Question

1. The directors of Brookside Ltd. Are considering a takeover bid for Molo Milk Ltd. However, they recognize that there are potential problems with any proposal bid. First, the directors of Brookside Ltd. Believe that any take over bid would be resisted by the directors of Molo milk Ltd. Would have to be either in form of a share for share exchange or a loan capital for share exchange.

Required

1. Discuss four reasons why a company seeking to maximize the wealth of its shareholders may wish to take over another company
2. Identify and discuss six defensive tactics the directors of XYZ Ltd. May employ to resist an unwelcome bid.

Answer 1

Answer:

Introduction of Takeover;

A takeover occurs when one company makes a bid to assume control of or acquire another, often by purchasing a majority stake in the target firm. In the takeover process, the company making the bid is the acquirer while the company it wishes to take control of is called the target.

Takeovers are typically initiated by a larger company for a smaller one. They can be voluntary, meaning they are the result of a mutual decision between the two companies. In other cases, they may be unwelcome, in which case the larger company goes after the target without its knowledge.

A takeover, which merges two companies into one, can bring major operational advantages and improvements to performance and for shareholders.

Four reasons why a company seeking to maximize the wealth of its shareholders may wish to take over another company

In business, especially in the modern markets, the usage and application of the term takeover is very common. It is used in reference to when one business assumes the control or the management of another business. There are different factors and reasons that motivate businesses to take over other businesses.

1. Enhancing business abilities

Modern markets demand that operating businesses are well endowed with abilities to effectively outperform competing businesses. A successful business, at least from the perspective of the modern market, must be marked by efficient production, effective marketing and high sales and turnovers. However, it is quite challenging to ensure that a business has all these abilities without proper investment. Therefore, businesses usually opt to take over other businesses in order to facilitate the efficiency with which they produce, the effectiveness with which they market their products and services and to increase their sales and turnovers.

Logically, taking over another business comes with the opportunity of increasing the abilities of the business. Takeovers come with ready alternative measures that can be used to sort out some management or business issues that previously hampered the attainment of the maximum potential of the acquiring company. The additional abilities of the acquired business can be used to enhance those of the acquiring business. The additional departments and sections availed by the acquired firm should offer the acquiring firm some additional space to effectively manage and utilize management resources in order to enhance the abilities of the acquiring business.

2. Gaining a larger market share and competitive advantage

Modern markets are characterized by stiff competition among businesses. The quest to attain high sales becomes complicated given the fact that many businesses offering almost similar services and products in the same market exist. Therefore, it becomes very expensive trying to beat this competition and gain a larger market share with the existence of all the competing brands and businesses. It is very hard to increase sales of products and services with all businesses jostling for market space. The end result of this competition usually is reduced market shares which initiate low product and service sale rates.

Initiating a takeover of the competing firm can help a business gain a larger market share in the market and reduce the pressure of completion in the market. By assuming the control and management of the competing firm in the market, it becomes possible that all the products and services offered by the acquired firm are controlled by the acquiring firm and all sales and profits are attributed to the acquiring firm. Once a business has been taken over by another business, the competition that previously existed between the two firms dies off as the two businesses become a single entity in the market competing against other businesses in the market.

3. Diversifying products and services in the market

For businesses to be assured of ultimate success in the market, they must diversify products and services. Products and service diversification allows businesses to be assured of high sales at all times. However, it is not easy to effectively diversify products and services in a single business. It is very expensive and very time consuming for a single business to offer more than three to five types of products and services. Given this difficulty, it becomes necessary that the business in question takes over the operations of other businesses offering different types of products and services.

Taking over a business with an aim of diversifying products and services comes with a notion of profitability. Logically, a business dealing with many different types of products and services will most likely remain significantly profitable when compared with those that offer just a single product or service. However, legal statutes regulating the practice business in relation to takeovers try to discourage instances where takeovers may create monopolies. Therefore, before assuming the control of businesses that will see a company being in control of most of the products and services in a niche within the market, the business in question must fully meet all set procedures and guidelines.

