Predators, raiders, and white knights

predator prey raider corporate raider

The takeover process is often described in terms of one animal hunting another: a company or individual seeking to take over another company may be referred to as a predator, and the target company as the prey. Predators are also referred to as raiders or corporate raiders.

The company and the sector, have deep problems to cope with and an uncertain future ahead. In their present state, they are sitting ducks for European or American predators looking for an entrée to the British insurance market.

The group could fall prey to one of the industry’s hungrier predators.

Lee Iacocca, Chrysler’s boss, explored the possibility of a takeover of general Motors, on behalf of a corporateraider in 1987, but dropped the idea after deciding ‘it might be easier to buy Greece’.

fend off a bid ward off a bid poison pill white knight green mail

A company wishing to resist, ward off, or fend off being taken over has a number of options.   It may devise plans that give existing shareholders special rights, or it may make itself less attractive to bidders by selling off a valuable part of the company, or holding on to an unattractive one. Actions like these are poison pills   Or it may persuade a friendly partner, a white knight, to take a stake in the company, thus preventing a complete takeover by a hostile bidder.   Bidders may agree to withdraw their bid if paid enough money for the shares they hold in the target company. This is greenmail

London Weekend Television’s attempt to attract a white knight to help it ward off the unwanted takeover bid from Granada has collapsed. US West, the giant US telephone company and one of the largest cable operators in the UK, was interested in a stake of 29.9 per cent in the London ITV company – the largest amount possible without triggering a full bid.

UK merchant banks do not appear attractive at the moment. Indeed, TSB’s chairman, Sir Nicholas Goodison, perhaps should consider holding on to Hill Samuel: it is a poison pill against predators who might want to swallow the whole group.

… greenmail transactions, in which the target of the takeover attempt buys off the hostile bidder by repurchasing any shares that it has acquired. Greenmail means that these shares are repurchased by the target at a price which makes the bidder happy to agree to leave the target alone.

Leveraged buy-outs and junk bonds

Leveraged buy-out LBO junk bonds

In a leveraged buy-out,or LBO,a company is acquired by a group of investors, often financed by heavy borrowing. The debt is often paid out of the target company’s operating revenues or by selling its assets.   The borrowing involved in LBOs is often high-risk debt called junk bonds

 

“Just Business” explains many business issues usually shrouded in mysticism and emotive language. For instance it made me feel at home with junk bonds for the first time. These are simply fixed-interest securities with less than investment-grade level rating. They are in themselves a borrowing instrument, which are neither good nor bad, but have acquired a bad name because of their use in certain criminal transactions.

An example of a solid company that seems to have thrived on the strength of junk-bond financing is FMC Corp., which makes armored vehicles and other military equipment. In 1986, the company, its shareholders and employees bought out its stock in a leveraged buy-out financed by junk.

Management buy-outs

management buy-out MBO venture capital

When a group is restructured, the managers of a business that is to be sold off may want to buy it themselves in a management buy-out or MBO, usually in a combination with an organization providing finance in the form of venture capital.

Executive Pay

compensation compensation package remuneration remuneration package bonuses benefits perks share options stock options

When talking about executive pay, compensation can refer, confusingly, to two different things: What top executives get fer running a company What they get on leaving a company Apart from salary, an executive’s compensation package can include   bonuses::extra payments, sometimes, but not always. related to the firm’s performance   benefitsand perksranging fromshare options,the right to buy the company’s shares at an advantageous price, to a chauffeur-driven car Remuneration is also used to talk abou executives’ salary and benefits.

Shareholders have been pressing IBM to split the office of chairman and chief executive officer, to establish independent committees to review company leadership and strategy, and to nominate directors and link executive compensation to IBM’s share price

When Salomon suffers, the shareholders bear the brunt of the poor performance through a lower share price and dividends, while the managing directors are cushioned by compensationpackages that are generous enough to ensure Salomon’s pay remains competitive.

