Control of the Corporation, Mergers and Acquisitions

The part Problem and Control of the Corporation, Mergers and Acquisitions The Agency Problem and Control of the Corporation Corporate managers ar the agents of shareholders. This relation creates a problem for shareholders who must find ways to induce managers to pursue shareholders interests. Financial managers do act in the best interest of the shareholders by taking action to increase the profligate value. However, in large corporations self-possession can be spread every rear end a huge number of shareowners. It has been menti unrivaledd that this office problem arises whenever a manager owns less than 100 percent of the firms shares.Because the manager bears only a fraction of the cost when his behavior reduces the firm value, he is unlikely to act in the shareholders best interest. Lets just say that management and stockholder interests might differ, imagine that the firm is considering a new enthronement, and the investment is expected to favorably impact the share va lue, but is relatively a risky venture. Owners of the firm depart then wish to take the investment because the stock will rise, but management may non with the fear of there jobs being lost. One obvious mechanism that can work to reduce the agency problem is increased manager insider shareholding.But, even where managerial wealth permits this is costly since it precludes efficient risk bearing. former(a) mechanisms are also available. More concentrated shareholdings by distantrs can induce increased monitoring by these outsiders and so improve performance by a firms own managers. Similarly, greater outside representation on corporate boards can result in more effective monitoring of managers, and the market place for managers also can improve managerial performance by causing managers to become concerned with their theme among prospective employers.The available theory and evidence are consistent with the view that stockholders control the firm and that stockholder wealth maxim ization is the relevant goal of the corporation. The stockholders elect the board of directors, who, in turn, hire and fire management. thus far so, there will undoubtedly be times when management goals are pursued at the outgo of the stockholders, at least temporarily. Mergers and Acquisitions An learning, also known as a takeover or a buyout or merger, is the buying of one fellowship (the target) by another. An acquisition may be amiable or hostile.In the former case, the companies cooperate in negotiations in the latter case, the takeover target is noncompliant to be bought or the targets board has no prior knowledge of the offer. Acquisition usually refers to a buy of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger or longer established company and confirm its name for the combined entity. This is known as a reverse takeover. Another type of acquisition is reverse merger a deal that enables a private company to get publicly listed in a short time period.A reverse merger occurs when a private company that has strong prospects and is impatient(predicate) to raise financing buys a publicly listed shell company, usually one with no business and modified assets. Achieving acquisition success has proven to be very difficult, while various studies have shown that 50% of acquisitions were unsuccessful. The acquisition process is very complex, with many dimensions influencing its outcome Although they are lots uttered in the same soupcon and used as though they were synonymous, the terms merger and acquisition mean slightly different things.When one company takes over another and clearly establishes itself as the new owner, the acquire is called an acquisition. From a legal smirch of view, the target company ceases to exist, the buyer sw reserves the business and the buyers stock continues to be traded. In the pure sense of the term, a merger communicates when two firms agree to go forwa rd as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a merger of equals. The firms are often of about the same size. Both companies stocks are surrendered and new company stock is issued in its place.For example, in the 1999 merger of Glaxo Wellcome and SmithKline Beecham, both firms ceased to exist when they merged, and a new company, GlaxoSmithKline, was created. In practice, however, actual mergers of equals dont happen very often. Usually, one company will buy another and, as part of the deals terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it is technically an acquisition. Being bought out often carries negative connotations, therefore, by describing the deal euphemistically as a merger, deal exciters and top managers try to make the takeover more palatable.An example of this would be the takeover of Chrysler by Daimler-Benz in 1999 which was widely ref erred to in the time, and is even-tempered now, as a merger of the two corporations. The buyer buys the shares, and therefore control, of the target company being purchased. self-control control of the company in turn conveys effective control over the assets of the company, but since the company is acquired full as a going concern, this form of transaction carries with it all of the liabilities accrued by that business over its past and all of the risks that company faces in its commercial environment. The buyer buys the assets of the target company.The cash the target receives from the sell-off is give back to its shareholders by dividend or through liquidation. This type of transaction leaves the target company as an desert shell, if the buyer buys out the entire assets. A buyer often structures the transaction as an asset purchase to cherry-pick the assets that it wants and leave out the assets and liabilities that it does not. This can be particularly important where fores eeable liabilities may include future, unquantified misuse awards such as those that could arise from litigation over defective products, employee benefits or terminations, or environmental damage.A disadvantage of this structure is the tax that many jurisdictions, particularly outside the United States, impose on transfers of the psyche assets, whereas stock transactions can frequently be structured as like-kind exchanges or other arrangements that are tax-free or tax-neutral, both to the buyer and to the sellers shareholders 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 un gracious that is, when the target company does not want to be purchased it is always regarded as an 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 lie s in how the purchase is communicated to and received by the target companys board of directors, employees and shareholders. It is quite normal though for M deal communications to take place in a so called confidentiality bubble whereby information flows are restricted due to