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Valuation (finance)From Wikipedia, the free encyclopedia

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Infinance,valuationis the process of estimating what something is worth. Items that are usually valued are a

financialassetorliability.Valuations can be done on assets (for example, investments in marketable securities

such asstocks,options,businessenterprises, orintangible assetssuch aspatentsandtrademarks)or on

liabilities (e.g.,bondsissued by a company). Valuations are needed for many reasons such asinvestment

analysis,capital budgeting,mergerandacquisitiontransactions,financial reporting,taxable events to determine

the propertaxliability, and inlitigation.

Contents

[hide]

1 Valuation overview

2 Business valuation

o 2.1 Guideline companies method

o 2.2 Net asset value method

3 Usage

4 Valuation of a suffering company

5 Valuation of intangible assets

6 Valuation of mining projects

7 Asset pricing models

8 See also

9 References

10 External links

Valuation overview[edit]

Valuation of financial assets is done using one or more of these types of models:

1. Absolute value models that determine the present value of an asset's expected future cash flows.

These kinds of models take two general forms: multi-period models such asdiscounted cash

flowmodels or single-period models such as theGordon model.These models rely on mathematics

rather than price observation.
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://en.wikipedia.org/wiki/Discounted_cash_flowhttp://en.wikipedia.org/wiki/Discounted_cash_flowhttp://en.wikipedia.org/wiki/Discounted_cash_flowhttp://en.wikipedia.org/wiki/Gordon_modelhttp://en.wikipedia.org/wiki/Gordon_modelhttp://en.wikipedia.org/wiki/Gordon_modelhttp://en.wikipedia.org/wiki/Gordon_modelhttp://en.wikipedia.org/wiki/Discounted_cash_flowhttp://en.wikipedia.org/wiki/Discounted_cash_flowhttp://en.wikipedia.org/w/index.php?title=Valuation_(finance)&action=edit&section=1http://en.wikipedia.org/wiki/Valuation_(finance)#External_linkshttp://en.wikipedia.org/wiki/Valuation_(finance)#Referenceshttp://en.wikipedia.org/wiki/Valuation_(finance)#See_alsohttp://en.wikipedia.org/wiki/Valuation_(finance)#Asset_pricing_modelshttp://en.wikipedia.org/wiki/Valuation_(finance)#Valuation_of_mining_projectshttp://en.wikipedia.org/wiki/Valuation_(finance)#Valuation_of_intangible_assetshttp://en.wikipedia.org/wiki/Valuation_(finance)#Valuation_of_a_suffering_companyhttp://en.wikipedia.org/wiki/Valuation_(finance)#Usagehttp://en.wikipedia.org/wiki/Valuation_(finance)#Net_asset_value_methodhttp://en.wikipedia.org/wiki/Valuation_(finance)#Guideline_companies_methodhttp://en.wikipedia.org/wiki/Valuation_(finance)#Business_valuationhttp://en.wikipedia.org/wiki/Valuation_(finance)#Valuation_overviewhttp://en.wikipedia.org/wiki/Valuation_(finance)http://en.wikipedia.org/wiki/Litigationhttp://en.wikipedia.org/wiki/Taxhttp://en.wikipedia.org/wiki/Financial_reportinghttp://en.wikipedia.org/wiki/Takeoverhttp://en.wikipedia.org/wiki/Mergerhttp://en.wikipedia.org/wiki/Capital_budgetinghttp://en.wikipedia.org/wiki/Investment_analysishttp://en.wikipedia.org/wiki/Investment_analysishttp://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Trademarkhttp://en.wikipedia.org/wiki/Patenthttp://en.wikipedia.org/wiki/Intangible_assethttp://en.wikipedia.org/wiki/Businesshttp://en.wikipedia.org/wiki/Option_(finance)http://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Liability_(accounting)http://en.wikipedia.org/wiki/Assethttp://en.wikipedia.org/wiki/Financehttp://en.wikipedia.org/wiki/Wikipedia:Verifiability#Burden_of_evidencehttp://en.wikipedia.org/wiki/Template:Citation_neededhttp://en.wikipedia.org/wiki/Help:Introduction_to_referencing/1http://en.wikipedia.org/w/index.php?title=Valuation_(finance)&action=edithttp://en.wikipedia.org/w/index.php?title=Valuation_(finance)&action=edit


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2. Relative valuemodels determine value based on the observation of market prices of similar assets.

3. Option pricing modelsare used for certain types of financial assets (e.g.,warrants,put options,call

options,employee stock options,investments withembedded optionssuch as acallable bond)and are

a complex present value model. The most common option pricing models are theBlackScholes-

Mertonmodels andlattice models.

