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Overview What is Finance Three Types of Business Organizations The Goal of the Financial Manager The Four Basic Principles of Finance

Learning Objectives Identify the 3 primary business decisions that financial managers make. Identify the key differences between 3 major legal forms of business. Understand the role of the financial manager within the firm and the goal for making financial choices. Memorize the 4 principles of finance that form the basis of financial management for both businesses and individuals.

What is Finance? Finance is the study of how people and businesses evaluate investments and raise capital to fund them. (-- How to get and use money) Three questions addressed by the study of finance What long-term investments should the firm undertake? (capital budgeting decisions – how to spend the money?) How should the firm fund these investments? (capital structure decisions -- How to get the money?) How can the firm best manage its cash flows as they arise in its day-to-day operations? (working capital management decisions – how to manage cash (liquid) money?)

Business Forms

Sole Proprietorship It is a business owned by a single individual that is entitled to all the firm’s profits and is responsible for all the firm’s debt. There is no separation between the business and the owner when it comes to debts or being sued. Sole proprietorships are generally financed by personal loans from family and friends and business loans from banks. Advantages: Easy to start No need to consult others while making decisions Taxed at the personal tax rate Disadvantages: Personally liable for the business debts Ceases on the death of the proprietor

Partnership A general partnership is an association of two or more persons who come together as co-owners for the purpose of operating a business for profit. There is no separation between the partnership and the owners with respect to debts or being sued. Advantages: Relatively easy to start Taxed at the personal tax rate Access to funds from multiple sources or partners Disadvantages: Partners jointly share unlimited liability

Limited Partnership In limited partnerships, there are two classes of partners: general and limited. The general partners runs the business and face unlimited liability for the firm’s debts, while the limited partners are only liable on the amount invested. One of the drawback of this form is that it is difficult to transfer the ownership of the general partner.

Corporation Corporation is “an artificial being, invisible, intangible, and existing only in the contemplation of the law.” Corporation can individually sue and be sued, purchase, sell or own property, and its personnel are subject to criminal punishment for crimes committed in the name of the corporation. Corporation is legally owned by its current stockholders. The Board of directors are elected by the firm’s shareholders. One responsibility of the board of directors is to appoint the senior management of the firm.

Corporation Pros & Cons Advantages Liability of owners limited to invested funds Life of corporation is not tied to the owner Easier to transfer ownership Easier to raise Capital Disadvantages Greater regulation Double taxation of dividends

Hybrid Organizations These organizational forms provide a cross between a partnership and a corporation. Limited liability company (LLC) combines the tax benefits of a partnership (no double taxation of earnings) and limited liability benefit of corporation (the owner’s liability is limited to what they invest). S-type corporation provides limited liability while allowing the business owners to be taxed as if they were a partnership – that is, distributions back to the owners are not taxed twice as is the case with dividends in the standard corporate form.

The Goal of the Financial Manager The goal of the financial manager must be consistent with the mission of the corporation. To maximize firm value shareholder’s wealth (as measured by share prices). While managers have to cater to all the stakeholders (such as consumers, employees, suppliers etc.), they need to pay particular attention to the owners of the corporation, i.e., shareholders. If managers fail to pursue shareholder wealth maximization, they will lose the support of investors and lenders. The business may cease to exist and ultimately, the managers will lose their jobs!

Corporate Mission Statements: Examples “To achieve sustainable growth, we have established a vision with clear goals: Maximizing return to shareholders while being mindful of our overall responsibilities” (part of Coca-Cola’s mission statement) “Our final responsibility is to our stockholders …when we operate according to these principles, the stockholders should realize a fair return” (part of Johnson & Johnson’s credo) “Optimize for the long-term rather than trying to produce smooth earnings for each quarter” -- Google.

Basic Principles of Finance Money has a time value. A dollar received today is more valuable than a dollar received in the future (due to interests, investment returns,…) There is a risk-return trade-off. One shall take extra risk only if one expects to be compensated for extra return. Cash flows are the source of value. Profit is an accounting concept designed to measure a business’s performance over an interval of time. Cash flow is the amount of cash that can actually be taken out of the business over this same interval. Market prices reflect information. Investors respond to new information by buying and selling their investments.

Financial Statement Nerves of a company…… Mirror for a company….

What is a Financial Statement? A financial statement is a quantitative way of showing how a company is doing. Three different ways of representing the financial state of a company: Cash Management (can the company meet its obligations?) Profitability (Is it making money?) - the income statement Assets versus Liabilities (what is the value of the company? Who owns what?) - the balance sheet Each one of these questions is answered by our Financial Statements.

