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Hostile Takeovers

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Introduction

Hostile takeovers have over the years taken the role of keeping corporate management in check. This is because to add the shareholders value, corporate raiders often change the management team once the buyout is complete. For this reason, hostile takeovers often solicit negative reactions from target corporate management. Corporations when taken over through buyouts are restructured to enhance wealth.  Hostile takeovers can be described as unsolicited purchase of one firm by another. The buyer is referred to as the acquirer or the bidder, while the company that is bought out is referred to as the target. Unlike friendly takeovers where a buyout often ends improving the corporate status of the buyer and target in hostile takeovers not both corporations end up better off.  Schwert ( 2000 ) argues that hostile bids are often perceived as threats by the targeted companies. Because of this negative perception the target management reacts defensively towards the unsolicited bid. Schwert ( 2000 ) further argues that hostile take overs can be beneficial to the shareholders when redudant management teams are replaced, since operations improve.In a hostile takeovers the details of buyout can be made become public by either the buyer or the target. The buyer can make his bid public in order to force the negotiation. The target firm on the other hand, can make the details public in bid to resist the take over. The target can also go public in order to solicit multiple bids and push for better prices. Given such undertakings, hostile takeovers often attract both negative and a positive  perception from the various stakeholders. However ,in cases where the takeover threats increase the company’s share prices,such news is often welcomed by the shareholders and other market players. Buyers often go public with their intention to takeover the target ,when private negotiations fail.  They can also go public if they perceive their offer being rejected. By making their intentions public ,buyers put pressure on target firms managers  by informing the target firms shareholders of their options. When the details of the offer become public target management teams can use the information as a means of attracting better offers. Targets, therefore, the publicity that often accompany takeover threats, to attract better prices. In the process the target management team can get better offers from other bidders.

Problem statement

Hostile takeovers can be used to ckeck management excess in corporations,However, this role is often curtailed by the interest that drives the hostile takeover bid. Hostile takeovers can ,therefore ,be beneficial or disadvantageous to shareholders.

Briefly define the concept of corporate governance

In the modern world corporations have become powerful dominant entities with tentacles in each corner of the planet. Today business are seen to be more powerful that governments. Indeed, governments are nowadays perceived to be serving the interest of the corporate world. For this reason most corporation seek more power by increasing their operation and entering new markets. This has seen more corporations use the various tools available to them to enlarge the range of their business. This is especially so, in this era of globalization where successful corporations have operations in all corner of the globe.  This means that in the last few decades, business organizations have acquired rivals, merged with competition and taken over vulnerable completion in a bid to catch up with the globalization frenzy.   As such the global business environment has turned into an arena of intense competition, where it is fair play to exploit all weaknesses of competing entities. In addition, all the avenues available to ensure competitive advantage is maintained are exploited. These include management strategies intended to run corporations more efficiently and reduce costs so as to maximize profitability.    The current business environment, therefore, has been increasingly getting competitive forcing business to adopt various strategies to remain ahead of their competition.  Gompers, Ishii, & Metrick ( 2003) argue that in order to survive, business organizations today require corporate management strategies, which will see them remain competitive. This has seen various organizations adopt varied strategies to survive. One of the most touted strategies is the good corporate governance strategy. Corporate governance entails making a decision and implementing the best choices.  Most corporations today have wider ownership, which leaves the management teams with the roles of overseeing the organization on behalf of their many shareholders. These roles, of overseeing the day to day running of organizations are entrusted to management teams who act on behalf of shareholders by making the necessary decisions and overseeing their implementation.   Caton and  Goh ( 2009) argue that managers are agents who oversee the daily running of organizations on behalf of the shareholders. To secure the interest of their varied owners, managers employ corporate governance strategies that add value to their shareholders investiment.

