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Corporate Governance: Changes in the Corporate World (Bangladeshi
Context)
This lecture talks about how corporate governance is changing, especially with takeovers
and more competition.
1. Uncertainty and Worry
Companies can't just make stakeholders happy anymore (like employees, customers).
They also face:
Scandals: Hidden problems can damage a company's image.
o Example: A food company in Bangladesh secretly using harmful ingredients,
leading to a public health scare.
Hostile Takeovers: Being bought by another company, even if management
doesn't want it.
2. Are Takeovers Good or Bad?
Opinions differ:
Good: Fix poorly managed companies.
Bad: Buyers profit at the public's expense.
3. Mergers and Acquisitions (M&A)
Acquisition: One company buys another, and the bought company disappears.
o Example: Beximco Pharma buying a smaller pharmaceutical company, which
then ceases to operate under its original name.
Merger: Two companies join to form a new one.
o Example: Two insurance companies in Bangladesh combining to become a
larger, more competitive insurer.
4. M&A Trends
The PDF mentions M&A trends in the USA.
Key takeaway: M&A activity goes up and down depending on the economy.
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5. Types of Mergers
The PDF lists Horizontal, Vertical, etc.
Horizontal: Gain market share (e.g., two telecom companies merging).
Vertical: Control supply chain (e.g., a garment factory buying a dyeing mill).
Diversified: Enter new industries (less common in Bangladesh).
6. Competition Law
M&A is legal as long as it doesn't create monopolies or hurt competition.
7. Friendly vs. Hostile Takeover
Friendly: Management approves the sale.
Hostile: Management rejects, but buyer keeps trying.
o Bangladeshi Context: Hostile takeovers are not common in Bangladesh.
Deals are usually negotiated.
8. Difference: Friendly vs. Hostile
Legally, no difference. Hostile takeovers are riskier as the buyer has less
information.
9. Hostile Takeovers & Leveraged Buyouts (LBOs)
Takeover: One company buys another.
LBO: Buying a company using mostly borrowed money.
o Bangladeshi Context: LBOs are not very common in Bangladesh.
10. Leveraged Buyout (LBO) Explained
A firm buys a company using a small amount of its own money and a lot of debt.
The company's cash flow is used to repay the debt.
11. How Hostile Takeovers Work
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1. Raider: An investor tries to take over a company against management's will.
2. Private Equity Firms: These firms often handle LBOs.
12. Selecting a Target
The raider thinks the target company's stock is undervalued.
13. Offer - The First Step
The raider offers to buy a controlling share at a higher price. This is usually done
with borrowed money.
14. Raising Private Equity
Private equity firms raise money through private equity funds.
15. Premium of Hostile Takeover
Raiders usually pay 15-50% more than the current stock price.
Golden Parachute: Payments to executives if they are forced out.
The buyout is usually financed with a lot of debt.
16. Takeover Defenses
Ways a company can protect itself.
Pre-emptive: Steps taken before a threat.
Reactionary: Steps taken after a threat.
State intervention: Government action.
17. Pre-emptive Defenses
Poison Pill: Making the company less attractive to a buyer.
o Example: Giving shareholders the right to buy the acquirer's stock at a
discount.
18. More Pre-emptive Defenses
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Supermajority Rules: Requiring a high percentage of shareholders to approve a
takeover.
Staggered Boards: Electing only a few board members each year.
Golden Parachute: Automatic payment to managers if they are ousted.
19. Reactionary Takeover Defenses
Greenmail: Paying off the raider to go away.
Convincing Shareholders: Arguing that the offer price is too low.
20. More Reactionary Defenses
White Knight: Finding a friendly buyer to make a better offer.
21. Government Intervention
Freeze Out Laws: Requiring a waiting period before a buyer can merge the target
with its own assets.
Fair Price Laws: Ensuring all shareholders get the same price.
22. More State Interventions
Poison Pill Endorsement Laws: Protecting poison pills.
Control Share Acquisition: Requiring shareholder approval before a bidder can
vote his shares.
Constituency Statute: Considering the interests of stakeholders like employees.
23. Post-Takeover Measures
Management changes, cost-cutting, selling assets.
The raider usually sells the company later (to another company, through an IPO,
etc.).
24. Who Gains and Who Loses?
Gains: Raiders, original shareholders (if they sell early).
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Losses: Incumbent management, workers, potentially other stakeholders.
25. Impact on the Economy and Corporate Management
Supporters: Takeovers improve management and make the economy more
competitive.
26. Advantages of Takeover
Takeovers help control managers of large corporations.
27. Criticism of Takeover
Not all takeovers are successful.
Raids are often based on short-term profit.
28. More Criticism
Gains may come at the expense of workers.
High debt can lead to bankruptcy.
29. More Criticism
Takeover doesn't always mean management is bad.
The acquiring firm's stock price doesn't always increase.
30. More Criticism
Takeover can contradict free market theory.
Managers with big egos may engage in takeovers.
31. More Criticism
The threat of takeover can lead to short-term focus.
Companies may spend too much time fighting takeovers instead of improving their
business.
32. Conclusion
The debate is about how well the market works.
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Takeovers can help keep management in check.
Bangladeshi Context: While not as prevalent as in developed economies, these
concepts are relevant as Bangladesh's corporate sector grows and becomes more
integrated into the global economy. Strengthening corporate governance and
competition policy is important for sustainable economic development.
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