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Spring 2022 Midterm Test on the Art of Self Defense for Companies- Finance, Fordham University

Here are the questions asked in the Spring 2022 midterm finance test. We have also included some answers to show you on how best the questions should have been completed. You can use these answers to guide you on how to answer any questions you may get on the topic of self defense in unwanted takeover bids. We also offer finance exam help to all students. Contact our finance exam writers and we will get you an A.

Exam Question: 

State and explain some of the good housekeeping measures a company’s management can take to prolong its life in the case of an unwanted takeover bid

Exam Solution

The price of liberty is eternal vigilance and nowhere is this more true than in the case of a public company whose shares are widely spread. Companies with no dominant shareholder group are always potentially vulnerable to an unwanted takeover bid. The announcement of a takeover bid can strike a company's management rather than a heart attack. After it has occurred, there are only a limited number of steps that can be taken and time is running out. In addition, there may be legal or other regulatory or practical restraints on management's freedom of action once a formal offer has been announced. A management which wishes to prolong its life should adopt preventative measures in advance and review them on a regular basis.

Good housekeeping measures relate primarily to an awareness of and sensitivity to the market. This includes shareholders, potential aggressors and the investment community in general.

  1. Share price - keep it up
  2. The surest defense against an unwanted takeover bid is not to receive one. The single most effective deterrent is a share price which fairly reflects the profit potential and asset-backing of the company. The most vulnerable companies are those with depressed share prices standing at a substantial discount to net asset value.

    Some managements claim indifference to the ups and downs of the share price. In their eyes, their job is to concentrate on the company's fundamental commercial and financial health, ignoring the whims and fads of the stock market. This approach, although understandable. invites opportunist attacks from a more market-aware operator.

    In the long run, a company's share price is likely to reflect the fundamental factors affecting itself and its industry. But there will be periods when this is not the case, and it is these periods an aggressor will watch for It is of course true that maintenance of a healthy share price is not wholly which within management's control but neither is management helpless.

  3. Shareholders who are they?
  4. If a takeover is announced for a widely-held company, the attitude of shareholders is likely to be decisive. It is therefore good sense for management to identify the company's shareholders and monitor changes.

    Some managements seem ignorant or careless of the shareholder base of the company they manage and, equally important, how it is changing. Directors may be only familiar with a few long-standing shareholders, often friends and acquaintances, a smattering of institutions, and the little old lady who asks a question each year at the annual general meeting This probably presents a thoroughly misleading picture of shareholders in general and what their attitudes are likely to be in the circumstances of a takeover bid.

    A sensible precaution is for the company secretary's department to compile on a regular basis (perhaps monthly or weekly in times of high stock market activity) a report on the numbers and composition of shareholders, Holders of, say, more than 1% of the company's voting capital or of securities convertible into that amount of voting capital should be listed individually. Any changes in their shareholding and any new shareholders reaching this level should be highlighted.

    Significant holders of preference share capital or debentures may also be relevant. Holders of such securities can normally block proposals which affect their rights. Preference shareholders may have considerable voting power on other matters if, for example, the payment of the preference dividend is in arrears

    Most public companies hire a specialist outside firm to maintain the register of their shareholders. Such a firm will normally computerize the register, in which case various analyses of the shareholders and the changes should be readily available

    Shares may not necessarily be under the control or ownership of the registered holder. The use of nominees to act as the registered owner of shares makes it more difficult to interpret shareholding lists. Nominee companies are not always sinister, often being used more as a convenience than as a cloak. Many nominees can be safely identified with a certain institution or group, either by a similar name (rather obvious acronyms are favored), the same address, or other clear connections, leaving a balance of potentially threatening holdings. In some countries, regulations permit a company to require nominees to reveal the identity of the beneficial owner of the shares.

    As a potential aggressor may not register shares promptly, the report on registered holdings should be supplemented by regular conversations with the company's brokers regarding concentrated buying from unusual sources. The level of turnover in the company's shares on the stock market and the price fluctuations should also be monitored to highlight any disturbing trends.

    In some countries, the accumulation under the control of one party of a certain level of shareholding (however registered or held) requires public disclosure or notification to the company concerned. In the US and the UK, for example, an important check is at 5% of the voting capital, a level which may signal potential trouble but rarely confers control.

  5. Public announcements
  6. Watchful management will pay particular attention to the content and presentation of all public announcements. Announcements of corporate results are often dictated by accounting or auditing timetables, with little opportunity allowed for an overall review of presentation and impact. Under the pressure of time to get an announcement out, implications that later seem quite obvious can be overlooked. Omissions can make management seem incompetent or insensitive to shareholder concerns.

    In the case of an announcement of results, the market is likely to have formed expectations in advance which the company's brokers or other market contacts can be asked to relay to management. If the actual figures are significantly different from the market's expectations, an explanation should be prepared in advance Explanations made later, perhaps under public pressure, rarely succeed in being wholly convincing.