The Big Three Cash Flow Statements These answer the important managerial question “do I have enough cash to run my business” Income Statements This is the financial sheet that tells you if your company is profitable or not. Balance Sheets How much debt do I have? How large are my assets? This sheet tells you the answer to these questions.

Cash Flow Statements A report of all a firm’s transactions that involve cash The key elements are revenues (money flowing in) and expenses (money flowing out). Cash flow statements compare the sum of the revenues to the sum of the expenses on a regular time basis – usually monthly.

What are Revenues? Sales Interest from firm’s investments (e.g., a company savings account) Royalty and Licensing payments for appropriate use of firm’s intellectual property Another source of cash inflow, but not a revenue is the cash the firm receives from borrowing money.

What are Expenses? There are two types of expenses: FIXED COSTS and VARIABLE COSTS

Fixed Costs Rent payments Salaried employees Capital Investments and (some) maintenance Utilities (phone, water, electric, etc) Insurance Taxes (on property, plant, and equipment) Advertising (*) Others things that do not depend on number of units produced.

Variable Costs Materials Cost Supplies Production Wages Outside / Contracted labor Advertising (*) Sales Commissions / Distribution Costs Equipment Maintenance Other things that depend on the number of units produced (e.g. royalties paid)

Putting it all together So, placing the revenues at the “top” and the expenses below – you get the following three month cash flow statement for a hypothetical startup:

Cash Flow (cont.) “Receipts” is the sum of all the firm’s sales and interest it collected that month Gross Margin is the Receipts minus the COGS Total Fixed Costs is the sum of all the fixed costs Monthly Cash flow is the Gross Margin minus the Total Fixed Costs

Answer: Simple Example If a company has sales of $500/mo, COGS of $200/mo, pays $50/mo in salary, and has no other fixed costs, what is that firm’s three month cash flow statement?

What’s Missing? Cumulative Cash Flow numbers Taxes (… and accumulated depreciation) Net Earnings

Cumulative Cash Flow - Cash Balance Just like the average person keeps their checking account balance – a firm also needs to know their cumulative cash flow or cash balance. It is an easy calculation – simply take the cumulative cash flow from this month and add it to the previous month’s cash balance. Your very first month’s cumulative cash balance is your first month’s monthly cash flow added to your start-up capital (probably an initial loan or first round financing).

EBI…. what? THE CHAIN OF EARNINGS EBIDT (Earnings Before Interest, Depreciation and Tax) EBIT (Earnings Before Interest and Tax) EBI TOTAL EARNINGS ( - accrued depreciation) ( - taxes paid once a year) ( - interest payments on your debt)

Non-depreciable Costs Capital Equip. (Depreciable Costs) EBITD = Revenues – (COGS + Salary + Rent + Phone + Advertising) EBIDT Your EBIDT (Earnings Before Interest Depreciation and Tax) is Total Revenues – All Costs that are not depreciable

Calculating Depreciation Continue depreciation on items purchased in earlier years, using previously established methods Sum up all of that fiscal year’s capital expenses Decide which method of Depreciation your firm wants to use (Straight Line or Accelerated) Determine the useful lifetime for the assets Determine the salvage value Use the formulas to calculate depreciation on new equipment Add up all depreciation contributions NOTE: while EBIDT may be a monthly figure – since taxes and depreciation are only calculated once a year – EBIT, EBI, and net earnings MUST be Year-End numbers.

Calculating Taxes Take the EBIDT and subtract the depreciation – this yields Earnings Before Interest and Tax Then calculate profit (or earnings) before taxes by subtracting interest expenses. Then multiply the profit before taxes by your effective tax rate – that will give the corporate income taxes the firm owes.

Final Cash Flow Statement

Income Statement Income Statement compares the profitability of the firm to prior years Total (yearly) revenuesminus total (yearly) expenditures

Cash Flow versus Income Statements Note that the final Net Earnings number for both the final month of the cash flow statement is exactly the same as the year-end Net Earnings total for the Income Statement, reflecting the same time period

Comparison (cont.) Further the Income Statement’s year-end figures for COGS, Salary, Rent, Advertising, and sales should be the 12 month totals of the cash-flows corresponding to the respective line item Likewise, depreciation and taxes should be equal for that fiscal year

