Deck 3: The Corporate Takeover Market:

Question 1

If you were the CEO of a target firm, what strategy would you recommend to convince institutional shareholders
to support your position in a proxy battle with the bidding firm?

Answer 1

The CEO could share additional details of the firm's strategic plan with the largest institutional investors in an effort to convince them that the plan will deliver superior value over the purchase price offered by the suitor. If the firm is confident that its plan is superior to the bidder's proposal, the CEO and board could agree to put the firm up for auction if it cannot meet or exceed certain quantifiable objectives within a specific time period (e.g., 12-24 months). The CEO and board could further commit that the auction process would be managed by a committee of outside board members who would work closely with an advisory committee consisting of the target firm's top 10 to 15 institutional investors.

Question 2

Friendly takeovers are negotiated settlements that are often characterized by bargaining, which remains undisclosed until the agreement has been signed.

Answer 2

True

Question 3

Anheuser-Busch reduced its anti-takeover defenses in 2006 when it removed its staggered board structure. Two
years earlier, it did not renew its poison pill provision. Speculate as to why the board acquiesced in these
instances? Explain how these events affected the firm's vulnerability to a takeover

Answer 3

The board succumbed to the groundswell for adopting good governance practices following the Enron
debacle in 2001. The firm is more vulnerable without the staggered board structure, because all directors are up for
reelection each year increasing the chances that a dissident shareholder can replace the board with their own slate
of candidates. Furthermore, a takeover would be theoretically cheaper for a bidder. The removal of the poison pill
eliminates the specter of the number of outstanding shares increasing once the bidder's target firm share purchases
exceeded the threshold necessary to allow holders of the poison pill to exercise their rights to purchase more target
or acquirer shares.

Question 4

the highest bid necessarily the best bid? Explain your answer.

Question 5

accumulation of a target firm's stock by arbitrageurs makes purchases of blocks of stock by the bidder easier.

Question 6

What are the advantages and disadvantages of the friendly versus hostile approach to a corporate takeover?

Question 7

your opinion, did the Dell Inc. board of directors act in the best interests of the Dell shareholders? Cite examples to support your position.

Question 8

Critics of activist investors argue that they force firms to focus on short-term considerations versus long-term performance. As such, they believe that shareholder rights to remove board members, to remove defenses, and to approve major strategic decisions through proxy contests should be restricted. Do you agree or disagree with such critics? Explain your answer.

Question 9

are the primary advantages and disadvantages of commonly used takeover defenses?

Question 10

buyout involving the target firm's current management is called a management buyout. In what way do these types of deals represent agency conflicts between managers and shareholders? What board procedures can be put in place to mitigate such conflicts? How can activist investors help mitigate such conflicts?

Question 11

publicly available information, find at least two examples of activist investors influencing the policies or strategies of a firm? Describe the impact you believe they had in each instance?

Question 12

How may golden parachutes for senior management help a target firm's shareholders? Are such
severance packages justified in your judgment?

Question 13

What are the management entrenchment and shareholder interests hypotheses? Which seems more realistic in your
judgment?

Question 14

astute bidder should always analyze the target firm's possible defenses such as golden parachutes for key employees and poison pills before making a bid.

Question 15

How might recapitalization as a takeover defense help or hurt a target firm's shareholders?

Question 16

In response to Microsoft's efforts to acquire the firm, the Yahoo board adopted a "change-in-control" compensation plan in May 2008. The plan states that if a Yahoo employee is terminated by Yahoo without cause (i.e., the employee is performing their duties appropriately) of if an employee leaves of their own volition due to a change in their position or responsibilities within two years after Microsoft acquires a controlling interest in Yahoo, the employee will receive one year's salary. Also, the plan provides for accelerated vesting of all stock options. Yahoo notes that the adoption of severance plan is an effort to ensure that employees are treated fairly if Microsoft wins control. Microsoft views the tactic as an effort to discourage a takeover. With whom do you agree and why?

Question 17

When, if ever, is it appropriate for a board to prevent shareholder votes on matters involved in selling a firm?

Question 18

Anheuser-Busch (AB) rejected InBev's all-cash offer price of $65 per share on June 30, 2008 saying it undervalued
the company, despite the offer representing a 35 percent premium to AB's pre-announcement share price. InBev
refused to raise its offer repeating its strong preference for a friendly takeover. Speculate as to why InBev refused
to raise its initial offer. Why do you believe that InBev continued to prefer a friendly takeover? What would you
recommend InBev do to raise pressure on the AB board to accept the offer?