Corporate governance can be reffered to as the process of making and implementing the best decisions in organization. This process as mentioned earlier ,is entrusted to management teams, whose role is to direct organizations on behalf of the shareholders. However ,the corporate governance strategies that organizations employ can vary from one corporation to the next. Corporate governance operates on the principle that managers or shareholders agents, will act in the best way that brings maximum value to their shareholder investiment. This therefore means that ,Corporate governance can be defined in a number of ways and may differ from one organization to the next (Jensen & Meckling, 1976). The principles that govern corporate governance ,however largerly remain the same. So ,despite various definations the function of corporate governance is to oversee the competent running of organizations. By observing the laws governing the various states they operate in, a the regulatory framework guiding the operations of the organization. Moreover ,most coporations today have set objectivesand goals that are  outlined in their vision and mission statement. Corporate governance entails fulfilling the set goals ensuring that an organization’s mission is fulfilled while observing the corporate culture adopted. One such defination is by OECD ,according to their defination corporate governance is a set of relationship between an organization’s management, the organization’s board ,the stakeholders and the organization shareholders (Bhimani, 2008). They view these relationships as providing the structural framework in an organization, to enable its achieve the organization’s set objectives. The relationship also involves  monitoring the performance to determine whether the objectives are met. Although, the stakeholders such as suppliers and creditors are often recognized ,corporate governance is mostly seen as related to shareholders and managers (Scharfstein, 1988). According to Bhimani (2008) managers are driven by self interest and at time undertake huge risks. On the other hand, he argues that the  shareholders are only interested in maximum returns. Given such behaviour ,it is possible to understand why large corporations fail. Management team can fail to achieve an organization’s set objectives for several reasons. Such reasons include, immense pressure to deliver their shareholders’ expectations, therefore, undertaking risky projects. Self serving behaviour, can also lead to failure especially if managers acts for their benefit, rather, than serving the interest of their shareholders. To ensure that shareholders and stakeholders are not undercharged, organization management teams are expected to follow good coporate gorvanance practices (Bhimani, 2008). However , this is easisly said than done.  Bhimani( 2008) argues that for an organization to meet their goals and maximize their shareholders value , agood regulator framework should be in place.

Agency theory and coporate governance

The agency theory determines the relationship between shareholders and the corporation management. According to the theory managers acts as agents for the shareholders. The agency theory reduces corporations into an entity involving the shareholders and their agents or more appropriately the management team. This theory simplyfies the relationships that exist in any given bussiness organizations. In that, it views corporate governance relations from the mangers and the shareholders perspective.as earlier noted corporate governance is a set of relationship between an organization’s management, the organization’s board ,the stakeholders and the other organization shareholders (Bhimani, 2008). These other stakeholders can range from regulators,creditors,suppliers,distributors, consumers,employees to the general public. They hold a stake in organizations , in that its behaviour can affect them directly or indirectly. It is ,therefore, in the interst of all these stakeholders that corporations be governed in a manner that remuneration all those concerned. The agency theory seeks to explain corporate governance from a more simplified perspect. The theory, therefore, view corporate governance as a beneficial relationship between the management and the shareholders. In other words managers are employed or appointed by shareholders to protect their investiments by overseeing eeficient daya to day running or their corporation (Bhimani, 2008).

Corporate governance theories and hostile takeovers

Several theories have been formulated to help explain corporate governance.  In their paper Heath & Norman (2004), argue that in absences of an effective regulator framework, corporate failures such as Enron can easily be repeated. Such huge failures ,have demostrated that greedy human nature, can easilytake over and  run down even the big coporations.  The self serving nature of management teams is evident in such failures ,where the interest of shareholders comes second to self interest. As such, various tools should be employed to help keep in check the behaviours of management teams responsible for failure. According to Franks and Mayer  (1996)  hostile takeovers are a market driven mechanism that can check ineffective management teams. Various schorals have, however, raised objections to the capability of hostile takeovers in checking management failure. Grossman & Hart ( 1980) for instance, dispute this view. According to them, hostile takeovers are motivated by bidders self interest ,rather, than to check management behaviour. In their view, bidders seek to maximize their investiments. Hostile takeovers , on the other hand, evoke different reactions from the various stakeholders. As earlier noted, the agency theory seeks to simplify the realationships existing in corporations, to be perceived as that involving managers and the organizations shareholders. However , the various actions undertaken by coporation management teams,does not affect the two parties alone. Management decision can affect the members of the general public, whose may seem to have no relation to the actions or events in a given company. As earlier mentioned, corporate governance can be seen to as a means of providing the structural regulatory framework. This structured regulatory framework, can be argued to have the capacity  to enable an organization its achieve the organization’s set objectives. The relationship between coporation management and that of its stakeholders, should also have mechanisms to monitor management performance to determine whether their objectives are met. Although, the stakeholders such as suppliers and creditors are often recognized ,corporate governance is mostly seen as related to shareholders and managers (Scharfstein, 1988). According to Bhimani (2008) managers are driven by self interest and at time undertake huge risks. On the other hand, he argues that the  shareholders are only interested in maximum returns. Given such behaviour ,it is possible to understand why large corporations fail. Hostile take overs are seen as one of the mechanism that can ensure that management undertake their roles in an efficient manner in order to maximize their shareholders value.