Balance Sheets Unlike Cash-Flow and Income Statements, Balance Sheets lists ASSETS and LIABILITIES Examples of Assets include: Land and Capital Equipment less accrued depreciation Intellectual Property (if purchased) Cash on Hand (which is equal to the year end Cumulative Cash Balance) Accounts Receivable Inventory Retained Earnings from Previous Years

Balance Sheets (cont.) Examples of Liabilities include: Short Term Debt (loans) Long Term Debt (bond issues, etc) Accounts Payable Interest Payable Taxes Payable The difference between Assets and Liabilities is your EQUITY

Example of a Balance Sheet

Some Basics of Accounting The orderly reporting of the financial activities of a business Most commonly visible forms Balance Sheets Income Statements Used by management, investors, creditors, government to monitor business activity

Business Transactions Business document is prepared, e.g. order form, invoice Debits and credits posted to accounts in a ledger Information entered chronologically into a journal Financial statements prepared -- balance sheet & income statement The Process of Accounting An orderly recording of all financial transactions (by hand or electronically)

Some Accounting Concepts and Terminology Dual Aspect Concept Embodies the notion that Assets = Equities or Assets = Liabilities + Owner’s equity Need to always record for a transaction - what gets “credit” for something and what gets “charged” Debit (Dr) - arbitrarily the left hand side of an account Credit (Cr) - the right hand side “To debit” - make a left hand side entry “To credit” - make a right hand side entry

Assets & Liabilities Assets: The economic resources of the firm. As shown on typical balance sheet Liabilities: Outside claims against the assets of the firm

Some Accounting Concepts and Terminology con’t Debit balances must equal credit balances From conventional layout of accounting statements Increases in assets are debits (decreases credits) Increases in liabilities are credits Increases in owner’s equity are credits Increases in expenses are debits Increases in revenues are credits

Some Accounting Concepts and Terminology con’t Note that assets (desirable) and liabilities (undesirable) both increase on the debit side There is no inherent “goodness” or “badness” to the terms debits & credits Assets Liabilities Dr Cr Dr Cr Increase (+) Decrease (-) Decrease (-) Increase (+)

Typical Layout of Balance Sheet Balance Sheet Assets Liabilities & Stockholder’s Equity Current Liabilities: -Accounts Payable -Notes Payable -Accrued Tax Current Assets: -Cash -Marketable Securities -Accounts & Notes Receivable -Inventory Long-term Liabilities: -Long-term bank loans -Bonds Fixed Assets: -Equipment -Building -Land Stockholder’s Equity: Total

Other Concepts Money Measurement Concept - Accounting records show only facts that can be expressed in terms of money. A company’s good name does not get reflected on a balance sheet, unless the company is sold and a value can be put on the good name (Goodwill) Going Concern Concept - There is a presumption of an indefinite period of operation of a company (no defined end date) Cost Concept - Assets entered in accounting records at the price paid to acquire them and are not re-evaluated (except for depreciation) Conservatism - Always select the least favorable scenario. For example, research and development (R & D) is accounted for as a straight expense, rather than an investment (it might not lead to anything.)

Amortization The write-off of intangible long-lived assets (e.g. goodwill, trademarks, patents) Analogous to depreciation Term used broadly to cover write-off of costs over a period of years

How do the Income Statement and Balance Sheet Relate? Balance SheetIncome StatementBalance Sheet(December 31, 2000) (December 31, 2000) (December 31, 2000)Assets xxx Sales xxx Assets xxx COGS xxxEquities Other Expense xxx Equities Liabilities xxx Net Income 200 Liabilities xxx Common Stock xxx R. E., 2000 100 Common Stock xxx Retained Earnings 100 Less Dividends 50 Retained Earnings 250 xxx xxx New R.E. 250

Examples of Actual Financial Statements Hasbro Annual Report 1) Cover Page 2) Income Statement 3) Balance Sheet (Assets & Liabilities) 4) Cash Flows 5) Notes 6) Notes 7) Notes

Cover Page

Income Statement

Balance Sheet (Assets & Liabilities)

Cash Flows

Ratios Quick evaluations of the economic health of a company, from balance sheet or income statement amounts

Current Ratio Current Ratio = Current AssetsCurrent Liabilities A value of 2 is good, unity could spell trouble

Acid-test or Quick Ratio Cash & temporary investments + A/RCurrent Liabilities No inventories Can you pay your bills in the short term, if the market for your product goes bad?

