© 2012 McGraw-Hill Ryerson LimitedChapter There are four ways to change the management:  Proxy Contests: Outsiders compete with management for shareholders’ votes in order to take control of the company. Also called proxy fight  Mergers & acquisitions: Combination of the assets and liabilities of two firms into one – a takeover  Leveraged Buyouts: Acquisition of the firm by a private group using substantial borrowed funds  Divestitures and Spin-offs: Instead of acquiring, sometimes corporations also sell full or part of a business LO4

© 2012 McGraw-Hill Ryerson LimitedChapter Tools Used To Acquire Companies Tender Offer Merger Management Buy-Out Leveraged Buy-Out Acquisition Proxy Contest LO4

 A proxy is the right to vote another shareholder’s shares  In a proxy contest, the dissident shareholders attempt to obtain enough proxies to elect their own slate to the board of directors  Once elected the new board is in control and can replace management © 2012 McGraw-Hill Ryerson LimitedChapter 6-3 LO4

 Poison Pill: Measure taken by a target firm to avoid acquisition; for example, the right for existing shareholders to buy additional shares at an attractive price if a bidder acquires a large holding.  White Knight: Friendly potential acquirer sought by a target company threatened by an unwelcome suitor  Shark Repellent: Amendments to a company charter made to forestall takeover attempts © 2012 McGraw-Hill Ryerson LimitedChapter 6-4 LO4, LO5

© 2012 McGraw-Hill Ryerson LimitedChapter  An LBO involves the acquisition of a firm by a private group using substantial borrowed funds  The LBO group then takes the firm private so its shares no longer trade in the securities markets  If the investor group is led by the management of the firm, then the takeover is called a management buyout (MBO) LO4, LO6

© 2012 McGraw-Hill Ryerson LimitedChapter  LBOs are different from ordinary acquisition  A large portion of the purchase price is debt financed  If the target company was publicly traded, after the LBO, the shares no longer trade on the open market. Remaining equities in the LBO are privately held by a small group of investors known as private equity investors  LBOs can generate value: ◦ The junk bond market ◦ Leverage and taxes ◦ Other stakeholders ◦ Leverage and incentives ◦ Free cash flow LO4, LO6

 A company can sell part of its business to another firm – divestiture  A company may spin-off a business by separating it from the parent. This is done by distributing stock in the newly independent company to the shareholders of the parent company  Equity carve-out – shares in the new company are sold in a public offering © 2012 McGraw-Hill Ryerson LimitedChapter 6-7 LO4