Permasalahan Umum M&As

1. Mergers & Acquisitions (M&As)
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Mergers & Acquisitions (M&As)
Modul VI

2. I N Wisnu Wardhana-M&As-IMTelkom
Modul VI
Permasalahan Umum Dalam M&As

3. Permasalahan Umum Dalam M&As
Permasalahan Umum Dalam M&As:
Law Vs. Management
Sentralisasi Vs. Desentralisasi
Information misleading
Konsep Free-rider problem
Prudent dalam M&As
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Law Vs. Management
Firms
Incentive Conflict in Firms
Owner-Manager Conflicts
Other Conflicts
Controlling Incentive Problems Through Contracts
Costless Contracting
Costly Contracting and Asymmetric Information
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4. FIRMs
What is a firm?
Economists have developed several different definitions of a firm, “The firm is a
focal point for a set of contracts.”
There is a refined British lady who is taking a boat ride in
China. A mean-looking man is yelling at the rowers and whips
them when they fail to work hard.
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them when they fail to work hard.
The lady comments to her guide that the British would not
allow this cruel treatment of workers. Indeed, the owner of
the boat would be put in jail for violating labor laws.
The guide is amused by her statement and
indicates that the people rowing the
boat are the owners. The mean-
looking man is an employee.

5. Incentive Conflict in Firms
Incentive conflicts:
i.e.
Between shareholders and managers, Managers might want to invest in pet
projects, rather than projects that increase shareholder value.
Between coworkers on teams, Individually, team members can have incentives to
shirk and hope that everyone else on the team works hard.
Contracts Surrounded
SuppliersSuppliers Labor UnionLabor UnionEmployeesEmployees
Owner versus manager
profits or salaries and perks
work hard or shirk
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The creation of the legal system that has the standing of an
individual in a court of law. The firm serves as one party to
many contracts that make up the firm.
Contracts Surrounded
The Firm StockholdersStockholders
CustomersCustomersBanksBanksBondholdersBondholders
Insurance ProvidersInsurance Providers
work hard or shirk
take chances or play it safe
Buyer versus supplier
Free ride or not
Management versus labor

6. Incentive Conflict in Firms – cont’
Owner – Manager conflicts:
Choice of effort, additional effort by manager generally increase the value of the
firm, but since managers expend the effort, additional effort reduces their utility
Perquisite taking, managers are likely to want not anly higher salaries but also
perquisites (such as exclusive club membership, luxurious automobiles, etc)
Differential risk exposure, managers appear excessively risk-averse they do not
want to bear the risk that the project might fail and lead to a reduction in their
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want to bear the risk that the project might fail and lead to a reduction in their
compensation
Differential horizons, managers’claims on the the corporation generally are limited
by their tenure with the firm
Over investment, managers are reluctant to reduce the size of the firm, even if it has
exhausted available provitable investments project they prefer to empire-build, they
also reluctant to lay off colleagues & friends that are no longer profitable

7. Controlling Incentive Problems Through Contracts
Agency relationship problems
AgentAgentPrincipalPrincipal Contract, can resolve
incentive problem at low cost?
An agent agrees to act in the interests of the principal. However, the agent may subsequently act in his own self
interest at the expense of the principal.
For example, an automobile agent has a legal obligation to represent the seller of a car. Nevertheless, the agent
might provide confidential information to a prospective buyer to speed the sale of the car and the receipt of the
agent’s commissions.
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agent’s commissions.
Why through a contract?
Individuals can find it in their interests to honor contracts and not engage in
“short-run” opportunistic actions because they fear the loss of future
business and profits from developing a bad reputation.
Costless!

8. Costly Contracting & Asymmetric Information
Managers who act for perk consumption or shirk from working hard , could be
enforced to their contract, but only at a cost!, why?
Legal fee can be substantial for enforcement
Managers are often know more than the owner about the firm’s profit
potential
To overcome such a problem, there are two things should be considered:
Post Contractual precludes costless resolution:
Owner/Principal can limit manager behaviour by establishing appropriate
Controlling Incentive Problems Through Contracts – cont’
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Owner/Principal can limit manager behaviour by establishing appropriate
incentive (through the contract) and incurring monitoring costs
Manager/Agent might incur bonding costs to ensure that the principal
will be compensated if they do, i.e. insurance policy for them as
guarantee
Pre Contractual generates costs:
Bargaining failure, if the manager and the owner have the difficulty in
their bargain to reach the mutual advantageous contract.
Adverse Selection, since the asymmetric information may lead to a single
wrong calculation that give harmful effect for both parties Clever
design of contract.