Common terms for the value of an asset or liability aremarket value,fair value,andintrinsic value.The

meanings of these terms differ. For instance, when an analyst believes a stock's intrinsic value is greater (less)

than its market price, an analyst makes a "buy" ("sell") recommendation. Moreover, an asset's intrinsic value

may be subject to personal opinion and vary among analysts.

TheInternational Valuation Standardsinclude definitions for common bases of value and generally accepted

practice procedures for valuing assets of all types.

Business valuation[edit]

Businessesor fractional interests in businesses may be valued for various purposes such asmergers and

acquisitions,sale ofsecurities,and taxable events. An accurate valuation ofprivately owned companieslargely

depends on the reliability of the firm's historic f inancial information.Public companyfinancial statementsare

audited byCertified Public Accountants(USA),Chartered Certified Accountants(ACCA)orChartered

Accountants(UK and Canada) and overseen by a government regulator. Alternatively, private firms do not

have government oversightunless operating in a regulated industryand are usually not required to have

their financial statements audited. Moreover, managers of private firms often prepare their financial statements

to minimize profits and, therefore,taxes.Alternatively, managers of public firms tend to want higher profits toincrease their stock price. Therefore, a firm's historic financial information may not be accurate and can lead to

over- and undervaluation. In an acquisition, a buyer often performsdue diligenceto verify the seller's

information.

Financial statements prepared in accordance withgenerally accepted accounting principles(GAAP) show

many assets based on their historic costs rather than at their current market values. For instance, a

firm'sbalance sheetwill usually show the value of land it owns at what the firm paid for it rather than at its

current market value. But under GAAP requirements, a firm must show the fair values (which usually

approximates market value) of some types of assets such as financial instruments that are held for sale rather

than at their original cost. When a firm is required to show some of its assets at fair value, some call this

process "mark-to-market". But reporting asset values on financial statements at fair values gives managers

ample opportunity to slant asset values upward to artificially increase profits and their stock prices. Managers

may be motivated to alter earnings upward so they can earn bonuses. Despite the risk of manager bias, equity

investors and creditors prefer to know the market values of a firm's assetsrather than their historical costs

because current values give them better information to make decisions.
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This method estimates the value of an asset based on its expected future cash flows, which are discounted to

the present (i.e., the present value). This concept of discounting future money is commonly known as thetime

value of money.For instance, an asset that matures and pays $1 in one year is worth less than $1 today. The

size of the discount is based on anopportunity cost of capitaland it is expressed as a percentage ordiscount

rate.

In finance theory, the amount of theopportunity costis based on a relation between the risk and return of some

sort of investment.Classic economic theorymaintains that people are rational and averse to risk. They,

therefore, need an incentive to accept risk. The incentive in finance comes in the form of higher expected

returns after buying a risky asset. In other words, the more risky the investment, the more return investors want

from that investment. Using the same example as above, assume the first investment opportunity is a

government bond that will pay interest of 5% per year and the principal and interest payments are guaranteed

by the government. Alternatively, the second investment opportunity is a bond issued by small company and

that bond also pays annual interest of 5%. If given a choice between the two bonds, virtually all investors would

buy the government bond rather than the small-firm bond because the first is less risky while paying the same

interest rate as the riskier second bond. In this case, an investor has no incentive to buy the riskier second

bond. Furthermore, in order to attract capital from investors, the small firm issuing the second bond must pay

an interest rate higher than 5% that the government bond pays. Otherwise, no investor is likely to buy that bond

and, therefore, the firm will be unable to raise capital. But by offering to pay an interest rate more than 5% the

firm gives investors an incentive to buy a riskier bond.

For avaluationusing thediscounted cash flowmethod, one first estimates the future cash flows from the

investment and then estimates a reasonable discount rate after considering the riskiness of those cash flows

and interest rates in thecapital markets.Next, one makes a calculation to compute the present value of the

future cash flows.

Guideline companies method[edit]

Main article:Comparable company analysis

This method determines the value of a firm by observing the prices of similar companies (called "guideline

companies") that sold in the market. Those sales could be shares of stock or sales of entire firms. The

observed prices serve as valuation benchmarks. From the prices, one calculatesprice multiplessuch as

theprice-to-earningsorprice-to-bookratiosone or more of which used to value the firm. For example, the

average price-to-earnings multiple of the guideline companies is applied to the subject firm's earnings to

estimate its value.

Many price multiples can be calculated. Most are based on a financial statement element such as a firm's

earnings (price-to-earnings) or book value (price-to-book value) but multiples can be based on other factors

such as price-per-subscriber.
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Net asset value method[edit]

Main article:Cost method

The third-most common method of estimating the value of a company looks to theassetsandliabilitiesof the

business. At a minimum, asolventcompany could shut down operations, sell off the assets, and paythecreditors.Any cash that would remain establishes afloor valuefor the company. This method is known as

thenet asset valueor cost method. In general thediscounted cash flowsof a well-performing company exceed

this floor value. Some companies, however, are worth more "dead than alive", like weakly performing

companies that own many tangible assets. This method can also be used to valueheterogeneous portfoliosof

investments, as well asnonprofits,for which discounted cash flow analysis is not relevant. The valuation

premise normally used is that of an orderlyliquidationof the assets, although some valuation scenarios

(e.g.,purchase price allocation)imply an "in-use"valuation such asdepreciatedreplacement cost new.

