Exam Prep Ch17 Governance & Global Corp Control

Chapter 17 Corporate Governance and the International Market for Corporate Control

Notes to instructors:

Answers to non-numeric multiple choice questions are arranged alphabetically, so that answers are randomly assigned to the five outcomes.

/

1. Corporate governance refers to the way in which stakeholders exert control over the modern corporation.

2. The Anglo-American model of corporate governance is characterized by dispersed equity ownership, a large proportion of public debt and equity, and an independent management team.

3. Bank-based corporate governance systems rely on bank loans and close monitoring of management by banks but do not rely on equity investments on the part of banks.

Bank-based systems rely on bank ownership of both debt and equity capital.

4. Corporate takeovers within Japanese keiretsu usually are public affairs conducted through the capital markets.

Japanese takeovers are managed by the corporation’s main bank or keiretsu partners.

5. The typical NYSE firm in the United States has a board of directors that is primarily drawn from the ranks of management.

Large U.S. corporations typically have boards that are at least half outside directors.

6. Market-based systems of corporate governance have supervisory boards that represent a dispersed set of shareholders and often include outside directors.

7. Bank-based systems of corporate governance have supervisory boards that are usually dominated by bankers and other corporate insiders.

8. Historically, banks in the United States have faced fewer legal and regulatory constraints on how and where they conduct their business than banks in Germany and Japan.

The growth of U.S. banks has been restricted by federal and state banking laws.

9. The ratio of the assets of the largest U.S. commercial banks to U.S. gross domestic product (GDP) exceeds the asset/GDP ratios of China, Germany, Japan, and the United Kingdom.

The growth of U.S. banks has been restricted by federal and state banking laws.

10. Commercial banks in Germany face relatively few legal constraints on how much stock they are allowed to own in a particular corporation.

11. Commercial banks in Japan face relatively few legal constraints on how much stock they are allowed to own in a particular corporation.

Japanese banks may own no more than 5 percent of the stock of any single company.

12. Commercial banks in the United States face relatively few legal constraints on how much stock they are allowed to own in a particular corporation.

U.S. banks are not allowed to own equity for their own account.

13. Hostile acquisitions are more common in Germany and Japan because of the concentration of equity ownership in the hands of only a few equity owners.

This makes it much more difficult to acquire a company through a hostile takeover.

14. The biggest barrier to a foreign acquisition of a Japanese company is the requirement that the Japanese Ministry of Finance and the Japanese Fair Trade Commission be notified of the offer.

Reciprocal business relationships and share cross-holdings are more formidable barriers.

15. The costs of monitoring management and ensuring that they act in the best interest of other stakeholders are called agency costs.

16. Comparative studies of executive turnover typically find evidence of cross-country similarities in how top management is replaced.

The evidence suggests that there are similarities in why and when, but not how.

17. In Japan, the national government usually takes the initiative in replacing top executives.

Either the main bank or the firm’s business partners take the lead.

18. In Germany, the lead bank often takes the initiative in replacing top executives.

19. China’s business sectors includes a state sector of partially privatized and exchange-listed state-owned enterprises (SOEs).

Partially privatized exchange-listed SOEs are in the listed sector.

20. China’s listed sector includes partially privatized exchange-listed state-owned enterprises (SOEs).

21. China’s banks have been constrained by intrusive government regulation and do not yet have a large role in China’s financial industry.

China’s four largest banks control nearly half of China’s banking assets and are very prominent in the corporate boardrooms of state-owned enterprises (SOEs).

22. China has fully privatized its four largest banks in an effort to allow the banking industry to grow along with the economy.

The Chinese government maintains a controlling interest in these banks.

23. In studies of U.S. acquisitions of foreign firms, shareholders of target firms typically capture large positive gains at the time of the acquisition announcement whereas shareholders of acquiring firms typically do not gain.

Both acquiring and target firm shareholders are likely to gain in cross-border acquisitions.

24. Returns to acquiring firms are negatively correlated with the profitability of the acquiring firm in cross-country mergers and acquisitions.

25. Empirical studies generally confirm that the level of foreign acquisitions by domestic firms is positively related to the real value of the domestic currency.

26. Tunneling refers to the expropriation of corporate assets by controlling stakeholders.

27. Tunneling is a mechanism for resolving the agency problems that exist between managers and other stakeholders of the firm.

Tunneling refers to expropriation from minority shareholders by controlling stakeholders.