Profit Margin Net IncomeTotal Sales Profit Margin = Return on Stockholder’s Equity Net IncomeStockholder Equity =

Earnings Per Share (EPS) Net IncomeNo. of shares of common stock SalesAverage Inventory Inventory turnover = Long term debt to equity - High ratio probably means low dividends Price to Earnings - Probably most familiar to stock investors

SOURCES OF FINANCE

LEARNING OBJECTIVES Various sources of short term and long term finance Finance by financial institution

INTRODUCTION It is rightly said that finance is the life-blood of business. No Business can be carried on without source of finance . The financial manager is mainly responsible for raising the required finance for the business. There are several sources of Finance and as such the finance has to be raised from the right kind of source.

SOURCES OF FINANCE SPONTANEOUS SOURCES NEGOTIATED SOURCES

Spontaneous finance: Finance which naturally arises in the course of business is called as “spontaneous financing.” Trade creditors, credit from employees, credit from suppliers of services etc are the examples of spontaneous financing. Negotiated financing: Financing which has to be negotiated with lenders, say commercial banks, financial institutions, general public are called as “negotiated financing.” This financing may be short term in nature or long term.

Long Term Source of Finance Long term sources of finance are those that are needed over a longer period of time - generally over a year. Long term finance may be needed to fund expansion projects IT’S TYPES ARE:- SHARE,DEBENTURE,VENTURE CAPITAL,GOVERNMENT GRANT,BANK LOAN MORTGAGE,OWNER CAPITAL,INTERNAL ACCURAL

SHARES The Total share capital of the company divided into large number of parts of equal face value, each of such part is called share. a) Equity share capital: Equity capital represents ownership capital as equity shareholders collectively own the company. They enjoy the rewards and bear the risk of ownership. However unlike the liability of the Equity share holder is limited to their contribution in the firm.

Cont’d ADVANTAGES :- Dividend to the equity share holder. Maturity date and redemption. Tax exempt income of investors. DISADVANTAGES :- Sales of equity shares. Rate of return . Not a tax deductible income.

Preference Shares Preference share represents that part of share capital of a company , which carries preferential rights. Important features of preference shares1.Fixed rate of dividend2.Normal voting rights. 3.Issued for a face value of Rs. 100

Cont’d: ADVANTAGES:- Raising long term capital . Property Mortgage. Rate of return . No obligation to pay dividend. No dilution of control. DISADVANTAGES:- Permanent burden to pay dividend. Disadvantages to Investors. High cost of raising.

Debenture: Debenture is a certificate issued by a company under its common seal acknowledging a debt by its holders. I1. Fixed rate of interest. 2. No profits but must pay. 3. Deductible expense. 4. Redemption. 5. Voting rights

Bank loan A Business enterprise requires short-term and long-term finance. It may raise financial resources by raising short-term loans and long-term loans. Short-term Sources. Long-term Sources.

venture capital Venture capitalists are groups of (generally very wealthy) individuals or companies specifically set up to invest in developing companies. Venture capitalists are on the look out for companies with potential

Government grant These grants are often linked to incentives to firms to set up in areas that are in need of economic development. One of the disadvantages of this type of funding is that it involves large amounts of paperwork and administration. This can add to costs and in some cases might not make the project worthwhile.

mortgage A mortgage is a loan specially for the purchase of property. Mortgages are use as a security for a loan:- it is often called taking out a second mortgage. If the business does not work out and the borrower could not pay the bank the loan then the bank has the right to take the home of the borrower and sell it to recover their money.

OWNER'S CAPITAL Some people are in a fortunate position of having some money which they can use to help set up their business.

Internal accruals This is a source of finance that would only be available to a business that was already in existence. Profits from a business can be used by the owners for their own personal use or can be used to put back into the business. This is often called ‘laughing back the profits'. This finance can be used to buy new equipment and machinery as well as more stock or raw materials and hopefully make the business more efficient and profitable in the future.

Cont’d ADVANTAGES :- 1.They are readily available. Management does not have to talk outsiders. 2. Use of Internal Accruals eliminates issue cost and losses on account of under pricing. 3. There is no dilution of control when firm relies on these sources. DISADVANTGES :- 1. The amount through this source is limited 2.Higher the Retain earning lead to higher dissatisfaction among the shareholders because it is the cost forgone by the shareholders.

Short term sources of finance Short term financing is essential to provide capital deficit businesses funds for short term period of a year or less. These funds are usually for businesses to run their day-to –day operations including payment of wages to employees, inventory ordering and supplies . These are the main short term sources of finance:- Bank overdraft , trade credit , credit card , and short term bank loans etc.