An alternative approach to the net asset value method is the excess earnings method. This method was first

described in ARM34, and later refined by the U.S.Internal Revenue Service's Revenue Ruling 68-609. The

excess earnings method has the appraiser identify the value of tangible assets, estimate an appropriate return

on those tangible assets, and subtract that return from the total return for the business, leaving the "excess"

return, which is presumed to come from the intangible assets. An appropriate capitalization rate is applied to

the excess return, resulting in the value of those intangible assets. That value is added to the value of the

tangible assets and any non-operating assets, and the total is the value estimate for the business as a whole.

Usage[edit]

In finance, valuation analysis is required for many reasons including tax

assessment,willsandestates,divorcesettlements,business analysis, and basicbookkeepingandaccounting.

Since the value of things fluctuates over time, valuations are as of a specific date like the end of the accounting

quarter or year. They may alternatively bemark-to-marketestimates of the current value of assets or liabilities

as of this minute or this day for the purposes of managing portfolios and associated financial risk (for example,

within large financial firms includinginvestment banksand stockbrokers).

Some balance sheet items are much easier to value than others. Publicly traded stocks and bonds have prices

that are quoted frequently and readily available. Other assets are harder to value. For instance, private firms

that have no frequently quoted price. Additionally, financial instruments that have prices that are partlydependent on theoretical models of one kind or another are difficult to value. For example, options are

generally valued using theBlackScholesmodel while the liabilities oflife assurancefirms are valued using the

theory ofpresent value.Intangible business assets, likegoodwillandintellectual property,are open to a wide

range of value interpretations.
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okkeepinghttp://en.wikipedia.org/wiki/Settlement_(litigation)http://en.wikipedia.org/wiki/Divorcehttp://en.wikipedia.org/wiki/Estate_(law)http://en.wikipedia.org/wiki/Will_(law)http://en.wikipedia.org/w/index.php?title=Valuation_(finance)&action=edit&section=5http://en.wikipedia.org/wiki/Internal_Revenue_Servicehttp://en.wikipedia.org/wiki/Depreciatedhttp://en.wikipedia.org/wiki/Value-in-usehttp://en.wikipedia.org/wiki/Purchase_price_allocationhttp://en.wikipedia.org/wiki/Liquidationhttp://en.wikipedia.org/wiki/Nonprofithttp://en.wikipedia.org/w/index.php?title=Heterogeneous_portfolio&action=edit&redlink=1http://en.wikipedia.org/wiki/Discounted_cash_flowhttp://en.wikipedia.org/wiki/Net_asset_valuehttp://en.wikipedia.org/w/index.php?title=Floor_value&action=edit&redlink=1http://en.wikipedia.org/wiki/Creditorhttp://en.wikipedia.org/wiki/Solvencyhttp://en.wikipedia.org/wiki/Liability_(financial_accounting)http://en.wikipedia.org/wiki/Assethttp://en.wikipedia.org/w/index.php?title=Cost_method&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Valuation_(finance)&action=edit&section=4


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It is possible and conventional for financial professionals to make their own estimates of the valuations of

assets or liabilities that they are interested in. Their calculations are of various kinds including analyses of

companies that focus on price-to-book, price-to-earnings, price-to-cash-flow andpresent valuecalculations,

and analyses of bonds that focus on credit ratings, assessments ofdefault risk,risk premia,and levels ofreal

interest rates.All of these approaches may be thought of as creating estimates of value that compete for

credibility with the prevailing share or bond prices, where applicable, and may or may not result in buying or

selling by market participants. Where the valuation is for the purpose of amerger or acquisitionthe respective

businesses make available further detailed financial information, usually on the completion of anon-disclosure

agreement.

It is important to note that valuation requires judgment and assumptions:

There are different circumstances and purposes to value an asset (e.g., distressed firm, tax purposes,

mergers and acquisitions, financial reporting). Such differences can lead to different valuation methods ordifferent interpretations of the method results

All valuation models and methods have limitations (e.g., degree of complexity, relevance of observations,

mathematical form)

Model inputs can vary significantly because of necessary judgment and differing assumptions

Users of valuations benefit when key information, assumptions, and limitations are disclosed to them. Then

they can weigh the degree of reliability of the result and make their decision.

