Deck 3: The Corporate Takeover Market: Common Takeover Tactics, anti-Takeover Defenses, and Corporate Governance

Question 1

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.

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

Most takeover attempts may be characterized as hostile bids.

Question 9

An 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 10

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 11

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

Question 12

A 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 13

A 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 14

A 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 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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 20

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

Question 21

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

Question 22

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

Question 23

Tender offers apply only for share for share exchanges.

Question 24

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

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

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 27

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

Question 28

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

Question 29

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

Question 30

Corporate governance refers to the way firms elect CEOs.

Question 31

Stakeholders in a firm refer to shareholders only.

Question 32

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

Question 33

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 34

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

Question 35

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

Question 36

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 37

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 38

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

Question 39

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

Question 40

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 41

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

Question 42

All 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 43

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

Question 44

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 45

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 46

All 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 47

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

Question 48

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

Question 49

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

Question 50

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

Question 51

All 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 52

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

Question 53

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 54

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

Question 55

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 56

All 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 57

All of the following are common takeover defenses except for

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

Question 58

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 59

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

Question 60

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

Question 61

The market governance model is applicable when which of the following conditions are true?

A) Capital markets are liquid
B) Equity ownership is widely dispersed
C) Ownership and control are separate
D) Board members are largely independent
E) All of the above

Question 62

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 63

Which of the following is true about supervoting stock?

A) Is a commonly used takeover tactic.
B) Is generally encouraged by the SEC
C) May have 10 to 100 times of the voting rights of other classes of stock
D) Is issued to acquiring firms if they agree not to purchase a controlling interest in the target firm
E) Is a widely used takeover defense

Question 64

Which of the following statements best describes the business judgment rule?

A) Board members are expected to conduct themselves in a manner that could reasonably be seen as being in the best interests of the shareholders.
B) Board members are always expected to make good decisions.
C) The courts are expected to "second guess' decisions made by corporate boards.
D) Directors and managers are always expected to make good decisions.
E) Board decisions should be subject to constant scrutiny by the courts.

Question 65

Which of the following are commonly considered alternative models of corporate governance?

A) Market model
B) Control model
C) Takeover model
D) A & B only
E) A & C only

Question 66

Over the years,the U.S.Congress has transferred some of the enforcement of securities laws to organizations other than the SEC such as

A) Public stock exchanges
B) Financial Accounting Standards Board
C) Public Accounting Oversight Board
D) State regulatory agencies
E) All of the above

Question 67

Which of the following government agencies can discipline firms with inappropriate governance practices?

A) Securities and Exchange Commission
B) Federal Trade Commission
C) The Department of Justice
D) A & C only
E) A, B, & C

