more expensive.

- Although stock prices may drop upon the target’s acquisition of the third party,
shareholders can benefit in the longer term from operational efficiencies and increased
revenues.

g. White Knight
- A strategic partner that meres with the target company to add value and increase
market capitalization.

- Such a merger can not only deter the unwanted acquirer, but can also benefit
shareholders in the short term, if the terms are favorable as well as in the long term
if the merger is a good strategic fit.

- Although a white knight defense is generally considered beneficial to shareholders,

that is not always the case when the merger price is low or when the synergies and
efficiencies of the combined entities do not materialize,