Question

Corporate Financial Management:

6. KSA is a public company listed on Singapore Exchange. It is fully equity financed with diverse ownership. It has accumulated a substantial amount of cash recently. There are a few ongoing mergers and acquisitions in the industry. KSA announces a share repurchase program using its cash.

(a)        Discuss the rationale of share repurchase program launched by KSA. What signals would the market perceive?

(b)        Critically discuss three defenses against hostile takeover.

Answer 1

a) KSA is a public company that announced a share repurchase program. The term share repurchase refers to the buying back of the shares of the company by itself so that it can acquire back its stock again from the shareholders. It is the easiest way to return the shareholders' money back to the shareholder. After a share repurchase, the price of the stock increases and it affects the profitability of the firm as well. The market would perceive that the company's management would like to increase its shareholding of the company. It also implies that the decision making power of the owners of the company will increase and they will be able to take major decisions.

b) A hostile takeover refers to taking over the ownership of the company even when the target company's management has not agreed or accepted the takeover. Some of the defenses against hostile takeover are:

i) Golden Parachute: This implies that the company will be providing extensive benefits to its employees after they are laid-off from the company.

ii) Crown jewel defense: This implies selling the most important and valuable assets of the company so that the target company becomes less attractive.

iii) Pac-Man defense: The target company buys the shares of the acquiring company. In other words, the company tries to buy the shares of the company that is trying to buy it.