At whom is the hostility directed by a takeover?

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  1. On power within the company

According to corporate finance theorists, the objective of the firm should be to maximize value or wealth. This means for stockholders to maximize stock prices. By focusing on maximizing stockholder wealth, the firm exposes itself to the risk that managers, who are hired to operate the firm for stockholders, may have their own objectives. This can lead to conflicts between both parties.

Stockholders have the power to discipline and replace managers who do not attempt to maximize their wealth. For managers there are several techniques to protect themselves for these actions.

In other words: stock price maximization is the most important goal of most corporations. Stockholders own the firm and elect the board of directors, who then appoint the management team. Management is supposed to operate in the best interests of the stockholders. We know, however, that because the stock of most large firms is widely held, the managers of large corporations have a great deal of autonomy. This means that managers might pursue goals other than stock price maximization. Therefore managers run the risk of being removed from their jobs, either by the firm’s board of directors or by outside forces.

Hostile takeovers (when management does not want the firm to be taken over) are most likely to occur when a firm’s stock is undervalued relative to its potential because of poor management. In a hostile takeover, the managers of the acquired firm are generally fired, and any who are able to stay on, lose the autonomy they had prior to the acquisition.

A potential agency conflict arises whenever the manager of a firm owns less than a substantial percentage of the firm’s common stock. In most large corporations, agency conflicts are quite important, because large firms’ managers generally own only a small percentage of the stock.

Questions:

At whom is the hostility directed by a takeover?

The hostilility is directed to the management of the company. Because the stockholders want to have more control over the company they might want to replace management of whom they think are not doing their best to maximize stock prices. Usually management own none or only a small part of the shares so a hostile take-over by stock-holders with a bigger stake is easy to do.

And how could that party protect itself?

Management can protect itself from a hostile take-over using one off the four following

Possibilities:

  • Greenmail: This possibility refers to the purchase of a potential hostile acquirer’s stake in a business at a premium over the price for that stake by the target company.
  • Golden Parachute: A golden parachute refers to a contractual clause in a management contract that allows the manager to be paid a specified sum of money in the event control of the firm changes, usually in the context of a hostile takeover.
  • Poison Pill: A poison pill is a security or a provision that is triggered by the hostile acquisition of the firm, resulting in a large cost to the acquirer.
  • Antitakeover amendments: have the same objective as greenmail and poison pill but differ on one very important count. They require the assent of stockholders to be instituted. Several types are: super-majority requirement, fair price amendments and staggered elections to boards of directors.
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Practical examples?

In reaction to the existing agency conflicts the Dutch Government installed in April 1996 the Commission Corporate Governance (Commissie Peters). In June 1997 the commission came up with her report “Corporate Governance in Nederland; de 40 aanbevelingen”.

Corporate Governance is defined by Moerland as “het geheel van structuren, regelingen en conventies dat bepalend is voor de wijze waarop de effectiviteit waarmede een vennootschap door middel van een door prikkels en tucht geregeerde interactie tussen stakeholders wordt bestuurd en gecontroleerd” all of the structures, procedures and conventions that are relevant for the way in which the ...

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