Multiple Choice Select the BEST ANSWER

1. Corporate governance refers to ____.

a. the model corporation as characterized by the World Bank

b. the role of top managers as the shepherds of the corporation

c. the organizational chart

d. the way in which stakeholders exert control over the corporation

e. none of the above

2. The “Anglo-American” model of corporate governance is characterized by ____.

a. a patriarchal top management team

b. a separate division for the Treasury and the Controller

c. concentrated bank ownership and bank monitoring of the management team

d dispersed equity ownership and a relatively independent management team

e. none of the above

3. The system of corporate governance used in Germany and Japan relies on ____.

a. a patriarchal top management team

b. a separate division for the Treasury and the Controller

c. concentrated bank ownership and bank monitoring of the management team

d dispersed equity ownership and a relatively independent management team

e. none of the above

4. In Japan, a network of companies linked through equity share cross-holdings and through customer/supplier relations is called a ____.

a. gaijin

b. keiretsu

c. mushi mushi

d. soju

e. wakarimasen

5. In Korea, a horizontally diversified network of related companies is called a ____.

a. bulgogi

b. chaebol

c. chop chae

d. galbi

e. kimchi

6. In Japan, corporate share cross-holdings contribute to ____.

a. a move to break up the Japanese keiretsu in favor of arms-length business transactions

b. an active market for mergers and acquisitions

c. close inter-firm cooperation

d. three of the above

e. both a and c

7. In Japanese keiretsu, corporate takeovers typically ____.

a. are aggressive, financially motivated, arm’s-length deals

b. are managed by the corporation’s main bank and keiretsu partners

c. involve outside investors and outside corporations

d. all of the above

e. none of the above

8. The supervisory board of a large German corporation typically ____.

a. includes management

b. includes government representatives

c. includes representatives of banks and of labor

d. all of the above

e. both a and c

9. The ratio of assets controlled by the three largest banks to GNP is highest in ____.

a. China

b. Germany

c. Japan

d. United Kingdom

e. United States

10. Historically, which of the following activities have been prohibited for U.S. banks?

a. engaging in investment banking activities

b. making a market in equity securities

c. owning stock for their own account

d. voting shares held in trust for other investors

e. Banks have been prohibited from all of the above.

11. The most important voice on the supervisory boards of large German corporations is that of ____.

a. banks

b. employees

c. government representatives

d. managers

e. stockholders

12. German banks control equity capital in which of the following ways?

a. through bank-controlled mutual funds and investment companies

b. through investment banking activities

c. through ownership of equity for their own account

d. through the shares of their banking clients

e. all of the above

13. The importance of commercial banks in Japanese corporate governance is ____.

a. greater than in Germany and the United States

b. less than in Germany and the United States

c. greater than in Germany but less than that in the United States

d. greater than in the United States but less than that in Germany

e. about the same as in Germany and the United States

14. China’s business sectors include each of (a) through (d) EXCEPT ____.

a. A “listed” sector of partially privatized exchange-listed state-owned enterprises (SOEs).

b. A “private” sector of family- and publicly-owned firms with no government ownership.

c. A “Red” sector of government-owned firms that are now exchange-listed listed in Hong Kong.

d. A “state” sector of wholly government-owned businesses.

e. China’s business sectors include each of the above.

15. In modern Japan, collaborative groups of vertically or horizontally integrated companies with extensive cross-holdings of each other’s shares and with a major Japanese bank or corporation at the center are called ____.

a. gaijin

b. keiretsu

c. wakarimashita

d. wasabi

e. none of the above

16. Hostile acquisitions conducted through the financial markets are most common in ____.

a. China

b. Germany

c. Japan

d. Mexico

e. the United Kingdom

17. Barriers against hostile foreign acquisitions of firms in Japanese keiretsu include ____.

a. exchanges of employees between companies

b. interlinked supervisory boards

c. reciprocal share cross-holdings with other business partners

d. three of the above

e. two of the above

18. The strongest barrier against hostile foreign acquisitions of German companies is from ____.

a. a cultural aversion to hostile and aggressive social behavior

b. a requirement that foreign bidders notify the European Union of their intended purchase