Valuation of a suffering company[edit]

Additional adjustments to a valuation approach, whether it is market-, income-, or asset-based, may be

necessary in some instances like:

Excess or restricted cash

Other non-operating assets and liabilities

Lack of marketability discount of shares

Control premium or lack of control discount

Above- or below-market leases

Excess salaries in the case of private companies

There are other adjustments to the financial statements that have to be made when valuing a distressed

company. Andrew Miller identifies typical adjustments used to recast the financial statements that include:

Working capitaladjustment

Deferred capital expenditures
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Cost of goods soldadjustment

Non-recurring professional fees and costs

Certain non-operating income/expense items[1]

Valuation of intangible assets[edit]

Valuation models can be used to value intangible assets such as forpatent valuation,but also

incopyrights,software,trade secrets,and customer relationships. Since few sales of benchmark intangible

assets can ever be observed, one often values these sorts of assets using either a present value model or

estimating the costs to recreate it. Regardless of the method, the process is often time-consuming and costly.

Valuations of intangible assets are often necessary for financial reporting andintellectual propertytransactions.

Stock markets give indirectly an estimate of a corporation's intangible asset value. It can be reckoned as the

difference between itsmarket capitalisationand itsbook value(by including only hard assets in it).

Valuation of mining projects[edit]

Inmining,valuation is the process of determining the value or worth of a mining property.

Mining valuations are sometimes required forIPOs,fairness opinions,litigation, mergers and acquisitions, and

shareholder-related matters.

In valuation of a mining project or mining property,fair market valueis the standard of value to be used. The

CIMVal Standards are a recognised standard for valuation of mining projects and is also recognised by

theToronto Stock Exchange(Venture). The standards spearheaded by Spence & Roscoe, stress the use of

the cost approach, market approach, and theincome approach,depending on the stage of development of the

mining property or project.

Introduction to Valuation

Every asset, financial as well as real, has a value. The key to successfully investing in and managing these assets lies inunderstanding not only what the value is, but the sources of the value. Every asset can be valued, but some assets are easier tovalue than others, and the details of valuation will vary from case to case. Thus, valuing of a real estate property will requiredifferent information and follow a different format than valuing a publicly traded stock. What is surprising, however, is not thedifferences in techniques across assets, but the degree of similarity in the basic principles of valuation.

Approaches to Valuation

Analysts use a wide range of models in practice, ranging from the simple to the sophisticated. These models often make verydifferent assumptions, but they do share some common characteristics and can be classified in broader terms. There are several

advantages to such a classification: It makes it easier to understand where individual models fit into the big picture, why theyprovide different results, and when they have fundamental errors in logic.

In general terms, there are three approaches to valuation. The first, discounted cash flow (DCF) valuation, relates the valueof an asset to the present value (PV) of expected future cash flows on that asset. The second, relative valuation, estimates the

value of an asset by looking at the pricing of comparable assets relative to a common variable such as earnings, cash flows, bookvalue, or sales. The third, contingent claim valuation, uses option pricing models to measure the value of assets that share option
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characteristics. Some of these assets are traded financial assets like warrants, and some of these options are not traded and arebased on real assets, (projects, patents, and oil reserves are examples).

Firm Valuation: Cost of Capital and Adjusted Present Value Approaches

The preceding two chapters examined two approaches to valuing the equity in the firm

the dividend discount model and thefree cash flow to equity (FCFE) valuation model. This chapter examines approaches to valuation in which the entire firm is

valued, by either discounting the cumulated cash flows to all claim holders in the firm by the weighted average cost of capital(the cost of capital approach) or by adding the marginal impact of debt on value to the unlevered firm valuethe adjusted

present value (APV) approach.

In the process of looking at firm valuation, we also look at how leverage may or may not affect firm value. We note that inthe presence of default risk, taxes, and agency costs, increasing leverage can sometimes increase firm value and sometimes

decrease it. In fact, we argue that the optimal financing mix for a firm is the one that maximizes firm value.

Fundamental Principles of Relative Valuation

In discounted cash flow valuation, the objective is to find the value of assets, given their cash flow, growth, and riskcharacteristics. In relative valuation, the objective is to value assets based on how similar assets are currently priced in the

market. While multiples are easy to use and intuitive, they are also easy to misuse. Consequently, a series of tests are developedin this chapter that can be used to check that multiples are correctly used.

There are two components to relative valuation. The first is that, to value assets on a relative basis, prices have to be

standardized, usually by converting prices into multiples of earnings, book values, or sales. The second is to find similar firms,which is difficult to do since no two firms are identical and firms in the same business can still differ on risk, growth potential,and cash flows. The question of how to control for these differences, when comparing pricing across several firms, becomes akey one.

TakeoverFrom Wikipedia, the free encyclopedia

This article is about the business term. For the science fiction series, seeHostile Takeover Trilogy.For other

uses, seeTakeover (disambiguation).