The takeover process and possible strategies by individual shareholders and raiders

Hostile takeovers can be undertaken by corporations with similar assets as the targeted firm on in the same industry as their target. This is done in order to specialize in a given industry in order to gain larger market share. Dominant firms in any given industry are in most cases, those larger firms that control a large chunk of their given market. This control, often results in more market power. Corporations with immense market powers can be able to cut their operation costs either through the economy of scale or by undercutting their competition. On the extreme such firms gain the capability to dictate their product prices and make it difficult for new entries to gain substantial markets. Hostile takeovers can, therefore, be employed by corporations in order to gain market power or specialize in their given industry. Hostile takeovers can also be undertaken by corporate Management Buyout teams or corporate raiders. The management buyout teams (MBO) and corporate raiders, takeover corporations purely to gain wealth and power. They operate through indentifying vulnerable firms; move in to takeover either by accumulating shares of their targeted firm or through direct negotiations. Hostile takeover gains, can at times result from merely under pricing the share value of the target firms.  In such a case, the bidders gain wealth simply by buying their target firm. Most MBO Teams and corporate raiders operate on this premise. They make wealth simply by target firms that have under priced shares then buy them out increasing the value of their investment. Similarly, they can buyout vulnerable firms then change the management team to increase the value of the taken over corporation. For such a scenario to succeed, the management of the targeted firm has to be inefficient thus, operating the firm below its capacity. In such a case, by simply changing the management team the stock price of the target firm simply increases.   

Effects of potential hostile takeovers threat on corporation management

The motives of hostile takeover are often not very direct. It is safe assumed, however, that most takeovers are driven by wealth gains. This can be either direct gain, where a corporation share prices are undervalued. Alternatively, indirect gains can be realized through cost cutting measures that can result, through gaining more market powers (Goergen & Renneboog, 2004). Either of the above motives translates into better management for the new venture. In the first scenario undervalued corporation share prices translate to investment value lose for the targeted corporation’s shareholder. A takeover bid, can point out such discrepancies leading to corrections. Increased share value translates to wealth gain for the shareholders. This means that, the overall effect is that shareholders investments increase in value hence, maximizing their resources. The general motive of any business organizations is to maximize its shareholders value. The management teams, which act on behalf of their shareholders, are tasked to carry out this vital task. A hostile bid that results in such objectives being met can, therefore, be said to achieve its end. Hostile takeovers can be linked to good corporate governance practices. In that, corporations avoid being targets of potential takeover threats. The link between corporate governance and hostile takeovers can, therefore, be said to be the capability of hostile takeovers to keep managers in check. Managers ensure that they run their organizations, in such a way that, their efficiency deters potential hostile takeovers threats. In so doing, managers run their organizations more efficiently, to ensure that shareholders value is maximized to keep away looming potential hostile takeover bids. Other gains that can ensure efficient corporate governance include joint research, distribution, procurement among many combined operation capable of reducing operating costs. Reducing costs can have an overall effect of cutting wastages in corporations, which implies the application of good governance principles (Heath & Norman, 2004). According to Bhimani ( 2008) corporate governance entails running organization efficiently to reduce the overall cost in organizations. In the recent years, however, there has been increased cases of higher managemant compensation and higher board honoriums. Their overall effects is that management increase the risks taken and misrepresent the financial reports, in a bid to make their organization more attractive to shareholders and other stakeholders (Heath & Norman, 2004). Such underhand management practices can be said to be undertaken to keep looming hostile takeovers at bay.

Takeover defenses

Acting in ones best interest can be said to be second to human nature. As such, managers often act in self serving ways, putting the interest of their shareholders second to their interest. Bhaghat, Schleifer, & Vishny ( 1990) argue ,that a substantial number of takeoverbids are often undertaken or detered to fulfill managements interest.  Managers can undertake defensive measures against takeoverbids, to serve their own interest. According to (Bhaghat, Schleifer, & Vishny ( 1990) one of the major results of takeovers is the laying off the top management teams. Given that it is predictable that takeovers results in management changes, managers can undertake defensive measures to ensure that their jobs are secure. Similarly hostile takeovers are accompanied by changes in corporation boards,defensive measures can be as a result of the self serving nature of humans. Despite such defensive self serving  behaviours, defensive actions can be carried out to protect the erosion of shareholders’ value. This is particularly so,in areas where the bidders underprices their bids to gain wealth.  In other words, as long as the defensive actions such as a fair price amendments can be undertaken to protect shareholders values. Given then ,that management can block hostile takeovers in order to protect their shareholders, such measueres should be allowed. It all depends, on the motive of disallowing the takeover. As noted earlier, hostile takeovers can gain more wealth for the shareholders. As such each case should be judged on its merits.