    Inconsistent comments, policy changes, missed forecasts and other unpleasant surprises are useful sources of ammunition for potential bidders. All statements should be reviewed to identify what 'hostages to fortune' are being given. Comment or loose wording that runs the risk of coming back to haunt management in the future might be best omitted in the first place.

    It is useful to bear in mind that the market tends to assume that delayed announcements of results mean bad news. If the news is bad, a delay in timing is not going to help.

  7. Putting yourself in the aggressor's shoes
  8. A useful exercise for management is periodically to view their own company in the way an aggressive bidder might. The exercise should include a valuation of all major group assets both on an existing user and on a best alternative use basis, Businesses with a below-average return on capital should be considered for management buy-out or other means of disposal at an acceptable price. Other possibilities include spinning off a part of the business whose worth may not be obvious to the market.

    Incumbent management is in a position to know the company's potential better than any outside party and can apply the same analysis and techniques as a raider would. sentiment or commitment to people or past decisions can make this a difficult or painful process. However, the options identified may strengthen the financial position of the company as well as anticipate and therefore neutralize a bidder's strategy.

    A mechanism to identify such opportunities should be established so that they can be considered for implementation before management's hand is forced.

    Such moves may be rejected as undesirable for the moment for many valid reasons but contingency plans should at least be prepared which can be activated at short notice.

    Management may have fears that rationalization along these lines will present the company to a bidder on a plate. Experience suggests that taking the necessary steps to improve the performance of a business is much less likely to attract a hostile bid than neglecting them.

Exam Question:

State and explain the steps that are likely to assist in keeping the share price up as a measure to defend the company against an unwanted takeover bid

Exam Solution

  1. Repurchase of the company's own shares in the market in jurisdictions where this is permitted
  2. Where such repurchase is not permitted, management may encourage major potential buyers sympathetic to them to enter the market in times of price weakness. Such a process tends to prevent a poor technical position developing in the market and helps to keep the price firm. It also serves to demonstrate management's views of the minimum value of the company.

  3. Cultivate a good market image
  4. It is good sense for management to promote cordial relations with the major shareholders who can be identified. This may be done by telephone calls, by lunch meetings, or other forms of entertainment and by off-the-record briefings on management's plans. In giving such contacts substance, care must be taken not to disclose to certain favored shareholders specific price-sensitive information concerning the company which is not available to the market generally.

    Management should also consider the merits of granting interviews and making background information available to research analysts employed by stockbrokers, fund managers, and other professionals. A favorable broker's circular can assist the market rating of the shares and help in building up an institutional shareholder base.

    Management should try to keep abreast of the preferences of the stock market which change from time to time. In differing phases, a market may emphasize low gearing, export sales, currency exposure, or some other factor. Some markets show a distinct liking for bonus issues of shares or stock splits which keep a share price within a certain range.

    A further step is to ensure that positive news or developments about the company receive favorable coverage in the media on a regular basis. There is a school of thought which favors this activity being handled by the company's staff, particularly the chief executive or other senior directors if they have any talent for public relations. There is a natural tendency for the media to be flattered by being granted access of this kind, as there is to regard a public relations consultant as either a buffer or a channel for 'misinformation. However, an individual may be a very capable executive but have little ability for communication outside the company, in which case the task is probably better handled by a professional firm.

    Responsibility for shareholder, market and press relations should be recognized as a significant function. The responsibility should be specifically allocated, whether it is carried out by company executives, external consultants, or a combination of the two.

  5. Keep in mind the benefits of a steady profit and dividend record
  6. Major transactions should be reviewed at the time they are undertaken to assess their immediate impact on the profit and loss account and balance sheet. While it is not suggested that short-term or cosmetic considerations should be given overwhelming weight when considering major corporate decisions, it is nevertheless naive to assume that shareholders will not be significantly affected by short-term results. As a highly successful investor remarked, in the long run, we are all dead. One of the skills shareholders demand from management is an ability to produce reasonable results in the short term while building for the future.

    Financial years which are likely to show outstanding results offer a chance to review and provide against doubtful or uncertain items to establish a strong base for less good years. The market may not applaud a large dividend increase for one year if the increased dividend cannot be maintained for the next

  7. Updating information
  8. If fixed assets form a significant proportion of a company's balance sheet. consideration should be given to periodic revaluations of assets, say once every three years. The annual report may also disclose other types of information not necessarily required but useful for shareholders to base an analysis of the company's worth.

    Some managements are reluctant to supply data on the basis that they may be giving ammunition to a bidder. However, a determined bidder may find out anyway; providing information to the market at large may well be the safer course if it results in the share price reflecting the underlying value more closely.

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