Bank over-draft. If the borrower requires temporary finance , the banker may allow him to overdraw on his account with or without security Cash credit Cash credit is a financial arrangement through which the commercial banks allow the borrower to the borrow money up to a certain limit

Public deposit Business firm are raising short-term finance from their member , directors and the general public. Bills discounting The commercial banks advance to the borrower by discounting his bill. Short-term loans The bankers makes a lump-sum payment to the borrower or credit his deposit account with the money advanced..

Mergers and Acquisitions Merger: One firm absorbs the assets and liabilities of the other firm in a merger. The acquiring firm retains its identity. In many cases, control is shared between the two management teams. Transactions were generally conducted on friendly terms. In a consolidation, an entirely new firm is created. Mergers must comply with applicable state laws. Usually, shareholders must approve the merger by a vote. WSU EMBA Corporate Finance

Mergers and Acquisitions Acquisition: Traditionally, the term described a situation when a larger corporation purchases the assets or stock of a smaller corporation, while control remained exclusively with the larger corporation. Often a tender offer is made to the target firm (friendly) or directly to the shareholders (often a hostile takeover). Transactions that bypass the management are considered hostile, as the target firm’s managers are generally opposed to the deal. WSU EMBA Corporate Finance

Mergers and Acquisitions In reality, there is always a bidder and a target. Almost all transactions could be classified as acquisitions. Some modern finance textbooks use the two terms interchangeably. Divestiture: a transaction in which a firm sells one of its subsidiaries or divisions to another firm. Spin-off: a transaction in which a firm either sells or issues all or part of its subsidiaries to its existing public investors, by issuing public equity. In 1997 PepsiCo spun-off its restaurant division. Shareholders received one share of the new restaurant company (TRICON), for every 10 issues of Pepsi they held. WSU EMBA Corporate Finance

Mergers and Acquisitions Target: the corporation being purchased, when there is a clear buyer and seller. Bidder: The corporation that makes the purchase, when there is a clear buyer and seller. Also known as the acquiring firm. Friendly: The transaction takes place with the approval of each firm’s management Hostile: The transaction is not approved by the management of the target firm. WSU EMBA Corporate Finance

Merger Types by Relatedness Horizontal acquisition Merger between two companies producing similar goods or services. Verticalacquisition Buying or taking over a firm in the same industry in which the acquired firm and the acquiring firm represent different steps in the production process. Conglomeratemerger A merger involving two or more firms that are in unrelated businesses.

Mergers and Acquisitions Reasons for mergers & acquisitions: Strategic: The combined FCFs (Free Cash Flows) of the merged operation are greater than the sum of the individual cash flows. Financial: The cash flows and also the market value of the target are below their true value, due to perhaps inefficient management. Such firms are typically restructured after the acquisition. WSU EMBA Corporate Finance

Mergers and Acquisitions Reasons for mergers & acquisitions (continued): Diversification: “Don’t put all your eggs in one basket.” Current finance literature seriously questions the merits of this reasoning: Why does the management know better than the shareholders how to achieve diversification? It is usually the case that shareholders can diversify much more easily than can a corporation. Individuals can easily diversify by buying shares in mutual funds. WSU EMBA Corporate Finance

Mergers and Acquisitions Reasons given for divestitures and spin-offs: To undo non-profitable mergers (originally motivated by pure diversification) To “break up” a inefficiently run conglomerate In the case of spin-offs, to improve managerial efficiency in the subsidiary, by offering a directly observable stock price as an (admittedly imperfect) measure of managerial performance. Also, in the case of spin-offs, to give equity investors more flexibility in diversifying their investment portfolios. WSU EMBA Corporate Finance

Market Conditions Global announced merger and acquisition activity reached a record of US$3.8 trillion, an increase of 37.9% over last year's volume, surpassing the previous record of US$3.4 trillion set in 2010. The fourth quarter was the busiest quarter in 2010, as deals announced in the last three months of the year approached US$1.3 trillion in rank value, representing 34.1% of global volume. US M&A activity in 2011 approached US$1.6 trillion, a 35.7% increase over last year's volume of US$1.2 trillion. Similar to global volume, the fourth quarter was the most active with US$560.5 billion in rank value, or 35.8% of overall US M&A volume.

