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Dealing with Pressure (Internal, External

)

Internal and External Pressure
• Corporate governance - internal and external pressures on

management to make decisions in the interest of the stakeholders
of the firm. • Internal pressure- the general assembly of shareholders, the workers' councils, and internal audits • External pressure - the market for managerial labor and the capital

market as the market for corporate control, where firms are sold
and bought. • Company has to deal with both types of pressure

Case on Multinational CorporationsAutomotive Industry
• MNCs should find balance between internal and external pressure:
– The corporate governance system in the host country of the subsidiary, under the legal framework and all its constraints – The demands and expectations from international capital markets and the home country of the mother company – Market forces, new regulations etc. which require constant strategy realignment and restructuring – The competitive advantage of the MNC across customers, partners, and suppliers – The forces towards globalization

Balance between internal and external pressure

Pressure Makers: • Shareholders • Market • Regulator • Stakeholder .

Shareholder’s Pressure Shareholders can express their activism through • • • • Demand for full disclosures Proxy fights Derivative Law Suit Class Actions .

Demand for full Disclosures • Demand of full disclosure can be made by different groups. • Institutional shareholders • General shareholders • Minority shareholders • Disclosure should be in certain standard determined by legal system. .

some active shareholders collects number of proxy and make themselves eligible for the position of the director and try to enforce their idea. .Proxy Fights When the Board members or the CEO do not work as per the interest of the shareholders.

• Burden of proof lies with shareholders • Award paid to the company. • Management is friendly to defendant director. shareholders have to pay. – If shareholders win. – No action taken even when plaintiff wins. not to shareholders. If shareholders lose. . • Legal cost should be paid by the shareholders. – Possibility of lawsuit is no credible threat.Derivative Law Suit • Shareholders file a suit against directors on behalf of the company. the cost can be claimed against the company.

Market’s Pressure Market can create pressure to any company through: • • • • • Competition (domestic & international) Progress of competitor Friendly mergers Acquisition Hostile takeover .

Pressure from Regulator • • • • • Prudent regulation Changes in regulatory regime Determination of extra criteria Demand of more disclosures Punitive actions .

Pressure from Stakeholders • • • • • • Employee unions Creditors Customers Suppliers Professional associations Activist group .

Common Definitions Shareholder Activism – A way in which shareholders can assert their power as owners of the company to influence its behavior. . Shareholder activist – A person who attempts to use his or her rights as a shareholder of a publiclytraded corporation to bring about social change.

4.Types of shareholder Large shareholders Minority(individual)  1. Institutional shareholders: Banks Insurance companies Retirement or pension funds Investment advisors . 2. 3.

Aspects of Shareholder Activism • Proxy voting • Dialogue • Resolutions • Divestment .

3.Reasons for Shareholder Activism 1. 2. 4. To make a quick profit To create long-term value Wish for changes To slow down too high managers’ activity 5. Just for fun .

o .  Directors and CEOs views of potential mergers or acquisitions would be tempered by their perceptions of their likely positions in the hierarchy of directors that would result after the merger.EXTERNAL EVENTS AND BOD MEMBERSHIP o Board Retrenchment: Poor performance by the board and the company can lead to outside pressures to reform the governance of the company.  The actual structure of the new board for the newly merged company is usually stipulated in the merger or acquisition documents. This is affected by the followings issues:  Many of the decisions on which director will be retained follow from the perceptions of their relative experience and expertise. Restructuring due to mergers or acquisitions: Acquiring another company of similar size or market values typically leads to downsizing of the combined board members by half since the resultant organization would not need all the members. Such pressures can lead to effective reform (if received well) or board retrenchment if received defensively.  The CEO of the surviving entity will want majority of directors on whom he/she can depend on for support in building the new company and implementing the new strategy.

2002 purchase / sales of shares is blocked capital structure change decision made shall be provided within forty-five days • in the case of additional statement or document is asked.Provisions Relating to Amalgamation. Merger and Upgrading • • • • Section 79 of the Nepal Rastra Bank Act. decision made shall be provided within additional fifteen days .