Most executives value salary increases far more than perks when changing jobs, says a survey carried out by a leading recruitment company. Responses in a recent survey of 146 executives found that 63% of them said they would prefer to have the equivalent increase in salary instead of some or all of the perks on offer. The benefits theyconsidered most important were non-contributory pensions, company cars and healthcare.

Britain’s bosses ranked 14^th in the international league for salaries and bonuses but in terms of total remuneration they were fifth.

Jerry Carbut said the shares sold were acquired in January by exercising options that were part of their total remuneration package.

Executive pay-offs

golden boot golden goodbye golden handshake golden parachute compensation payment compensation payoff compensation payout severance package severance payment oust

A compensation package for an executive leaving a company is also known as a golden goodbye, golden handshake,or golden parachute. Compensation for someone leaving a company may be referred to as a compensation payment, compensation payoff, or compensation payout. These payments may form part of aseverance package. Severance payments can be the subject of complex negotiations when an executive leaves, or is ousted: forced to leave.   When executives are ousted, people may talk about companies giving them the golden boot

Basics of Accounting

Assets

assets current assets fixed assets intangible assets depreciate amortize depreciation amortization book value charge goodwill going concern

Things of value or earning power to a firm are its assets. Current assets include cash,.receivables, bank deposits, and trade investments: investments in other companies   Fixed Assets include land, plant, buildings, and furniture. Assets such as plant and equipment that over time wear out or become outdated are said to depreciate. A chargemustbemadeforthisdepreciationoramortizationin calculating a business’s profitability: the assets are depreciated or amortized by an amount each year.   The book value of an item of equipment is the amount it as theoretically worth after depreciation, but this may not reflect what someone would pay for it if it was sold.   Intangible assetsmay include such things as patents owned by the company, and goodwill, the value of the company as a functioning business or going concernwith a client base, experienced management and other benefits that a start-up may not have.

The figures revealed that News Corp’s debt had blown out to $10.5 billion and that currentassets of $3.4 billion were little more than half current liabilities of $6 billion.

Goodwill is an asset: the value of a firm as going concern in excess of the sum of its parts

The need for an asset to be ‘measured at a monetary amount with sufficient reliability’ would also affect accounting for intangible assets such as brand names.

British Airports Authority has expanded the ‘economic life’ of its terminals and runways from 16 years and 23.5 years respectively to 50 years for terminals and 100 years for runways. This means these assets can be depreciated over a longer period, reducing the annual charge, and thereby increasing reported profits.

The technology is developing so fast that Rebo’s High Definition Television, which it had initially planned on amortizing over five years, grew obsolete in less than two years. Ew Rebo must lay out money for a newer, even costlier generation equipment.

Liabilities

liabilities long-term liabilities current liabilities gearing leverage highly geared highly leveraged

Debts to lenders form part of a company’s liabilities Liabilities is also used to refer exclusively to debt. Long-term debts are long-term liabilities The ratio of a firm’s debt to its equity is its gearing or leverage; a firm with a high proportion of debt in relation to equity is highly geared or highly leveraged. Short-termdebtsanddebtstosuppliersareamongitscurrent liabilities.

Any buyer of USX would have to assume $5.8 billion in debt, plus billions more in other liabilities.

Current liabilities are bills that the company expects to pay in the near future. They include debts that are due to be repaid within the next year and payables: amounts owed by the company to its suppliers. In addition to these short-term obligations, International Paper has issued bonds that will not be repaid for many years. These are shown as long-term liabilities.

When a firm borrows money it promises to make a series of fixed payments. Because the shareholders get only what is left over after the debtholders have been paid, debt is said to create financial leverage.

A company may be too highly geared for the realities of the markets in which it is operating.

Investors worry that an economic downturn would make it difficult for highly leveraged companies to meet their debt obligations.