Hostile takeovers benefactors

Various stakeholders react differently to hostile takeovers. The reactions range from acceptance to outright rejection of the takeover bids. These varied reactions are often driven by the various self interests that different stakeholders hold. Hostile takeovers are often accompanied by changes in management, corporate structure and the general ways in which an organization is run. This implies that various players in a target corporate can either gain or lose from a hostile takeover.  Franks & Mayer (1996) argues that in most of the takeovers in the USA and Britain management changes were carried out. As such, we can argue that the first culpruits to fall when hostile takeovers are undertaken , are the management teams. Consindering this, then it is clear that the  managements objection to takeover bids is not always to protect their shareholders. Franks & Mayer (1996) argue that takeover motives can vary. In most cases, however, the bidders are driven by wealth gains. This is because, most target firms are often underprices and post-takeover periods are marked by significan rises in the new entitys value. The question that arises, is the sources these wealth gains.

In an examination of over sixty hostile takeovers bids between 1984 to 1986 Bhaghat, Schleifer, & Vishny (1990)  found out that fifty two targeted firms were acquired. In their post-takeover analysis they concluded that in most cases the wealth of bidding firms increases. In their examination they also concluded that target firms gain from take over bids whether successful or not.  In their examination of hostile takeovers (Bhaghat, Schleifer, & Vishny (1990) post –takeover operation were evaluated in order to find out the gainers in the takeover bids. divesture ,tax savings ,investment cuts and layoff operations after takeovers were examined to determine the gains made and those who benefitted. They also looked into the possibilitoes of taken over firms losing their investiment values. The authours noted that once takeovers were concluded and the merged entity operations harmonised it was impossible to determine or attribute any given gain to the target firm or the bidder. Their joint account records do not specify the origin of gains or loses made after operations of the two firms are combined. Howeever , their reasearch indicated that the first losers in the takeovers are employees in top management positions. The following layoffs according to their findings begins with the acquired firm’s top management team. Tax savings in the examined hostile takeovers were minimal implying that wealth is not gains from tax savings. They argue that gains made from tax savings are minimal in comparison to the gains made by laying off top employees. They did note, however, that the resulting entities make substantial tax reduction in their merged operations (Bhaghat, Schleifer, & Vishny, 1990).

The overall implication of these savings is reduction in the operation costs of the new entity. This proves the point tht in hostile takeovers the merged entity becomes more efficient since operation costs are significantly reduced. In additon, the debts incurred during  the takeover are paid out in shorter periods reducing the interest rate burden on the new merged corporation. Their reaserch also concluded that once the firms merge they do not undertake major investiments. This means that the motives for hostile takeovers are not so that firms can increase their investiment. Share holders of the bidding firms were also found in some cases to lose the value of their investiment while the investiment value  of the target corporation increases slightly.

The most common characteristic that they found in the operations of the resulting corporations , was  that targeted firms and bidders are most often in the same industry or closely related fields (Bhaghat, Schleifer, & Vishny, 1990). This suggest that one of the motives of hostile takeovers is to corner the industry market. This is because the resultant firms most often become big players in their given industry. One of the gains that result from hostile take overs is an enlarged market. This therefore implies that future operations of the resultant firm can gain immensely from the economy of scales. The bidding firms also gains market shares in regions where it previsouly had no presence. Similarly majority of the targeted firms ,often have similar assets to those of the larger bidder. This implies that in most cases, hostile takeovers represent an attempt by corporation to specialization in areas where they have invested substatial assets. In such cases the gains that motivate hostile take overs seems to be cost saving strategies, resulting from the new joint operation. Under such consinderations, we can argue that some of the hostile take overs are driven by future gains rather that immediate wealth increament for the shareholders. In addition, large corporations dominate their given industry.  Thus , hostile takeover can be power driven as corporations seek to dominate their industry to gain market power. This can enable such firms to dictate prices and undercut their competition. 

