Module 6 – Discussion Question
Question:
Why do management and stockholders often have divergent viewpoints about the desirability of a takeover? Provide an example.
Why do management and stockholders often have divergent viewpoints about the desirability of a takeover? Provide an example.
📘 Detailed Explanation:
🔹 Incentive Alignment:
Stockholders aim to maximize their return on investment. When a takeover is proposed, it typically includes a premium on the current share price, presenting stockholders with the chance for immediate financial gain.
In contrast, management’s priorities often include job security, influence, and long-term strategic control. They may view a takeover as a direct threat to their authority and compensation structures.
Stockholders aim to maximize their return on investment. When a takeover is proposed, it typically includes a premium on the current share price, presenting stockholders with the chance for immediate financial gain.
In contrast, management’s priorities often include job security, influence, and long-term strategic control. They may view a takeover as a direct threat to their authority and compensation structures.
🔹 Job Security and Autonomy:
A successful takeover usually leads to structural reorganization, management replacement, or redefined goals. Managers may fear losing their jobs or autonomy under new ownership.
Meanwhile, stockholders might willingly accept such disruptions if the financial return from the acquisition is favorable.
A successful takeover usually leads to structural reorganization, management replacement, or redefined goals. Managers may fear losing their jobs or autonomy under new ownership.
Meanwhile, stockholders might willingly accept such disruptions if the financial return from the acquisition is favorable.
🔹 Managerial Entrenchment and Agency Theory:
Managers often become entrenched in their roles and might prefer the status quo that offers them ongoing security and influence. This can lead to resistance against takeovers, even when those takeovers could increase shareholder value.
According to agency theory, managers (agents) may pursue self-interest, which might not align with stockholders’ (principals’) interests. This misalignment can result in opposition to takeovers that management perceives as personally disadvantageous.
Managers often become entrenched in their roles and might prefer the status quo that offers them ongoing security and influence. This can lead to resistance against takeovers, even when those takeovers could increase shareholder value.
According to agency theory, managers (agents) may pursue self-interest, which might not align with stockholders’ (principals’) interests. This misalignment can result in opposition to takeovers that management perceives as personally disadvantageous.
🔹 Strategic Vision and Future Outlook:
Management may believe in the company’s long-term potential and argue that a takeover would suppress that growth or undervalue future opportunities. They often prefer to stick with long-term strategic plans.
Conversely, shareholders—especially those driven by short-term gains or activist investors—might prefer the immediate value created by accepting a takeover bid.
Management may believe in the company’s long-term potential and argue that a takeover would suppress that growth or undervalue future opportunities. They often prefer to stick with long-term strategic plans.
Conversely, shareholders—especially those driven by short-term gains or activist investors—might prefer the immediate value created by accepting a takeover bid.
✅ Summary:
Stockholders are typically focused on financial returns, seeing takeovers as profitable opportunities. Management, however, may resist takeovers due to fears over job loss, diminished autonomy, and conflicting visions of the company’s future. This results in a natural conflict between the two groups.
Stockholders are typically focused on financial returns, seeing takeovers as profitable opportunities. Management, however, may resist takeovers due to fears over job loss, diminished autonomy, and conflicting visions of the company’s future. This results in a natural conflict between the two groups.