Reporting results

balance sheet off-balance sheet strong balance sheet weak balance sheet provision bad debts write off

Assets and liabilities are normally shown on a firm’s balance sheet: a ‘photograph’ taken, normally once a year, of its financial situation at that tim.   Firm in a good situation are said to have a strong balance sheet and those that are not, a weak one.   Things that are not shown in the balance sheet but in a foot note, for example, are off-balance sheet.   A company’s balance sheet may include provisions for potential losses, such as bad debts, debts that may never be paid. If it looks almost certain that a debt will not be paid, it is considered a write-off and written off.

 

Total has a strong balance sheet: debt has fallen from 37% of equity to 25%.

Unlike Toyota, which is known as the ‘Toyota Bank’ because of the huge pile of cash on which it sits, Nissan has a weak balance sheet.

Another frequently quoted term in modern accounting is ‘ off-balance sheet’ Assets as well as liabilities are removed from the balance sheet of the company concerned, and there may also be some impact on the profit-and-loss account. But the usual aim is to reduce a company’s apparent gearing.

At Lloyd’s bank, bad debt provisions fell by almost ₤100 million to ₤329 million, helped by an improvement in the Third World country debts.

The collapse of Citygrove, the property developer, was partly responsible for a ₤3.15 million bad debts write-off at Henry Barrett, the steel and industrial products company.

results report results profit loss pre-tax profit pre-tax loss profit and loss account income statement accounts accountants auditors creative accounting window dressing

A company’s financial performance for a period is its results,which it reports in the form of a profit and loss account, indicating, unsurprisingly, whether it has made a profit or a loss. The equivalent document in the US is the income statement. A pre-tax profit or loss is one calculated before tax is taken into account.   The accuracy of accountssuch as the balance sheet and the profit and loss account is checked and supposedly guaranteed by auditors,, outside accountants who specialize in this.   When a company’s accounts are presented ina way that makes performance look better than it really is, the company may be accused of window dressing, or creative accounting.

Gieves Group made a pre-tax loss of ₤105,000 in the 26 weeks to 31 July as a result of ₤250,000 costs incurred in the redundancy programme at Redwood.

Substance should triumph over form in situations of window dressing and off-balance-sheet financing. It is argued that assets and liabilities should be brought together on the balance sheet if this is necessary to give a true and fair view, whether or not the information involved is specifically required by legislation.

If companies are so defensive and embarrassed about creative accounting, now is the time for auditors to toughen up and insist that as much of it as possible is stripped out of reported figures.

The income statement shows the amount that the company earned during the year. Ater deducting the costs of goods sold and other expenses, International Paper had total earn ings before interest and taxes of $1610 million.

The bottom line

bottom line

The bottom line is an informal way of talking about the results of a company: the so-called bottom line of the profit and loss account. The bottom line also means the final result or the most important aspect of something

Consolidated sales for Nissan and 100 subsidiaries worldwide dropped by 3.4 per cent to 6, 198 billion yen (₤37.1 billion). But the bottom line performance was that a profit of 85.7 billion yen (₤513 million) last year turned into a 108 billion yen loss

IPO & Stock Exchange

Stakes

stakes equity holding shareholding shareholder stake hold a stake majority stake controlling stake minority stake

If Company A owns shares or equity in Company B, A has or holds a stake, holding or shareholding in B.   If A owns less than half the shares in B, it has a minority stakein B.   If A owns more than half the shares in B, it has a majority stake or controlling stake in B.   If you have shares in a company you are a shareholder

The Spanish banks have the sort of links with the corporate world that are typical of the German banks, with the banks holding large stakes in al most all the major Spanish companies. Some of the banks have begun to rethink this situation.

The position of the Fayed brothers, proprietors of Harrods, who have held a 10% shareholding in Sears for years, is becoming very interesting.

The very rich Mark Rich is to retire from the company he founded 15 years ago and will reduce his controlling stake to 15% within five years.

McPherson always takes a majority stake in the businesses he invests in and he likes a hands-on role in the management.

Share Issues

share issue share flotation share offering float

When companies raise finance by selling shares the make share issues, share flotationsor share offerings.   Companies making share issues and listed for the first time are floatedon the stock market.