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Examples of M&A Blackstone Unit to Acquire DJO for $1.6 billion. RBS Group Increases ABN cash bid to $9.8 billion. J.P.Morgan take over Bank One for $58 billion Cingular Wireless acquire AT&T Wireless for $41 billion Comcast bit Walt Disney for $54 billion

Past M&A AOL paid 106 billion for Time Warner in 2000 Pfizer paid 116 billion for Warner-Lambert in 1999 AT&T bought Media One for 56 billion in 1999 Exxon acquired Mobile for 86 billion in 1998 …

Definition: Merger A transaction where two firms agree to integrate their operations on a relatively coequal basis because they have resources and capabilities that together may create a stronger competitive advantage Acquisition A transaction where one firm buys another firm with the intent of more effectively using a core competence by making the acquired firm a subsidiary within its portfolio of businesses Takeover An acquisition where the target firm did not solicit the bid of the acquiring firm

Merger Types by Relatedness Horizontal acquisition Merger between two companies producing similar goods or services. Verticalacquisition Buying or taking over a firm in the same industry in which the acquired firm and the acquiring firm represent different steps in the production process. Conglomeratemerger A merger involving two or more firms that are in unrelated businesses.

Merger Types by Attitudes Hostile takeover A takeover of a company (usually made by an open tender offer to shareholders) against the wishes of the current management and the Board of Directors by an acquiring company or raider. Tender offer General offer made publicly and directly to a firm's shareholders to buy their stock at a price well above the current value market price. Friendly takeover Merger when the target firm's management and board of directors is in favor of the takeover.

Regulatory Bodies United States: Department of Justice Federal Trade Commission Individual States Banks: Federal Reserve and FDIC Radio/TV: Federal Communications Commission

Regulatory Bodies (UK) 1965 Monopolies and Mergers Commission created (MMC) 1973 Office of Fair Trade (OFT) created with a Director General These assess potential mergers

Regulation (Japan) Japan FTC reviews mergers (only 30 days) Stock-for-stock transactions do not need government approval

Regulation (Europe) European Commission (EU) has exclusive authority to review mergers – it can defer to individual country antitrust authorities. Focus: on community impact. Does merger create or enhance a dominant position? EC can recommend to Minister of Competition of the European Union (EU)

Regulation (EC examples) Boeing-McDonnell Douglas merger announced 12/96 EC concerned about Boeing’s dominance of market and Boeing’s aggressive purchase contracts with major U.S. airlines (would make it difficult for Airbus to compete) EC announced objections on 5/21/97

Regulation (continued) Boeing: EC could fine Boeing and seize planes in Europe Boeing made concessions for approval GE-Honeywell rejected by EC in 2001

Increased market power Integration difficulties Overcome entry barriers Inadequate evaluation of target Cost of new product development Large or extraordinary debt Increased speed to market Acquisitions Inability to achieve synergy Lower risk compared to developing new products Too much diversification Increased diversification Managers overly focused on acquisitions Avoid excessive competition Too large Reasons for Acquisitions Problems in Achieving Success

Why do firms engage in M&A? Value-maximizing explanations Synergy (operating, financial, reduced agency costs) Expropriation (bondholders, taxes, monopolies) Market inefficiency (underpricing, market myopia) Nonvalue-maximizing explanations Diversification Free cash flow Hubris Self-aggrandizement

Value-maximizing explanations:Synergy Synergy from Operating efficiency Economies of scale Downsizing an industry Vertical integration Synergy from Financial efficiencies Diversification Adopt a new financial structure Reduced bankruptcy costs Reduced agency costs Remove poor management Alignment of incentives

Value-maximizing explanations:Expropriation From the government Tax benefits – interest shield Transferable tax attributes From bondholders & labor Transfers of wealth between different claimants to the firm’s value Violation of implicit contracts From the market Monopoly rents

Market Inefficiencies Securities are priced below their true value due to information asymmetries between management and shareholders Market Myopia Markets are focused on the short term

Nonvalue-maximizing explanations: Diversification At firm level v.s. at shareholder level Portfolio v.s. human capital Self Aggrandizement Wanna see my smiling face on the cover of the Business Week Free Cash Flow What to do with the extra money in the firm? Hubris Management systematically overprice targets

Proxy Contest Tender Offer Acquisition Merger Leveraged Buy-Out Management Buy-Out Takeover Methods Tools Used To Acquire Companies

Takeover Defenses Preventive defenses Poison Pills Shark Repellents a.k.a. charter amendments Golden Parachutes Reactive Defense Greenmail Standstill agreements White knight or White squire Litigation Pac-Man defense Scorched earth defense

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SOURCES OF FINANCE