9. Permasalahan Umum Dalam M&As
Permasalahan Umum Dalam M&As:
Law Vs. Management
Sentralisasi Vs. Desentralisasi
Information misleading
Konsep Free-rider problem
Prudent dalam M&As
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Sentralisasi Vs. Desentralisasi
Benefits of Decentralization
Costs of Decentralization
Illustrating the Trade-offs
Management Implications

10. Centralization Vs. Decentralization
Production process involves tasks bundled into jobs
Job dimensions:
variety of tasks (few or many)
Assigning tasks and decision rights, as firm transform inputs into outputs that
are sold to customer, this process typically involves many task, whereas:
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decision authority (limited or broad)
Hence, decision right that are being authorized within the
firm is a much of the art of the management itself, will be
considered from the perspective of centralization or
decentralization.
The optimum benefits & costs are as part of the
circumstances lead to a compromise

11. Benefits of Decentralization
Effective use of local knowledge
local tastes and preferences
price sensitivities of particular customers
Conservation of management time
senior management focus on strategy
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Training and motivation for local managers
to attract talented employees & cadre formation
leveraging managers’ commitment
Alfred Sloan – Former CEO of General Motor:
"The business of business is business"

12. Costs of Decentralization
Potential agency problems Incentive problem!
effective control systems may be expensive
Coordination costs and failures
Ignoring Important Interaction Effect
Wasteful to have same type of market analysis
Less effective use of central information
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Less effective use of central information
Centralized Information about product costs,
promotion, new product, etc, might be
futile/useless
Jack Welch - former CEO of General Electric:
“Good business leaders create a vision, articulate the vision,
passionately own the vision, and relentlessly drive it to
completion”

13. Determining ‘Optimal’ Decentralization?
Illustrating the Trade-offs
D = Degree of Decentralization
When D = 0, all decision have made by Top Management
As D increase, managers are granted more decision right
(decentralized)
Thus,
Benefits = B x D (linear Equation)
Hence, B will be a positive constant
But,
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But,
Since decentralization incurs costs, for instance incentive problem (A),
and cost for coordination/central information (C)
Finally we have,
Costs = (A x D) + (C x D2) (Quadratic)
Net benefits are maximized, when vertical distance between cost
and benefits is the greatest.
D* = (B – A) / 2C

14. Illustrating the Trade-offs – cont’
Completely
Centralized
Completely
Decentralized
Costs
Information &
Agency/Incentive
problem Costs
Maximized benefits for corporation
Determining ‘Optimal’ Benefits?
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Distance of decision
right from CEO’s
Office.
CEO’s Office. Point at which decision
right and specific
knowledge are
collocated
Corporate
benefits
Determining ‘Optimal’ Costs?

15. Management Implications
Real Case;
PT.Pertamina - Indonesian oil industry and gas (a State-Owned Enterprise), former of
NV NIAM (NV Nederlands Indische Aardolie Maatschappij), that first charged uniform
prices in an entire provinces, has recently realized that local market conditions are too
different and, therefore, has decided that a different price can be charged for petrol
at any of its retail stations in Indonesia. However, all pricing decisions are still made by
the Central Office General Marketing Director. What are the consequences
of this?
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of this?
Now, the PT. Pertamina has just finished implementing a new Management
Information System that reduces the costs of information exchange between Central
Office and all PT. Pertamina petrol stations in all provinces of Indonesia by as much as
50 %. Would this mean that the pricing procedure as described
above will become more effective? (Hint: draw a graph of the relevant
costs.)

16. Permasalahan Umum Dalam M&As
Permasalahan Umum Dalam M&As:
Law Vs. Management
Sentralisasi Vs. Desentralisasi
Information misleading
Konsep Free-rider problem
Prudent dalam M&As
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Information misleading/asymmetric
Asymmetric Information & its consequencies
Hypothesis
Implication to M&As

17. Asymmetric Information & its consequencies
Asymmetric Information
A situation in which one party in a transaction has more or superior information
compared to another. This often happens in transactions where the seller knows more
than the buyer, although the reverse can happen as well. Potentially, this could be a
harmful situation because one party can take advantage of the other party’s lack of
knowledge.
Information Asymmetry can lead to two main problems:
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Information Asymmetry can lead to two main problems:
Adverse selection- immoral behavior that takes advantage of
asymmetric information before a transaction. For example, a person
who is not be in optimal health may be more inclined to purchase life
insurance than someone who feels fine
Moral Hazard- immoral behavior that takes advantage of asymmetric
information after a transaction. For example, if someone has fire
insurance they may be more likely to commit arson to reap the
benefits of the insurance

18. Hypothesis
Companies with high information asymmetry prefer internal
financing to external financing, and face more
financial constraints.
Companies with high information asymmetry have a higher tendency
to get involved in M&As, and ultimately generate
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to get involved in M&As, and ultimately generate
higher excess returns as a result.
Companies with higher information asymmetry with financial constraint
benefit more through M&As, and eventually
generate larger excess return upon M&As.

19. Result from study;
Companies with high information asymmetry usually have more
investment opportunities. However, these companies are small and
medium sized enterprises with higher financial constraints. These companies rely
heavily on internal financing.
tends to acquire a
Implication to M&As
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Companies with high information asymmetry tends to acquire a
company with low information asymmetry, which
achieves a bigger short-term market reaction and higher long term performance.
Companies with higher information asymmetry can improve internal
financing sources through M&As, when they
face financial constraints or have high leverage.