 

As Britain recovers from recession, companies will seek to raise finance through share issue. In the coming months, they will publish glossy prospectuses that celebrate their track records and invite people to part with their money.

 

In New York on Friday, the group disclosed plans to issues $690 million through a global shareoffering. On top of the 40 million shares offered last December, the issue will dilute the holding of News Corp’s chairman and chief executive, Rupert Murdoch, and his family, from around 46% to 33%.

Under the scheme being considered, the Post Office would be floated (have its shares sold) on the stock market in 1996. This would raise up to ₤5 billion for the government. Ministers are convinced that a floatation would be popular.

How do the venture capitalists regard the decline of the stock exchange’s small companies sector? Public flotation is the traditional route for venture capitalists to realize gains and exit their investments.

rights issue cash call warrant

Companies looking for more finance may make a rights issue by offering new shares to existing shareholders at a discount. Rights issues are referred to informally by commentators as cash calls. Buyingwarrants gives the right to buy a certain number of a company’s shares for a given price at a later date. Warrants are similar to rights issue except that holders usually have longer periods in which to exercise their right to buy shares.

Construction group George Wimpey yesterday announced a ₤104 million rights issue its first cash call since the company was floated on the stock market in 1963. Shareholders have been offered one new share, at 148p, for every four held. Wimpey shares fell 3p to close at 184p.

Unveiling results

results announce results report results unveil results earnings distributed dividend yield price/earnings ratio P/E ratio

Stock markets eagerly await company results. A company’s share price is obviously affected by these: whether it has made a profit or loss over a given period, and how much.   Commentators talk about companies announcing, reporting, or unveiling results.   Apart of profits or earnings for a given period may be distributedto shareholders in the form of adividend. A share’syieldis the dividend expressed as a percentage of the share price.   The price/earnings ratio, or P/E ratio, of a company’s shares is the earnings of the company per share expressed as a multiple of the share price.

Mr. Canelo suggests that investors compare price/earnings ratios (the price of a share divided by a company’s per-share earnings for a 12-month period) with projected growth rates. ‘If you think earnings will grow at 20% a year, it’s all right to pay 20 times earnings,’ he says. But don’t pay 30 time earnings for a company that’s expected to grow at 15% a year.

Wall Street is sharply divided over whether general Motors is a bargain in light of its 6% dividend yield, or an unnecessary risk at a time when the outlook for cars and the economy is uncertain.

ordinary shares preference shares common shares preferred shares

When a company distributes earnings in the form of a dividend, holders of preference shares get priority over holders of ordinary shares. Likewise, if a company goes into liquidation, preference shareholders are paid off before ordinary shareholders.   Ordinary and preference shares are referred to in American English as common stock and preferred stock.

Farm and Home Financial Corp won’t pay its third-quarter dividend on common stock as a result of the previously announced third-quarter loss.

 

Per-share earnings also shrank because of dividends on a new series of preferred stock.

* The MIT Dictionary of Modern Economics, The MIT Press Cambridge, Massachusetts

[1] Just as people cast physical shadows, they also cast psychological shadows. Psychological shadows can provide much valuable information if we are creative enough to engage them directly in what has been called “shadow work”. Unlike conventional work, which focuses on material progress and tangible results, shadow work requires us to go within and learn from our inner being. A leader has a special responsibility for what is going on inside himself. Getting to know one’s shadow can be liberating whereas ignoring one’s shadow can enslave.

William Q. Judge “The Leader’s Shadow”

 

 

[2] In Roman religion six priestesses representing the daughters of the Royal house, who tended the state cult of Vesta, the goddess of the hearth. They served for thirty years, during which time they had to remain virgins. The Vestal Virgins enjoyed many honours and privileges, including emancipation from their father’s rule.

The New Encyclopedia Britannica (Micropedia)

 

* Stephen A. Ross, Randolph W. Westerfield, Jeffrey F. Jaffe «Corporate Finance»