Question 19

What do you believe are the primary factors a target firm's board should consider when evaluating a bid from a
potential acquirer? Explain your answer.

Question 20

Concern about their fiduciary responsibility to shareholders and shareholder lawsuits often puts pressure on a target firm's board of directors to accept an offer if it includes a significant premium to the target's current share price.

Question 21

Litigation is a tactic that is used only by acquiring firms.

Question 22

proxy contest is one in which a group of dissident shareholders attempts to obtain representation on a
firm's board by soliciting other shareholders for the right to vote their shares.

Question 23

Concern about their fiduciary responsibility and about stockholder lawsuits puts pressure on the target's
board to accept the offer.

Question 24

takeover attempts may be characterized as hostile bids.

Question 25

An acquiring firm may attempt to limit the options of the target's senior management by making a formal
acquisition proposal, usually involving a public announcement, to the board of the directors of the target.

Question 26

Bylaws may provide for a staggered board, the inability to remove directors without cause, and
supermajority voting requirements for approval of mergers.

Question 27

The final outcome of a hostile takeover is rarely affected by the composition of the target's stock
ownership and how stockholders feel about management's performance.

Question 28

shareholder interests theory suggests that shareholders gain when management resists takeover
attempts.

Question 29

hostile tender offer is a takeover tactic in which the acquirer bypasses the target's board and management and
goes directly to the target's shareholders with an offer to purchase their shares.

Question 30

Dissident shareholders always undertake a tender offer to change the composition of a firm's board of
directors.

Question 31

Despite the pressure of an attractive purchase price premium, the composition of the target's board
greatly influences what the board does and the timing of its decisions.

Question 32

Public announcements of a proposed takeover are often designed to put pressure on the board of the target firm.

Question 33

A target firm is unlikely to reject a bid without getting a "fairness" opinion from an investment banker
stating that the offer is inadequate.

Question 34

The target firm's bylaws may provide significant hurdles for an acquiring firm.

Question 35

takeover premium is the dollar or percentage amount the purchase price proposed for a target firm
exceeds the acquiring firm's share price.

Question 36

According to the management entrenchment hypothesis, takeover defenses are designed to protect the
target firm's management from a hostile takeover.

Question 37

bear hug involves mailing a letter containing an acquisition proposal to the target's board without warning and demanding an immediate response.

Question 38

tender offer is a proposal made directly to the target firm's board as the first step leading to a friendly takeover.

Question 39

successful proxy fight may represent a far less expensive means of gaining control over a target than a
tender offer.

Question 40

standstill agreement is one in which the target firm agrees not to solicit bids from other potential
buyers while it is negotiating with the first bidder.

Question 41

Corporate governance refers to the way firms elect CEOs.

Question 42

Corporate anti-takeover defenses are necessarily a sign of bad corporate governance.

Question 43

By replacing the target's board members, proxy fights may be an effective means of gaining control
without owning 51% of the target's voting stock.

Question 44

The threat of corporate takeover has little impact on how responsibly a corporate board and management manage a firm.

Question 45

Tender offers always consist of an offer to exchange acquirer shares for shares in the target firm.

Question 46

In elections involving staggered or classified boards, only one group of board members is up for
reelection each year.

Question 47

Corporate governance refers to a system of controls both internal and external to the firm that protects
stakeholders' interests.

Question 48

Institutional activism has assumed a larger role in ensuring good corporate governance practices in recent years.

Question 49

Tender offers apply only for share for share exchanges.

Question 50

All materials in a proxy contest must be filed with the SEC before they are sent to shareholders.

Question 51

Poison pills represent a new class of securities issued by a company to its shareholders, which have no
value unless an investor acquires a specific percentage of the firm's voting stock.

Question 52

Poison pills are a commonly used takeover tactic to remove the management and board of the target firm.

Question 53

The threat of hostile takeovers is a factor in encouraging a firm to implement good governance practices.

Question 54

Proxy contests and tender offers are often viewed by acquirers as inexpensive ways to takeover another
firm.

Question 55

Federal and state laws make it extremely difficult for a bidder to acquire a controlling interest in a target
without such actions becoming public knowledge.

Question 56

Golden parachutes are employee severance arrangements, which are triggered whenever a change in
control takes place. They are generally held by a large number of employees at all levels of management throughout the firm.

Question 57

A standstill agreement prevents an investor who has signed the agreement from ever again buying stock in the target firm.