c. reciprocal share cross-holdings with other corporations

d. the German predilection for order and cleanliness

e. the structure of the supervisory board

19. Large, family-controlled businesses are most commonly found in _____.

a. China

b. Germany

c. Japan

d. Mexico

e. the United States

20. Who usually wins in domestic U.S. takeovers?

a. managers of the target firm

b. shareholders of the acquiring firm

c. shareholders of the target firm

d. three of the above

e. two of the above

21. In less-competitive domestic M&A markets, winners often include which of the following?

a. managers of the target firm

b. shareholders of the acquiring firm

c. shareholders of the target firm

d. all of the above

e. both b and c

22. Empirical evidence from cross-border acquisitions suggests that the gain to shareholders of acquiring firms is ____.

a. negatively related to the profitability of the acquiring firm

b. negatively related to the profitability of the target firm

c. positively related to the profitability of the acquiring firm

d. positively related to the profitability of the target firm

e. independent of the profitability of the acquiring and target firms

23. The level of domestic acquisitions of foreign firms is ____.

a. negatively related to the real value of the domestic currency

b. positively related to the real value of the domestic currency

c. negatively related to the level of domestic interest rates

d. negatively related to the level of foreign interest rates

e. none of the above

24. The level of domestic acquisitions of foreign firms is ____.

a. negatively related to the real value of the domestic currency

b. positively related to the real value of the domestic currency

c. negatively related to the level of domestic interest rates

d. negatively related to the level of foreign interest rates

e. none of the above

Problems (These can be converted into Multiple Choice questions.)

1. Bavarian Versicherung (BV) of Germany acquires Napobank of France. The market value of BV stock on the Frankfurt exchange is €1 billion. Napobank’s equity trades in Paris for €200 million. BV pays a 25 percent acquisition premium to acquire Napobank. The synergy created through the combination of the two financial institutions adds 5 percent to the value of the combined firm. How much are BV’s shareholders likely to gain or lose through this acquisition?

a. Calculate the implied synergy in the deal.

b. Calculate the acquisition premium.

c. Calculate the gain or loss to BV shareholders.

2. Rumors of a Vodafone (UK) offer for Mannesmann (Germany) surfaced on October 20, 1999. Vodafone eventually offered €266 per share. Mannesmann decided to accept the deal on December 17, 1999. Answer the questions below based on the following information.

October 21, 1999 December 17, 1999

Vodafone Mannesmann Vodafone Mannesmann

Share price £2.70 €145 £3.11 €234

# of shares 31 billion 518 million 31 billion 518 million

FX rate (£/€) £0.6450/€ £0.6274/€

a. Calculate the implied synergy in the deal in pounds sterling (£).

b. Calculate the acquisition premium in pounds sterling (£).

c. Calculate the gain or loss to Vodafone shareholders in pounds sterling (£).

Problem Solutions

1. The preacquisition value of the two firms is €1.2 billion. Synergy is 5 percent of this value, or (0.05)(€1.2 billion) = €60 million. After subtracting the (0.25)(€200 million) = €50 million acquisition premium from the €60 million synergy, BV shareholders are likely to see a €10 million gain, or (€10 million)/(€1 billion) = 1 percent increase in share value.

a. V_A = €1.0 billion and V_T = €0.2 billion

V_AT = (1.05) × [(€1.0 billion) + (€0.2 billion)] = €1.26 billion

Synergy = V_AT – (V_A + V_T) = €1.26 billion – [(€1.0 billion) + (€0.2 billion)] = €60 million

b. Purchase price = (1.25) × (€200 million) = €250 million

Acquisition premium = Purchase price – V_T = €250 million – €200 million = €50 million

c. Gain to acquiring firm = Synergy – Acquisition premium = €60 million – €50 million = €10 million

In this acquisition, BV shareholders received a proportionally small NPV on their investment.

2. a. V_AT = (£96.41 billion + £76.05 billion) = £172.46 billion

V_A = (£2.70/share)(31 billion shares) = £83.70 billion

V_T = (€145/share)(518 million shares)(£0.6450/€) = £48.45 billion

Synergy = V_AT – (V_A + V_T) = £172.46 billion – [(£83.70 billion) + (£48.45 billion)] = £40.31 billion

b. Purchase price = (€266/share)(518 million shares)(£0.6450/€) = £39.32 billion

Acquisition premium = Purchase price – V_T = €250 million – €200 million = €50 million

b. Acquisition premium = Purchase price – V_T

= (€266/share)(518 million shares)(£0.6450/€) = £39.32 billion

c. Gain to acquiring firm (Vodafone) = Synergy – Acquisition premium

= (£40.31 billion) – (£39.32 billion) = £0.98 billion

In this acquisition, Vodafone shareholders paid nearly full price for Mannesmann.