This article needs additional citations for verification. Please helpimprove this

articlebyadding citations to reliable sources.Unsourced material may

bechallengedandremoved.(March 2008)

The examples and perspective in this article may not represent aworldwide viewof

the subject. Pleaseimprove this articleand discuss the issue on thetalk

page.(December 2010)

In business, a takeoveris the purchase of onecompany(the target) by another (the acquirer, or bidder). InUK,

the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast

to theacquisitionof aprivate company.

Contents
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[hide]

1 Types of takeover

o 1.1 Friendly takeovers

o 1.2 Hostile takeovers

o 1.3 Reverse takeovers

o 1.4 Backflip takeovers

2 Financing a takeover

o 2.1 Funding

o 2.2 Loan note alternatives

o 2.3 All share deals

3 Mechanics

o 3.1 In the United Kingdom

4 Strategies

5 Agency Problems

6 Pros and cons of takeover

7 Occurrence

8 Tactics against hostile takeover

9 See also

10 References

11 External links

Types of takeover[edit]

Friendly takeovers[edit]

A "friendly takeover" is an acquisition which is approved by the management. Before a bidder makes

anofferfor another company, it usually first informs the company'sboard of directors.In an ideal world, if the

board feels that accepting the offer serves theshareholdersbetter than rejecting it, it recommends the offer be

accepted by the shareholders.

In a private company, because the shareholders and the board are usually the same people or closely

connected with one another, private acquisitions are usually friendly. If the shareholders agree to sell the

company, then the board is usually of the same mind or sufficiently under the orders of the equity shareholders

to cooperate with the bidder. This point is not relevant to the UK concept of takeovers, which always involve the

acquisition of a public company.

Hostile takeovers[edit]
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A "hostile takeover" allows a suitor to take over a target company whosemanagementis unwilling to agree to

amergeror takeover. A takeover is considered "hostile" if the target company's board rejects the offer, but the

bidder continues to pursue it, or the bidder makes the offer directly after having announced its firm intention to

make an offer. Development of the hostile tender is attributed toLouis Wolfson.

A hostile takeover can be conducted in several ways. Atender offercan be made where the acquiring company

makes a public offer at a fixed price above the currentmarket price.Tender offers in the United States are

regulated by theWilliams Act.An acquiring company can also engage in aproxy fight,whereby it tries to

persuade enough shareholders, usually asimple majority,to replace the management with a new one which

will approve the takeover. Another method involves quietly purchasing enough stock on the open market,

known as a "creeping tender offer", to effect a change in management. In all of these ways, management

resists the acquisition, but it is carried out anyway.

The main consequence of a bid being considered hostile is practical rather than legal. If the board of the target

cooperates, the bidder can conduct extensivedue diligenceinto the affairs of the target company, providing the

bidder with a comprehensive analysis of the target company's finances. In contrast, a hostile bidder will only

have more limited, publicly available information about the target company available, rendering the bidder

vulnerable to hidden risks regarding the target company's finances. An additional problem is that takeovers

often require loans provided bybanksin order to service the offer, but banks are often less willing to back a

hostile bidder because of the relative lack of target information which is available to them.

Reverse takeovers[edit]

A "reverse takeover"is a type of takeover where a private company acquires a public company. This is usually

done at the instigation of the larger, private company, the purpose being for the private company to

effectivelyfloatitself while avoiding some of the expense and time involved in a conventionalIPO.However, in

theUKunderAIMrules, a reverse take-over is an acquisition or acquisitions in a twelve-month period which for

an AIM company would:

exceed 100% in any of the class tests; or

result in a fundamental change in its business, board or voting control; or

in the case of an investing company, depart substantially from the investing strategy stated in its admission

document or, where no admission document was produced on admission, depart substantially from the

investing strategy stated in its pre-admission announcement or, depart substantially from the investing

strategy.

An individual or organization, sometimes known ascorporate raider,can purchase a large fraction of the

company's stock and, in doing so, get enough votes to replace the board of directors and theCEO.With a new
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agreeable management team, the stock is a much more attractive investment, which would likely result in a

price rise and aprofitfor the corporate raider and the other shareholders.

Backflip takeovers[edit]

A "backflip takeover" is any sort of takeover in which the acquiring company turns itself into asubsidiaryof thepurchased company. This type of takeover can occur when a larger but less well-known company purchases a

struggling company with a very well-known brand such asTexas Air Corporationtakeover ofContinental

Airlinesbut taking the Continental name as it was better known.

Financing a takeover[edit]

Funding[edit]

Often a company acquiring another pays a specified amount for it. This money can be raised in a number of

ways. Although the company may have sufficient funds available in its account, remitting payment entirely from

the acquiring company's cash on hand is unusual. More often, it will beborrowedfrom abank,or raised by an

issue ofbonds.Acquisitions financed through debt are known asleveraged buyouts,and the debt will often be

moved down onto thebalance sheetof the acquired company. The acquired company then has to pay back the

debt. This is a technique often used by private equity companies. The debt ratio of financing can go as high as

80% in some cases. In such a case, the acquiring company would only need to raise 20% of the purchase

price.