Question 58

Executive stock option plans have little impact on the way management runs the firm.

Question 59

The size of the target firm is the best predictor of the likelihood of being taken over by another firm.

Question 60

Stakeholders in a firm refer to shareholders only.

Question 61

of the following are true of a proxy contest except for

A) Are usually successful
B) Are sometimes designed to replace members of the board
C) Are sometimes designed to have certain takeover defenses removed
D) May enable effective control of a firm without owning 51% of the voting stock
E) Are often costly

Question 62

A no-shop agreement prohibits the takeover target from seeking other bids.

Question 63

In a one-tier offer, the acquirer announces the same offer to all target shareholders.

Question 64

According to the management entrenchment theory,

A) Management resistance to takeover attempts is an attempt to increase the proposed purchase price premium
B) Management resistance to takeover attempts is an attempt to extend their longevity with the target firm
C) Shareholders tend to benefit when management resists takeover attempts
D) Management attempts to maximize shareholder value
E) Describes the primary reason takeover targets resist takeover bids

Question 65

Which of the following are common takeover tactics?

A) Bear hugs
B) Open market purchases
C) Tender offers
D) Litigation
E) All of the above

Question 66

Purchasing target stock in the open market is a rarely used takeover tactic.

Question 67

of the following are common takeover defenses except for

A) Poison pills
B) Litigation
C) Tender offers
D) Staggered boards
E) Golden parachutes

Question 68

of the following are commonly used takeover tactics, except for

A) Poison pills
B) Bear hug
C) Tender offer
D) Proxy contest
E) Litigation

Question 69

Which of the following is true about so-called shark repellants?

A) They are put in place to strengthen the board
B) They include poison pills
C) Often consist of the right to issue greenmail
D) Involve White Knights
E) Involve corporate restructuring

Question 70

Purchasing the target firm's stock in the open market is a commonly used tactic to achieve all of the following except for

A) Acquiring a controlling interest in the target firm without making such actions public knowledge.
B) Lowering the average cost of acquiring the target firm's shares
C) Recovering the cost of an unsuccessful takeover attempt
D) Obtaining additional voting rights in the target firm
E) Strengthening the effectiveness of proxy contests

Question 71

Which of the following factors often affects hostile takeover bids?

A) The takeover premium
B) The composition of the board of the target firm
C) The composition of the ownership of the target's stock
D) The target's bylaws
E) All of the above

Question 72

The following takeover defenses are generally put in place by a firm after a takeover attempt is underway.

A) Staggered board
B) Standstill agreement
C) Supermajority provision
D) Fair price provision
E) Reincorporation

Question 73

Which of the following is true? A hostile takeover attempt

A) Is generally found to be illegal
B) Is one that is resisted by the target's management
C) Results in lower returns to the target firm's shareholders than a friendly attempt
D) Usually successful
E) Supported by the target firm's board and its management

Question 74

The primary forms of proxy contests are those for seats on the board of directors, those concerning management proposals, and those seeking to force management to take a particular action.

Question 75

Which is true of the following? A white knight

A) Is a group of dissident shareholders which side with the bidding firm
B) Is a group of the target firm's current shareholders which side with management
C) Is a third party that is willing to acquire the target firm at the same price as the bidder but usually removes the target's management
D) Is a firm which is viewed by management as a more appropriate suitor than the bidder
E) Is a firm that is willing to acquire only a large block of stock in the target firm

Question 76

of the following are true of tender offers except for

A) Tender offers consist only of offers of cash for target stock
B) Are generally considered an expensive takeover tactic
C) Are extended for a specific period of time
D) Are sometimes over subscribed
E) Must be filed with the SEC

Question 77

Poison pills represent a new class of stock issued by a company to its shareholders, usually as a dividend.

Question 78

of the following are true of poison pills except for

A) They are a new class of security
B) Generally prevent takeover attempts from being successful
C) Enable target shareholders to buy additional shares in the new company if an unwanted shareholder's ownership exceeds a specific percentage of the target's stock
D) Delays the completion of a takeover attempt
E) May be removed by the target's board if an attractive bid is received from a so-called "white knight."

Question 79

In a two-tiered offer, target shareholders typically received two offers, which potentially have different values.

Question 80

The following takeover defenses are generally put in place by a firm before a takeover attempt is initiated.

A) Standstill agreements
B) Poison pills
C) Recapitalization
D) Corporate restructuring
E) Greenmail