TEACHER: TE-KUANG - 周德光
Corporate Governance
Final Report
Alexandre Geffard – MA2N0242 -艾永德
06/03/2014
A report about Shareholders and Board relationship in takeover context.
The objective of this report is to discuss issues such as the role of the board and management in a
takeover situation. The case I choose to develop it allows comparing this kind of situation.
Thanks to it, I will be able to introduce in this report the use anti-takeover defenses and to
develop what are the situations in which takeover benefits shareholders or not.
The case I decided to choose is about the attempted takeover of Yahoo! by Microsoft.
Introduction to the issues
Unsolicited takeover bids, also referred to as "hostile" or "contested" bids (since they are made
without the support of management and the board of directors of the target company), are
presented directly to the target company's shareholders
When target’s board is independent, recommendations are used in order to increase the wealth of
target shareholders by guiding the shareholders through the optimal decision. It’s usually what
happens.
However, a control contest can present the board, as well as senior management, with a conflict
of interest. A successful bid may be value maximizing for existing shareholders, but have a
negative effect on the wealth of directors and managers if it threatens their power, reputation or
company specific human capital for example. So the board may eventually decide that the offer
is not acceptable.
Alternatively, the board may feel that a bid undervalues the firm, but an assurance by the
bidding firm of continuity in their positions, or a promised bonus upon successful transaction,
can lead the board to recommend acceptance of the bid.
Background
In February 2008, Microsoft launched a huge bid for Yahoo. They actually offered to pay
$44.6billion, setting the bid price at $31 per share, 62% more than Yahoo’s closing price the
previous day. So it seems like a very good deal. However, a few days later, Yahoo, and
particularly Jerry Yang (co-founder and CEO), rejected this offer that is undervaluing Yahoo’s
share according to the CEO; and a second offer a bit higher.
The boards’ actions
In May, Microsoft withdrew its bid and a number of shareholders complained about Yahoo’s
board after that and even suited in law. One of them, Carl Icahn, claimed that CEO’s behavior
had scuttled the deal. He planned to get rid of him if his proxy campaign would be a success.
It is interesting to know that in some countries, the boards are allowed to just say no, and take
some measures to avoid and/or prevent hostile bids; that’s the case n the USA for example. But
in some others, the shareholders can eventually decide whether they want to accept an
unsolicited takeover bid or not.
On the one hand, a delegation of a veto power lead to a better informed decision. On the other
hand, if shareholders choose not to delegate this decision to their board, they finally are
relatively uninformed and subject to a free-riding behavior.
On the Microsoft side; CEO Steve Ballmer viewed the merger between Microsoft and Yahoo as
an opportunity to strengthen Microsoft’s market position in the online advertising market (would
reach 86% of US Internet users).
Though Microsoft initially pursued the deal believing that it would help it enter the lucrative
online advertising market, the resistance of the Yahoo board was proving difficult. Many
Microsoft shareholders were displeased at the company’s attempt to diversify its business,
thinking that even if it reduces risk, they could potentially do more effectively on their own.
The anti-takeover tactics
There are many tactics to stop an unsolicited takeover, or to avoid them. Let’s first present these
tactics:
The first one is called greenmail. The term greenmail refers to the payment of a substantial
premium for a significant shareholder’s stock in return for the stockholder’s agreement that he or
she will not initiate a bid for control of the company. Greenmail is a form of targeted share
repurchases, which is a general term that is more broadly applied to also include other purchases
of stock from specific groups of stockholders who may not ever contemplate a raid on the
company.
Second, the company may seek the aid of a white knight, that is, another company that would be
a more acceptable suitor for the target. The white knight will then make an offer to buy all or part
of the target company on more favorable terms than those of the original bidder.
Third, the white squire defense which is similar to the white knight defense. However, in the
white squire defense, the target company seeks to implement a strategy that will preserve the
target company’s independence
Fourth, the capital structure changes. For instance, through a recapitalization, the firm can
assume more debt while it pays shareholders a larger dividend. The target can also simply
assume more debt without using the proceeds to pay shareholders a dividend. Both alternatives
make the firm more heavily leveraged and less valuable to the bidder.
Fifth, litigation is one of the more common antitakeover defenses. Today litigation is only one of
an array of defensive actions a target will take in hopes of preventing a takeover. It could be
useful to litigate for different reasons, and among others: to delay the bidder while the target
pursues a white knight or to provide a psychological lift to the target’s management.
Sixth, the Pac-Man defense, it means that the target try to reverse the situation making an offer
to buy the first bidder.
In the most basic form of antitakeover defense, the target refuses to be taken over, simply hiding
behind its poison pills and other defenses and stating that it will not deactivate them and will not
bring the offer before the shareholders.
In the just say no defense, the target may refuse to take any measures, even providing more cash
to shareholders, by stating that it has more optimistic plans for the future of the company.
Moreover, t has to be said that some of the tactics mentioned are not really allowed and
companies should be careful when using these kinds of tricks. They could be punished for that
later.
…What are the tactics applied to the case
Now go back to the case. Yahoo’s executives went on to enact a controversial severance plan
and pursued alternative tie-ups with Google and AOL in an effort to put a stop to the takeover by
Microsoft. Yahoo executives cited regulatory hurdles, pricing and strategic issues,
undervaluation of Yahoo, and the loss of human capital and impact on employee morale in
defense of their actions.
The original bid was half cash half stock and the value of Microsoft’s shares dropped, so did the
one of the deal. Yahoo also feared to deal with a huge company with little expertise, and poor
performance in its area. Yahoo also disagreed because of the undervaluation by Microsoft.
Therefore, Jerry Yang was attached to the company he co-founded.
The different points of view
Yahoo’s shareholders saw this offer as a good way to cash out on their investment, especially
because Yahoo had poor performance the past few years. In mid-2008, Carl Icahn, who held
about 5 per cent of Yahoo stock, initiated a proxy fight to unseat all of the existing board of
directors. However, it is often difficult to replace the board of directors in a large public
company like Yahoo, even in light of perceived executive incompetence.
However, unsuccessful takeover attempts may be followed by a high frequency of management
turnover. This occurs because a takeover attempt conveys adverse information possessed by the
bidder about the target's manager
But if the board of directors rejects a hostile bid, it doesn’t mean that it doesn’t protect
shareholders’ interests. The board of directors, acting in shareholders' interests, will sometimes
oppose a takeover, and this opposition can be good news for the firm, because the board has
favorable private information about firm value. Such takeover resistance can sometimes cause
the bid to fail. Besides, the reasons mentioned by Yahoo’s board are, in my opinion, receivable.
Investors' perception of the board's vigilance will influence the market's reaction to takeover
resistance. If the board is viewed as being insiders dominated, then defensive measures against a
takeover are bad news. On the other hand, for boards perceived to be outsider-dominated, they
are good news. That’s why shareholders may see the CEO’s decision as a bad news, among other
reasons.
Thus, in considering potential defensive measures, it is necessary for the board to be able to
demonstrate that the measures adopted are for the benefit of the target and its shareholders as a
whole, and not for an improper purpose such as entrenchment of the directors and management.
As I said, that is what did Yahoo’s executive. But given the context, it may be difficult for
shareholders to accept it.