Another defense is use of shark repellents which are

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Unformatted text preview: deter hostile takeovers to the extent that the cash outflows required by these contracts are large enough to make the takeover unattractive to the acquirer. Another defense is use of shark repellents, which are antitakeover amendments to the corporate charter that constrain the firm’s ability to transfer managerial control of the firm as a result of a merger. Although this defense could entrench existing management, many firms have had these amendments ratified by shareholders. Because takeover defenses tend to insulate management from shareholders, the potential for litigation is great when these strategies are employed. Lawsuits are sometimes filed against management by dissident shareholders. In addition, federal and state governments frequently intervene when a proposed takeover is deemed to be in violation of federal or state law. A number of states have legislation on their books limiting or restricting hostile takeovers of companies domiciled within their boundaries. CHAPTER 17 Mergers, LBOs, Divestitures, and Business Failure 731 Holding Companies A holding company is a corporation that has voting control of one or more other corporations. The holding company may need to own only a small percentage of the outstanding shares to have this voting control. In the case of companies with a relatively small number of shareholders, as much as 30 to 40 percent of the stock may be required. In the case of firms with a widely dispersed ownership, 10 to 20 percent of the shares may be sufficient to gain voting control. A holding company that wants to obtain voting control of a firm may use direct market purchases or tender offers to acquire needed shares. Although there are relatively few holding companies and they are far less important than mergers, it is helpful to understand their key advantages and disadvantages. Advantages of Holding Companies The primary advantage of holding companies is the leverage effect that permits the firm to control a large amount of assets with a relatively small dollar investment. In other words, the owners of a holding company can control significantly larger amounts of assets than they could acquire through mergers. EXAMPLE Carr Company, a holding company, currently holds voting control of two subsidiaries—company X and company Y. The balance sheets for Carr and its two subsidiaries are presented in Table 17.8. It owns approximately 17% ($10 $60) TABLE 17.8 Balance Sheets for Carr Company and Its Subsidiaries Assets Liabilities and Stockholders’ Equity Carr Company Common stock holdings Company X Company Y Total Long-term debt $ 10 14 $ 24 $6 Preferred stock 6 Common stock equity Total 12 $ 24 Company X Current assets Fixed assets Total $ 30 70 $100 Current liabilities Long-term debt Common stock equity Total $ 15 25 60 $100 Company Y Current assets Fixed assets Total $ 20 Current liabilities $ 10 140 Long-term debt 60 $160 Preferred stock 20 Common stock equity Total 70 $160 732 PART 6 Special Topics in Managerial Finance of company X and 20% ($14 $70) of company Y. These holdings are sufficient for voting control. The owner...
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This document was uploaded on 01/19/2014.

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