20. Other study has empirically verifies that a purpose of M&As is to decrease
information asymmetry and to utilize the benefits of internal financing post M&A.
With increased advancements in technology, asymmetric information has been
on the decline as a result of more and more people being able to easily access
all types of information;
Insider trading (legal & illegal):
Implication to M&As – cont’
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Insider trading (legal & illegal):
Conduct by officers, key employees, directors, and large shareholders
Using Material of non-public information (appropriation)
Fiduciary duties, good faith, trust & confidence
Ordinary trading thru stock exchange (i.e. Public company via - analyst)
IT Tools
Experiences
Outsider trading?

21. Permasalahan Umum Dalam M&As
Permasalahan Umum Dalam M&As:
Law Vs. Management
Sentralisasi Vs. Desentralisasi
Information misleading
Konsep Free-rider problem
Prudent dalam M&As
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Free Rider Problems
Idea of Free Rider
The Problems may arise
Possible Solutions

22. The term free rider comes from the example of someone using public
transportation without paying the fare. If too many people do this, the
system will not have enough money to operate.
In economics, collective bargaining, psychology and political science, a free rider (or
freeloader) is someone who consumes a resource without paying for it, or
pays less than the full cost.
Idea of Free Rider
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In economics, the free rider problem refers to a situation where some individuals in
a population either consume more than their fair share of a common
resource, or pay less than their fair share of the cost of a common
resource.
In the context of a brokerage firm, a free rider problem refers to a situation where a
client has been allowed to purchase shares without actually paying for
them, and then subsequently sells the shares (ideally for profit).
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23. The Problems may arise – M&As context
Problem of diffused, small shareholders
Small shareholders may not expend resources monitoring
management performance in a diffusely held corporation
Shareholders simply free-ride on monitoring efforts of other
shareholders and share in any resulting performance improvements of the firm
Free-rider problem in mergers
Small shareholders will not tender at any offer price below the
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Small shareholders will not tender at any offer price below the
higher expected price that should result from the merger
Individual decision to accept or reject tender offer does not affect
success of the offer
If offer succeeds, they fully share in the improvement brought by
takeover

24. Possible Solutions
Possible solutions to free-rider problem
₰ Allow bidder to dilute value of non tendered shares of
the target firm after takeover though, many venture capital
contracts contain an anti-dilution provision in favor of the original investors, to
protect their equity investments.
₰ Two-tier offer purchase a sufficient number of stockholders' shares so as
to gain effective control of a firm at a certain price per share, followed by a lower
offer at a later date for the remaining shares.
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offer at a later date for the remaining shares.
₰ Make some shareholders pivotal in the outcome of the
bid (Bagnoli and Lipman, 1988) But, the fact that shareholders
are unable to be pivotal when they hold only a negligible fraction of the shares.
₰ Tender offer from a large shareholder or an outsider
who had secretly accumulated a large fraction of the
equity Eliminate free riders, but still exist (though, these are small fraction)

25. Permasalahan Umum Dalam M&As
Permasalahan Umum Dalam M&As:
Law Vs. Management
Sentralisasi Vs. Desentralisasi
Information misleading
Konsep Free-rider problem
Prudent dalam M&As
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How we can stand with our feeble competitiveness?

26. CEOs, success in M&As
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James W. Owens is
the former Chairman
and Chief Executive
Officer of Caterpillar
Inc., the world's
largest manufacturer
of construction and
mining equipment,
diesel and natural
gas engines and
industrial gas
turbines.
Alan George "A.G."
Lafley (born June 13,
1947) is the former
Chairman of the Board,
President and Chief
Executive Officer of
Procter & Gamble

27. I N Wisnu Wardhana-M&As-IMTelkom
Time Magazine featured Ross
Johnson on the cover of its
December, 5th 1988

28. P&G
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29. CAT
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30. RJR Nabisco
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31. The Johnson GroupThe Johnson Group The KKR – Group
Kohlberg Kravis Roberts
The KKR – Group
Kohlberg Kravis Roberts
RJReynolds – Nabisco Corp.
Charles Hugel
Chairman of the Board
F. Ross Johnson
CEO
Linda Robinson
Public Relation
Jim Robinson
Anderson Butler Davis Macomber
B O R D – O F – D i r e c t o r s
Henry Kravis
CEO & Chairman
Kohlberg Kravis Roberts
BARBARIANS AT THE GATE – The Fall of RJR Nabisco
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Ed Horrigan
President RJR Tobacco
John Greneaus
President Nabisco
Jim Robinson
CEO
Shearson-Lehman
American Express
Peter Cohen
President
Shearson-Lehman
Saloman Brothers Forstmann - Little
Banks Brought in to help Finance Takeover
B O R D – O F – D i r e c t o r s
S H A R E H O L D E R S
Drexel, Burnham, Lambert Morgan-Stanley Merrill Lynch
Banks Brought in to help Finance Takeover
Peter Atkins
Attorney
Lazard, Freres
Bids
Advice