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

Shareholders 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.

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

Derivative Law Suit

Shareholders file a suit against directors on behalf of the company. Burden of proof lies with shareholders Award paid to the company, not to shareholders. Legal cost should be paid by the shareholders.
If shareholders win, the cost can be claimed against the company. If shareholders lose, shareholders have to pay.

Management is friendly to defendant director.

No action taken even when plaintiff wins. Possibility of lawsuit is no credible threat.

Markets 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.

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

Aspects of Shareholder Activism

Proxy voting Dialogue

Resolutions
Divestment

Reasons for Shareholder Activism

1. 2. 3. 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

EXTERNAL EVENTS AND BOD MEMBERSHIP

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Board Retrenchment: Poor performance by the board and the company can lead to outside pressures to reform the governance of the company. Such pressures can lead to effective reform (if received well) or board retrenchment if received defensively. 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. 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. 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. 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. The actual structure of the new board for the newly merged company is usually stipulated in the merger or acquisition documents.

Provisions Relating to Amalgamation, Merger and Upgrading

Section 79 of the Nepal Rastra Bank Act, 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, decision made shall be provided within additional fifteen days

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 13.8bn

Mergers & Acquisitions-Definitions

The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of Corporate Strategy, Corporate Finance and Management dealing with the buying, selling and combining of different Companies that can aid, finance, or help a growing company in a given industry to grow rapidly without having to create another business entity.

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.

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

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. But when the deal is unfriendly and is hostile, i.e. the Target Company does not want to be purchased, then it regarded as Acquisition. 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. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders.

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

Types of mergers and acquisition

Horizontal

Vertical

Two or more firms with related goods which do not completely compete with each other join together.

Lateral

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

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, status

Economies of Scale
The advantages of large scale production that lead to lower unit costs

Motives
Efficiency
Improve technical, 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

Hostile takeover and friendly merger

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

Hostile takeover and friendly merger

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

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

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, prohibitive cost that must be paid after the takeover.

is a tactic companies use to thwart hostile takeovers makes the target's stock prohibitively expensive unattractive to an unwanted acquirer.

 deterrent and negotiation tool, buying their company time to bargain for a better purchase price.

acquiring companies will approach its board of directors, not the shareholders. Poison pill strategies are also known as shareholders' protection rights plans.

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. Flip-over Flip-in Suicide pill Poison Debt Put Right Plan

 Flip-over: If a hostile takeover occurs

investors have the option to purchase

the bidders shares at a discount,

thereby devaluing the acquirers stock diluting its stake in the company.

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

SUICIDE PILL
self-destructive measures to thwart a hostile takeover. If a company becomes the target of a hostile takeover by another company,
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. Such a tactic qualifies as an extreme version of a poison pill tactic. By taking unnecessary loan.

SUICIDE PILL
If a company decides to confront a hostile takeover using a suicide pill approach,
it must carefully calculate the effects to its own long-term well-being. 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

PUT RIGHTS" PLAN.

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, The target shareholders, excluding the acquirer, are entitled to sell their common stock back to the company for a specified sum
of cash, debt securities, preferred stock, or some combination thereof.

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

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.

Boards also favor poison pills for the leverage they bring to the bargaining table.

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. In 2003, enterprise software giant Oracle attempted to acquire rival PeopleSoft through a $5.1 billion hostile takeover bid. But PeopleSofts poison pill was set to trigger if Oracle bought more than 20 percent of the company. After a year-long battle, PeopleSoft finally voided its poison pill and was acquired by Oracle for $10.3 billion nearly double Oracles initial offer.

WEAK PONITS
Since shareholders could gain from a takeover, they often view managements adoption of a poison pill as blatant disregard of investors interests. Accordingly, in some cases investors send a clear message that they dont agree with managements strategy by dumping some of their shares.
Consider the example of oil company Tesoro: When the company adopted a poison pill in November 2007 to defend itself against billionaire Kirk Kerkorians Tracinda Corp., its stock plummeted almost 14 percent between the week before the announcement and the week after. In March 2008, Tesoros management dropped its poison pill, with CEO Bruce Smith explaining that the company wanted to act in the best interests of our stockholders.