8bn .Recent Example • Microsoft's recent bid to take over rival Yahoo • board of directors (Yahoo) said "No thanks“ • The Kraft successful hostile takeover of Cadbury • completed in April 2010 for £13.

finance. • In Business or in Economics a Merger is a combination of two Companies into one larger company. • Such actions are commonly voluntary and involve Stock Swap or cash payment to the target. Stock swap is often used as it allows the shareholders of the two companies to share the risk involved in the deal. selling and combining of different Companies that can aid. . Corporate Finance and Management dealing with the buying. or help a growing company in a given industry to grow rapidly without having to create another business entity.Mergers & Acquisitions-Definitions • The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of Corporate Strategy.

simply allow the acquired firm to proclaim that the action is a merger of equals. the Target company ceases to exist. one company will buy another and. actual mergers of equals don't happen very often. the purchase is called an Acquisition. • In practice.Acquisitions • When one company takes over another and clearly established itself as the new owner. by describing the deal as a merger. deal makers and top managers try to make the takeover more palatable . the buyer "swallows" the business and the buyer's stock continues to be traded. even if it's technically an Acquisition. as part of the deal's terms. Usually. therefore. Being bought out often carries negative connotations. From a legal point of view. however.

. But when the deal is unfriendly and is hostile. i.Acquisitions • A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. then it regarded as Acquisition. employees and shareholders. the Target Company does not want to be purchased.e. • Whether a purchase is considered a Merger or an Acquisition really depends on whether the purchase is friendly or hostile and how it is announced. the real difference lies in how the purchase is communicated to and received by the target company's board of directors. In other words.

Motives of mergers and takeovers • • • • • • • • • Quick way of expansion Cheaper than internal growth Costs saving by cross selling Cash available Economy of scale Consolidating market position Control Globalization Diversification © PhotoDisc .

Types of merger or acquisition • Figure Backward vertical Previous stage of production Diversification (different) Horizontal The same stage of Production or the same line Types of acquisition Forward vertical Next stage of production © PhotoDisc .

.Types of mergers and acquisition Horizontal • Two or more firms which are exactly in the same line of business and the same stage of production join together.

Types of mergers and acquisition Horizontal • Two or more firms in the different stage of production join together. • Backward integration(merging with raw materials or component firms • Forward integration (distribution firms) Vertical .

Lateral .Types of mergers and acquisition Horizontal Vertical • Two or more firms with related goods which do not completely compete with each other join together.

Types of mergers and acquisition Horizontal Vertical Lateral • Two or more firms in completely different lines of business join together. • Also called conglomerate merger Diversification .

status • Economies of Scale – The advantages of large scale production that lead to lower unit costs .Motives • Cost Savings • Shareholder Value – External growth may be – Improve the value of the cheaper than internal overall business for growth – acquiring an shareholders underperforming or young • Asset Stripping firm may represent a cost – Selling off valuable parts effective method of of the business growth • Managerial Rewards – External growth may satisfy managerial objectives – power. influence.

productive or allocate efficiency • Control of Markets – Gain some form of monopoly power – Control supply – Secure outlets • Synergy – The whole is more efficient than the sum of the parts (2 + 2 = 5!) • Risk Bearing – Diversification to spread risks .Motives • Efficiency – Improve technical.

Friendly Mergers • The targeted company is willing to be acquired or invite the bid. • The targeted firm may take some measures to resist. • Reasons may include the firm has met with problems or it thinks it is better under the control of another. or announcing new dividend plans. such as asking another firm’ s bid. .Hostile takeover and friendly merger Hostile takeover : • The targeted company tries to resist the bid. etc. forming management team.

Acquisition is less expensive than merger. It is the mutual decision. It is faster and easier transaction. It can be friendly takeover or hostile takeover. • • • • • • .Hostile takeover and friendly merger • • • Buying one organization by another. Through merger shareholders can increase their net worth. Merger is expensive than acquisition (higher legal cost). Dilution of ownership occurs in merger. It is time consuming and the company has to maintain so much legal issues. The acquirer does not experience the dilution of ownership • • • Merging of two organization in to one. Buyers cannot raise their enough capital.