Loan note alternatives[edit]

Cash offers forpublic companiesoften include a "loan note alternative" that allows shareholders to take a part

or all of theirconsiderationinloan notesrather than cash. This is done primarily to make the offer more

attractive in terms oftaxation.A conversion of shares into cash is counted as a disposal that triggers a payment

ofcapital gains tax,whereas if the shares are converted into othersecurities,such as loan notes, the tax is

rolled over.

All share deals[edit]

A takeover, particularly areverse takeover,may be financed by anall share deal.The bidder does not pay

money, but instead issues newsharesin itself to the shareholders of the company being acquired. In a reverse

takeover the shareholders of the company being acquired end up with a majority of the shares in, and so

control of, the company making the bid. The company has managerial rights.

Mechanics[edit]

In the United Kingdom[edit]
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Takeovers in the UK (meaning acquisitions of public companies only) are governed by theCity Code on

Takeovers and Mergers,also known as the 'City Code' or 'Takeover Code'. The rules for a takeover can be

found in what is primarily known as 'The Blue Book'. The Code used to be a non-statutory set of rules that was

controlled by city institutions on a theoretically voluntary basis. However, as a breach of the Code brought such

reputational damage and the possibility of exclusion from city services run by those institutions, it was regarded

as binding. In 2006, the Code was put onto a statutory footing as part of the UK's compliance with

theEuropean Takeover Directive(2004/25/EC).[1]

The Code requires that all shareholders in a company should be treated equally. It regulates when and what

information companies must and cannot release publicly in relation to the bid, sets timetables for certain

aspects of the bid, and sets minimum bid levels following a previous purchase of shares.

In particular:

a shareholder must make an offer when its shareholding, including that of parties acting in concert (a

"concert party"), reaches 30% of the target;

information relating to the bid must not be released except by announcements regulated by the Code;

the bidder must make an announcement if rumour or speculation have affected a company's share price;

the level of the offer must not be less than any price paid by the bidder in the three months before the

announcement of a firm intention to make an offer;

if shares are bought during the offer period at a price higher than the offer price, the offer must be

increased to that price;

The Rules Governing the Substantial Acquisition of Shares, which used to accompany the Code and which

regulated the announcement of certain levels of shareholdings, have now been abolished, though similar

provisions still exist in theCompanies Act 1985.

Strategies[edit]

There are a variety of reasons why an acquiring company may wish to purchase another company. Some

takeovers are opportunistic- the target company may simply be very reasonably priced for one reason or

another and the acquiring company may decide that in the long run, it will end up making money by purchasing

the target company. The largeholding companyBerkshire Hathawayhas profited well over time by purchasing

many companies opportunistically in this manner.

Other takeovers are strategicin that they are thought to have secondary effects beyond the simple effect of the

profitability of the target company being added to the acquiring company's profitability. For example, an

acquiring company may decide to purchase a company that is profitable and has gooddistributioncapabilities

in new areas which the acquiring company can use for its own products as well. A target company might be
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attractive because it allows the acquiring company to enter a new market without having to take on the risk,

time and expense of starting a new division. An acquiring company could decide to take over a competitor not

only because the competitor is profitable, but in order to eliminate competition in its field and make it easier, in

the long term, to raise prices. Also a takeover could fulfill the belief that the combined company can be more

profitable than the two companies would be separately due to a reduction of redundant functions.

Agency Problems[edit]

Takeovers may also benefit fromprincipalagent problemsassociated with top executive compensation. For

example, it is fairly easy for a top executive to reducethe price of his/her company's stock due toinformation

asymmetry.The executive can accelerate accounting of expected expenses, delay accounting of expected

revenue, engage inoff balance sheettransactions to make the company's profitability appear temporarily

poorer, or simply promote and report severely conservative (e.g. pessimistic) estimates of future earnings.

Such seemingly adverse earnings news will be likely to (at least temporarily) reduce share price. (This is again

due to information asymmetries since it is more common for top executives to do everything they can

towindow dresstheir company's earnings forecasts). There are typically very few legal risks to being 'too

conservative' in one's accounting and earnings estimates.

A reduced share price makes a company an easier takeover target. When the company gets bought out (or

taken private) at a dramatically lower price the takeover artist gains a windfall from the former top

executive's actions to surreptitiously reduce share price. This can represent tens of billions of dollars

(questionably) transferred from previous shareholders to the takeover artist. The former top executive is then

rewarded with agolden handshakefor presiding over thefire salethat can sometimes be in the hundreds of

millions of dollars for one or two years of work. (This is nevertheless an excellent bargain for the takeover artist,

who will tend to benefit from developing a reputation of being very generous to parting top executives). This is

just one example of some of theprincipal-agent/perverse incentiveissues involved with takeovers.