4. Cutting business operation costs

Business operation, especially in the modern market, is very expensive. Costs are often incurred from almost every sphere of operation. For a business to attain profitability, it must effectively cater for production costs, management costs, and other miscellaneous costs. Taking over another business provides a window of reprieve from where it is possible to control business management costs. The fact that the two businesses become merged, there is availed an ample opportunity through which the acquiring business expands without incurring huge costs that are involved during the expansion of a single business.

Taking over another business enables efficient production of goods and services given the increased manpower. The reduction of costs is even maximized if the merging businesses deal with the production of the same product. In this case, the total costs of production and management will be lowered while production yield will be increased. Through this kind of merging, businesses combine locations, integrate and streamline support functions which in turn help greatly in reduction of costs, a precursor to profitability. A takeover is generally viewed as an important tool in the economies of scale business strategy. In this strategy, it is theorized that when production costs are lowered as production volumes increase, the involved businesses are guaranteed of maximized profits.

5. Changing the leadership of a business

There comes a time when a business needs to change its leadership. However, leadership changes in business are often complicated. In most cases, they are intertwined with a haven of legal and procedural issues that demand strict adherence to. This strict adherence to such procedural and legal requirements often becomes a challenge that is likely to hinder maximum business performance. Therefore, the best way to bypass the issue of business leadership incase of a crisis is to initiate a takeover.

The business that takes over the operations of the other becomes legible to bring in new leaders and/or new procedures regarding the management and running of the involved business. Since taking over another business is the only window which allows easy manipulation of business procedures, the management team of the business taking over the business in question can effectively initiate the hiring of new leaders whom they believe that can provide effective leadership for the acquired business. However, leadership change in business is a very critical issue that demands strict adherence to business ethics and legal frameworks in order for success to be attained. Therefore, the acquiring firm ought to ensure all procedures involved in leadership change are exhaustively adhered to avoid a scenario where the business fails due to ineffective leadership.

Identify and discuss six defensive tactics the directors of XYZ Ltd. May employ to resist an unwelcome bid.

Introduction of Unwelcome Bid

In the takeover process, the company making the bid is the acquirer while the company it wishes to take control of is called the target. ... In other cases, they may be unwelcome, in which case the larger company goes after the target without its knowledge

Defensive tactics

• Stock repurchase
• Poison pill
• Staggered board.
• Shark repellants
• Golden parachutes
• Greenmail
• Standstill agreement
• Leveraged recapitalization

Stock repurchase

Firms repurchase shares to reward shareholders, signal undervaluation, fund ESOPs, adjust capital structure, and defend against takeovers. When used as a takeover defense, share buybacks reduce the number of shares that could be purchased by the potential buyer or by arbitrageurs who will sell to the highest bidder.

Poison pill

A poison pill is a type of defense tactic utilized by a target company to prevent, or discourage, attempts of a hostile takeover by an acquirer. Poison pills allow existing shareholders the right to purchase additional shares at a discount, effectively diluting the ownership interest of any new, hostile party.

Staggered board.

A staggered board is a board made up of different classes of directors that serve different term lengths and are elected at different times of the year. A staggered board is an effective defense against a hostile takeoverdue to the staggered style of the elections.

Shark repellants

• Shark repellent refers to measures employed by a company to lock out hostile takeover. ...
• Some takeover attempts can be beneficial to shareholders. ...
• A golden parachute. ...
• A poison pill. ...
• The tenures of all the directors of the company are staggered over several years such that, the directors

Golden parachutes

A golden parachute consists of substantial benefits given to top executives if the company is taken over by another firm, and the executives are terminated as a result of the merger or takeover. Golden parachutes are contracts with key executives and can be used as a type of anti-takeover measure, often collectively referred to as poison pills, taken by a firm to discourage an unwanted takeover attempt. Benefits may include stock options, cash bonuses, and generous severance pay.

Greenmail

Greenmail is the practice of buying enough shares in a company to threaten a hostile takeover so that the target company will instead repurchase its shares at a premium. Regarding mergers and acquisitions, the greenmail payment is made as a defensive measure to stop the takeover bid. The target company is forced to repurchase the stock at a substantial premium to thwart the takeover, which results in a lucrative profit to the greenmailer.

Conclusion:

Directors of XYZ Ltd. Consider above six defensive tactics to resist an unwelcome bid.