Question 68

Mittal Acquires Arcelor-A Battle of Global Titans in the European Corporate Takeover Market
Ending five months of maneuvering, Arcelor agreed on June 26, 2006, to be acquired by larger rival Mittal Steel Co. for $33.8 billion in cash and stock. The takeover battle was one of the most acrimonious in recent European Union history. Hostile takeovers are now increasingly common in Europe. The battle is widely viewed as a test case as to how far a firm can go in attempting to prevent an unwanted takeover.
Arcelor was created in 2001 by melding steel companies in Spain, France, and Luxembourg. Most of its 90 plants are in Europe. In contrast, most of Mittal's plants are outside of Europe in areas with lower labor costs. Lakshmi Mittal, Mittal's CEO and a member of an important industrial family in India, started the firm and built it into a powerhouse through two decades of acquisitions in emerging nations. The company is headquartered in the Netherlands for tax reasons. Prior to the Arcelor acquisition, Mr. Mittal owned 88 percent of the firm's stock.
Mittal acquired Arcelor to accelerate steel industry consolidation to reduce industry overcapacity. The combined firms could have more leverage in setting prices and negotiating contracts with major customers such as auto and appliance manufacturers and suppliers such as iron ore and coal vendors, and eventually realize $1 billion annually in pretax cost savings.
After having been rebuffed by Guy Dolle, Arcelor's president, in an effort to consummate a friendly merger, Mittal launched a tender offer in January 2006 consisting of mostly stock and cash for all of Arcelor's outstanding equity. The offer constituted a 27 percent premium over Arcelor's share price at that time. The reaction from Arcelor's management, European unions, and government officials was swift and furious. Guy Dolle stated flatly that the offer was "inadequate and strategically unsound." European politicians supported Mr. Dolle. Luxembourg's prime minister, Jean Claude Juncker, said a hostile bid "calls for a hostile response." Trade unions expressed concerns about potential job loss.
Dolle engaged in one of the most aggressive takeover defenses in recent corporate history. In early February, Arcelor doubled its dividend and announced plans to buy back about $8.75 billion in stock at a price well above the then current market price for Arcelor stock. These actions were taken to motivate Arcelor shareholders not to tender their shares to Mittal. Arcelor also backed a move to change the law so that Mittal would be required to pay in cash. However, the Luxembourg parliament rejected that effort.
To counter these moves, Mittal Steel said in mid-February that if it received more than one-half of the Arcelor shares submitted in the initial tender offer, it would hold a second tender offer for the remaining shares at a slightly lower price. Mittal pointed out that it could acquire the remaining shares through a merger or corporate reorganization. Such rhetoric was designed to encourage Arcelor shareholders to tender their shares during the first offer.
In late 2005, Arcelor outbid German steelmaker Metallgeschaft to buy Canadian steelmaker Dofasco for $5 billion. Mittal was proposing to sell Dofasco to raise money and avoid North American antitrust concerns. Following completion of the Dofasco deal in April 2006, Arcelor set up a special Dutch trust to prevent Mittal from getting access to the asset. The trust is run by a board of three Arcelor appointees. The trio has the power to determine if Dofasco can be sold during the next five years. Mittal immediately sued to test the legality of this tactic.
In a deal with Russian steel maker OAO Severstahl, Arcelor agreed to exchange its shares for Alexei Mordashov's 90 percent stake in Severstahl. The transaction would give Mr. Mordashov a 32 percent stake in Arcelor. Arcelor also scheduled an unusual vote that created very tough conditions for Arcelor shareholders to prevent the deal with Severstahl from being completed. Arcelor's board stated that the Severstahl deal could be blocked only if at least 50 percent of all Arcelor shareholders would vote against it. However, Arcelor knew that only about one-third of shareholders actually attend meetings. This is a tactic permissible under Luxembourg law, where Arcelor is incorporated.
Investors holding more than 30 percent of Arcelor shares signed a petition to force the company to make the deal with Severstahl subject to a traditional 50.1 percent or more of actual votes cast. After major shareholders pressured the Arcelor board to at least talk to Mr. Mittal, Arcelor demanded an intricate business plan from Mittal as a condition that had to be met. Despite Mittal's submission of such a plan, Arcelor still refused to talk. In late May, Mittal raised its bid by 34 percent and said that if the bid succeeded, Mittal would eliminate his firm's two-tiered share structure, giving the Mittal family shares ten times the voting rights of other shareholders.
A week after receiving the shareholder petition, the Arcelor board rejected Mittal's sweetened bid and repeated its support of the Severstahl deal. Shareholder anger continued, and many investors said they would reject the share buyback. Some investors opposed the buyback because it would increase Mr. Mordashov's ultimate stake in Arcelor to 38 percent by reducing the number of Arcelor shares outstanding. Under the laws of most European countries, any entity owning more than a third of a company is said to have effective control. Arcelor cancelled a scheduled June 21 shareholder vote on the buyback. Despite Mr. Mordashov's efforts to enhance his bid, the Arcelor board asked both Mordashov and Mittal to submit their final bids by June 25.
Arcelor finally agreed to Mittal's final bid, which had been increased by 14 percent. The new offer consisted of $15.70 in cash and 1.0833 Mittal shares for each Arcelor share. The new bid is valued at $50.54 per Arcelor share, up from Mittal's initial bid in January 2006 of $35.26. The final offer represented an unprecedented 93 percent premium over Arcelor's share price of $26.25 immediately before Mittal's initial bid. Lakshmi Mittal will control 43.5 percent of the combined firm's stock. Mr. Mordashov would receive a $175 million breakup fee due to Arcelor's failure to complete its agreement with him. Finally, Mittal agreed not to make any layoffs beyond what Arcelor already has planned.
:
Identify the takeover tactics employed by Mittal.Explain why each was used.

Question 69

The control model of corporate governance is applicable under all of the following conditions except for

A) Capital markets are illiquid
B) Board members are largely insiders
C) Ownership and control overlap
D) Equity ownership is widely dispersed
E) A, B, & D only

Question 70

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 71

Using the information in this case study,discuss the arguments for and against encouraging hostile corporate takeovers

Question 72

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 73

The control market is applicable when which of the following conditions are true?

A) Capital markets are illiquid
B) Equity ownership is heavily concentrated
C) Board members are largely insiders
D) Ownership and control overlap
E) All of the above

Question 74

Studies show that which of the following combinations of corporate defenses can be most effective in discouraging hostile takeovers?

A) Poison pills and staggered boards
B) Poison pills and golden parachutes
C) Golden parachutes and staggered boards
D) Standstill agreements and White Knights
E) Poison Pills and tender offers

Question 75

Some of Acme Inc.'s shareholders are very dissatisfied with the performance of the firm's current management team and want to gain control of the board.To do so,these shareholders offer their own slate of candidates for open spaces on the firm's board of directors.Lacking the necessary votes to elect these candidates,they are contacting other shareholders and asking them to vote for their slate of candidates.The firm's existing management and board is asking shareholders to vote for the candidates they have proposed to fill vacant seats on the board.Which of the following terms best describes this scenario?

A) Leveraged buyout b Proxy contest
C) Merger
D) Divestiture
E) None of the above

Question 76

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 77

Xon Enterprises is attempting to take over Rayon Group.Rayon's shareholders have the right to buy additional shares at below market price if Xon (considered by Rayon's board to be a hostile bidder)buys more than 15 percent of Rayon's outstanding shares.What term applies to this antitakeover measure?

A) Share repellent plan
B) Golden parachute plan
C) Pac Man defense
D) Poison pill
E) Greenmail provision

Question 78

Which of the following are the basic principles on which the market model is based?

A) Management incentives should be aligned with those of shareholders and other major stakeholders
B) Transparency of financial statements
C) Equity ownership should be widely dispersed
D) A & B only
E) A, B, and C only

Question 79

Identify the takeover defenses employed by Arcelor? Explain why each was used.

Question 80

Which of the following factors influences corporate governance practices?

A) Securities legislation
B) Government regulatory agencies
C) The threat of a hostile takeover
D) Institutional activism
E) All of the above