Similar issues occur when a publicly held asset or non-profit organization undergoesprivatization.Top

executives often reap tremendous monetary benefits when a government owned or non-profit entity is sold to

private hands. Just as in the example above, they can facilitate this process by making the entity appear to be

in financial crisis. This perception can reduce the sale price (to the profit of the purchaser) and make non-profits

and governments more likely to sell. It can also contribute to a public perception that private entities are more

efficiently run, reinforcing the political will to sell off public assets.

Pros and cons of takeover[edit]

While pros and cons of a takeover differ from case to case, there are a few reoccurring ones worth mentioning.

Pros:
http://en.wikipedia.org/w/index.php?title=Takeover&action=edit&section=13http://en.wikipedia.org/w/index.php?title=Takeover&action=edit&section=13http://en.wikipedia.org/w/index.php?title=Takeover&action=edit&section=13http://en.wikipedia.org/wiki/Principal%E2%80%93agent_problemhttp://en.wikipedia.org/wiki/Principal%E2%80%93agent_problemhttp://en.wikipedia.org/wiki/Principal%E2%80%93agent_problemhttp://en.wikipedia.org/wiki/Principal%E2%80%93agent_problemhttp://en.wikipedia.org/wiki/Principal%E2%80%93agent_problemhttp://en.wikipedia.org/wiki/Information_asymmetryhttp://en.wikipedia.org/wiki/Information_asymmetryhttp://en.wikipedia.org/wiki/Information_asymmetryhttp://en.wikipedia.org/wiki/Information_asymmetryhttp://en.wikipedia.org/wiki/Off_balance_sheethttp://en.wikipedia.org/wiki/Off_balance_sheethttp://en.wikipedia.org/wiki/Off_balance_sheethttp://en.wikipedia.org/wiki/Window_dresshttp://en.wikipedia.org/wiki/Window_dresshttp://en.wikipedia.org/wiki/Window_dresshttp://en.wikipedia.org/wiki/Golden_handshakehttp://en.wikipedia.org/wiki/Golden_handshakehttp://en.wikipedia.org/wiki/Golden_handshakehttp://en.wikipedia.org/wiki/Fire_salehttp://en.wikipedia.org/wiki/Fire_salehttp://en.wikipedia.org/wiki/Fire_salehttp://en.wikipedia.org/wiki/Principal-agenthttp://en.wikipedia.org/wiki/Principal-agenthttp://en.wikipedia.org/wiki/Principal-agenthttp://en.wikipedia.org/wiki/Perverse_incentivehttp://en.wikipedia.org/wiki/Perverse_incentivehttp://en.wikipedia.org/wiki/Perverse_incentivehttp://en.wikipedia.org/wiki/Privatizationhttp://en.wikipedia.org/wiki/Privatizationhttp://en.wikipedia.org/wiki/Privatizationhttp://en.wikipedia.org/w/index.php?title=Takeover&action=edit&section=14http://en.wikipedia.org/w/index.php?title=Takeover&action=edit&section=14http://en.wikipedia.org/w/index.php?title=Takeover&action=edit&section=14http://en.wikipedia.org/w/index.php?title=Takeover&action=edit&section=14http://en.wikipedia.org/wiki/Privatizationhttp://en.wikipedia.org/wiki/Perverse_incentivehttp://en.wikipedia.org/wiki/Principal-agenthttp://en.wikipedia.org/wiki/Fire_salehttp://en.wikipedia.org/wiki/Golden_handshakehttp://en.wikipedia.org/wiki/Window_dresshttp://en.wikipedia.org/wiki/Off_balance_sheethttp://en.wikipedia.org/wiki/Information_asymmetryhttp://en.wikipedia.org/wiki/Information_asymmetryhttp://en.wikipedia.org/wiki/Principal%E2%80%93agent_problemhttp://en.wikipedia.org/w/index.php?title=Takeover&action=edit&section=13


13/14

1. Increase in sales/revenues (e.g.Procter & Gambletakeover ofGillette)

2. Venture into new businesses and markets

3. Profitability of target company

4. Increase market share

5. Decreased competition (from the perspective of the acquiring company)

6. Reduction of overcapacity in the industry

7. Enlarge brand portfolio (e.g.L'Oral's takeover ofBody Shop)

8. Increase ineconomies of scale

9. Increased efficiency as a result of corporate synergies/redundancies (jobs with overlapping

responsibilities can be eliminated, decreasing operating costs)

Cons:

1. Goodwill,often paid in excess for the acquisition

2. Culture clashes within the two companies causes employees to be less-efficient or despondent

3. Reduced competition and choice for consumers inoligopolymarkets. (Bad for consumers, although

this is good for the companies involved in the takeover)

4. Likelihood of job cuts

5. Cultural integration/conflict with new management

6. Hidden liabilities of target entity

7. The monetary cost to the company

8. Lack of motivation for employees in the company being bought.

Takeovers also tend to substitute debt for equity. In a sense, any government tax policy of allowing for

deduction of interest expenses but not ofdividends,has essentially provided a substantial subsidy to

takeovers. It can punish more-conservative or prudent management that do not allow their companies

toleveragethemselves into a high-risk position. High leverage will lead to high profits if circumstances go well,

but can lead to catastrophic failure if circumstances do not go favorably. This can create substantialnegative

externalitiesfor governments, employees, suppliers and otherstakeholders.

Occurrence[edit]

See also:Golden share

Corporate takeovers occur frequently in theUnited States,Canada,United Kingdom,FranceandSpain.They

happen only occasionally inItalybecause larger shareholders (typically controlling families) often have special

board voting privileges designed to keep them in control. They do not happen often inGermanybecause of

thedual boardstructure, nor inJapanbecause companies have interlocking sets of ownerships known
http://en.wikipedia.org/wiki/Procter_%26_Gamblehttp://en.wikipedia.org/wiki/Procter_%26_Gamblehttp://en.wikipedia.org/wiki/Procter_%26_Gamblehttp://en.wikipedia.org/wiki/The_Gillette_Companyhttp://en.wikipedia.org/wiki/The_Gillette_Companyhttp://en.wikipedia.org/wiki/The_Gillette_Companyhttp://en.wikipedia.org/wiki/L%27Or%C3%A9alhttp://en.wikipedia.org/wiki/L%27Or%C3%A9alhttp://en.wikipedia.org/wiki/L%27Or%C3%A9alhttp://en.wikipedia.org/wiki/Body_Shophttp://en.wikipedia.org/wiki/Body_Shophttp://en.wikipedia.org/wiki/Body_Shophttp://en.wikipedia.org/wiki/Economies_of_scalehttp://en.wikipedia.org/wiki/Economies_of_scalehttp://en.wikipedia.org/wiki/Economies_of_scalehttp://en.wikipedia.org/wiki/Goodwill_(accounting)http://en.wikipedia.org/wiki/Goodwill_(accounting)http://en.wikipedia.org/wiki/Oligopolyhttp://en.wikipedia.org/wiki/Oligopolyhttp://en.wikipedia.org/wiki/Oligopolyhttp://en.wikipedia.org/wiki/Dividendhttp://en.wikipedia.org/wiki/Dividendhttp://en.wikipedia.org/wiki/Dividendhttp://en.wikipedia.org/wiki/Leverage_(finance)http://en.wikipedia.org/wiki/Leverage_(finance)http://en.wikipedia.org/wiki/Leverage_(finance)http://en.wikipedia.org/wiki/Negative_externalitieshttp://en.wikipedia.org/wiki/Negative_externalitieshttp://en.wikipedia.org/wiki/Negative_externalitieshttp://en.wikipedia.org/wiki/Negative_externalitieshttp://en.wikipedia.org/wiki/Stakeholder_(corporate)http://en.wikipedia.org/wiki/Stakeholder_(corporate)http://en.wikipedia.org/wiki/Stakeholder_(corporate)http://en.wikipedia.org/w/index.php?title=Takeover&action=edit&section=15http://en.wikipedia.org/w/index.php?title=Takeover&action=edit&section=15http://en.wikipedia.org/w/index.php?title=Takeover&action=edit&section=15http://en.wikipedia.org/wiki/Golden_sharehttp://en.wikipedia.org/wiki/Golden_sharehttp://en.wikipedia.org/wiki/Golden_sharehttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Francehttp://en.wikipedia.org/wiki/Francehttp://en.wikipedia.org/wiki/Francehttp://en.wikipedia.org/wiki/Spainhttp://en.wikipedia.org/wiki/Spainhttp://en.wikipedia.org/wiki/Spainhttp://en.wikipedia.org/wiki/Italyhttp://en.wikipedia.org/wiki/Italyhttp://en.wikipedia.org/wiki/Italyhttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/Dual_boardhttp://en.wikipedia.org/wiki/Dual_boardhttp://en.wikipedia.org/wiki/Dual_boardhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/Dual_boardhttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/Italyhttp://en.wikipedia.org/wiki/Spainhttp://en.wikipedia.org/wiki/Francehttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Golden_sharehttp://en.wikipedia.org/w/index.php?title=Takeover&action=edit&section=15http://en.wikipedia.org/wiki/Stakeholder_(corporate)http://en.wikipedia.org

Documents

Copy of Valuation