Hostile takeovers can also simply earn the bidders wealth. This is especially so in cases where the stock value of the targetted firm is undervalued.  These kind of hostile takeovers are often undertaken by corporate Management Buyout teams or corporate raiders. Simply put, they buyout underpriced corporations, and by merely doing so, gain additional value for their investments. The management buyout teams (MBO) and corporate raiders, takeover corporations purely to gain wealth and power. They indentify vulnerable firms with undervalued stocks or inefficient management teams. Hostile takeover gains, can at times also result from merely under pricing the share value of the target firms. The bidders, therefore, gain wealth while the targeted firms’ shareholders lose theirs.  

During negotiations the bidders simply offer to buy firms at lower values knowing that by doing so they are gaining wealth. In such a case, the bidders gain wealth simply by buying their target firm. Most MBO Teams and corporate raiders operate on this premise (Bhaghat, Schleifer, & Vishny, 1990). They make wealth simply by target firms that have under priced shares then buy them out increasing the value of their investment. Similarly they can buyout vulnerable firms then change the management team to increase the value of the taken over corporation. For such a scenario to succeed, the management of the targeted firm has to be inefficient thus, operating the firm below its capacity. Changing the management, therefore, increases the value of the targeted firm. Hostile takeovers can also be instigated by a firm’s management purely for personal gains. In such a case, both the bidders’ shareholders and targeted firms shareholders can gain from the hostile takeover (Franks & Mayer, 1996). In that most hostile takeovers become public, the publicity puts the takeover bid under scrutiny helping the targeted shareholders realize that their stock is underpriced. In other case, other bidders emerge offering better prices.

As mentioned earlier takeovers can be carried out in a bid to gain more market power. This often the case with bidders targeting firms in the same industry (Schwert, 2000 ). This means, that the bidding shareholders can fail to gain from such an undertaking. In that, if the hostile takeover motive is to corner the market, the bidder may end up overpaying the target. Such a hostile takeover bid is often driven by the management, and is undertaken to achieve management teams’ expansion strategies.  In such a case, the target shareholders end up gaining wealth. On the other hand the bidders shareholders, stands to gain from their management long-term strategies. This can be accrued through future savings, as well as, pricing advantages and cost cutting gains through economies of scale. In other words, the bidders’ shareholders, in management driven hostile takeover have no immediate wealth gains. Instead they end up paying the target more that their stock value. This implies that they lose wealth while the bidders gain more wealth. For every case, therefore, wealth loses to the bidders shareholders, implies wealth gains to target shareholders. In most cases as mentioned earlier the publicity that results from hostile takeovers often results in competition for the targeted company. This, inevitably increase the value of the target stock prices. In most cases, target shareholders end up gaining in the majority of hostile takeovers (Bhaghat, Schleifer, & Vishny, 1990). Additionally, by announcing takeover bids, share prices for the target firms often increase. This also increases the value of target shareholders’ stock.   Hostile takeovers can also result in operation efficiency. In that joining operations firms can gain through combined marketing, research, headquarters, and distribution among other combined operations.

Conclusions

The link between corporate governance and hostile takeovers can be said to be, the ability of hostile takeovers to keep managers in check. Managers ensure that they run their organizations, in such a way that, their efficiency deters potential hostile takeovers threats. Acting in ones best interest can be said to be second to human nature. As such, managers often act in self serving ways, putting the interest of their shareholders second to their interest. This means that some of the hostile takeovers, are undertaken to serve the interest of managers. This can be ,to expand the bussiness by divesting or increasing their market shares through acquisations. Such moves,can lead to the bidders overpaying for their target. The process cana also be open to manipulation by management teams in order to serve their own interest. As earlier noted in absence of efficient coporate governance, corporations can fail.Such huge failures ,have demostrated that greedy human nature, can easilytake over and  run down even the big coporations.  The self serving nature of management teams is evident in such failures ,where the interest of shareholders comes second to self interest. As such, various tools should be employed to help keep in check the behaviours of management teams and prevent failure. Hostile takeovers, have demostrated the capacity to keep such failure in check. In addition shareholders can also gain from hostile takeovers by increasing the value of their investments. This can happen by bringing efficiency in the corporate world.However , hostile takeovers can also earn the bidders shareholders wealth. This occurs, where the stock value of the targetted firm is undervalued.  In addition, hostile takeover can accrue gains to bidders simply by under pricing the share value of the target firms. The bidders, therefore, gain wealth while the targeted firm’s shareholders lose theirs. However, the joint ventures resulting from hostile takeovers often enjoy combined operation advantages such as procurement, marketing, research, joint overall operations and distribution. This helps shareholders, increase their investments value and maximize their investments achieving the overall objective of corporate governance.

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