Treat a person as he is. Treat him as he could be. and he will remain as he is. —Jimmy Johnson . and he will become what he should be.

. prohibitive cost that must be paid after the takeover.POISION PILL •A poison pill is a strategy:  that tries to create a shield against a takeover bid  from another company(Bidder)  by triggering a new. •is a tactic companies use to thwart hostile takeovers •makes the target's stock prohibitively expensive • unattractive to an unwanted acquirer.

buying their company time to bargain for a better purchase price. • Poison pill strategies are also known as shareholders' protection rights plans. • acquiring companies will approach its board of directors. .• deterrent and negotiation tool. not the shareholders.

• Flip-over • Flip-in • Suicide pill • Poison Debt • Put Right Plan .HOW IT WORKS ? • Most poison-pill agreements are triggered when an outside company or individual — acquires enough stock to gain a controlling interest in the target company.

. thereby devaluing the acquirer’s stock diluting its stake in the company.• Flip-over: If a hostile takeover occurs  investors have the option to purchase  the bidder’s shares at a discount.

on average.  so it becomes extremely expensive for that acquirer to complete the takeover cost an unwanted bidder.• Flip-in:  Management offers shares to investors at a discount if an acquirer merely purchases a certain percentage of the company. . four to five times more to “swallow” a poison pill in order to acquire a target.  The discount is not available to the acquirer.

• If a company becomes the target of a hostile takeover by another company.  By taking unnecessary loan.  it may engage in a self-defeating move  which renders it no longer attractive to the acquiring company. . • move may be so detrimental to the acquiring company  that it threatens to bankrupt both.SUICIDE PILL • self-destructive measures to thwart a hostile takeover.  Such a tactic qualifies as an extreme version of a poison pill tactic.

 it must carefully calculate the effects to its own long-term well-being.SUICIDE PILL • If a company decides to confront a hostile takeover using a suicide pill approach. A takeover is sometimes more attractive than bankruptcy .

POISION DEBT • The target company issues debt securities on certain stipulated terms and conditions  in order to discourage a hostile takeover bid .

. preferred stock. are entitled to sell their common stock back to the company for a specified sum • of cash. debt securities. • The target company  issues rights to its stockholders in the form of a dividend. When an acquirer purchases a specified percentage ownership in the target company. or some combination thereof.  The target shareholders.PUT RIGHTS" PLAN. excluding the acquirer.

Greenmail • Greenmail : To protect its self from the shareholder who is threatening to take control By paying the money .

” Boards also favor poison pills for the leverage they bring to the bargaining table.Strong Points defensive tactic White Knight Vs Black Knight  Not only do they fend off unwanted takeover bids. but boards often argue that the strategy gives the company an opportunity to find a more. suitable acquiring party. . a so-called “white knight.

After a year-long battle. • In 2003. enterprise software giant Oracle attempted to acquire rival PeopleSoft through a $5. But PeopleSoft’s poison pill was set to trigger if Oracle bought more than 20 percent of the company. .EXAMPLES!!! • Yahoo. which has one in place that will be triggered if Microsoft or any other potential suitor buys more than 15 percent of the company without board approval.3 billion — nearly double Oracle’s initial offer.1 billion hostile takeover bid. PeopleSoft finally voided its poison pill and was acquired by Oracle for $10.

they often view management’s adoption of a poison pill as blatant disregard of investors’ interests.WEAK PONITS • Since shareholders could gain from a takeover. In March 2008. • Accordingly.” . in some cases investors send a clear message that they don’t agree with management’s strategy by dumping some of their shares. its stock plummeted almost 14 percent between the week before the announcement and the week after. Tesoro’s management dropped its poison pill..  Consider the example of oil company Tesoro: When the company adopted a poison pill in November 2007 to defend itself against billionaire Kirk Kerkorian’s Tracinda Corp. with CEO Bruce Smith explaining that the company wanted to act in “the best interests of our stockholders.