Question

17. a) 'There is evidence that roughly two-thirds of public merger and acquisition transactions destroy shareholder value for the acquiring companies.' Critically discuss. (50 marks) b) Critically discuss the five anti-takeover devices which are commonly available to the target firm's management to use as defence mechanisms. (50 marks)

Answer 1

Answer a) There are several reasons which results in the reduction of the shareholders value due to mergers and acquisition transactions.The reasons for the failed mergers include operation failures and failures to deal with the people and human emotions in the event of mergers and acquisitions.Fraudulent accounting practices are one of the major cause for the failure of the merger and acquisitions because of overvaluation of the company.Because of overvaluation of company it leads to acquisition of wrong and undesired company.Intervention of various third parties for various reasons can also lead to the reduction in shareholders wealth.Because of fear and greed company acquire other companies without any appropriate reasons to merge which impact the shareholders value.

Answer b) Following are the five anti-takeover devices which are available to the target firms management :

i) Poison Pill :- It means making share of the company unattractive or undesirable to the acquiring firm to prevent from takeover of firm.

ii) Stock Repurchase : Purchasing of its own shares by the target firm from its shareholders in order to prevent it from hostile takeover.

iii) Golden Parachutes :- Payment of additional compensation to the top management in case of hostile takeover in order to prevent from takeovers because of reduction in the value of assets of target company because of repayment of huge compensation.

iv) Greenmail :- In this method company buyouts its own shares from the acquirer with premium over the market price of the company which restricts the buyer from obtaining control in traget in the near future.

v) Pacman :- It is the target tender offer for the acquirer's share.