Theories of Merger and Takeover Waves

Theories of Merger and Takeover Waves Merger Wave The American economy experienced two great takeover waves in the postwar period, first in the 1960s and the second in the 1980s. Both waves had a deep affect on the structure of corporate America. The main trend in the 60s was diversification and conglomeration. In contrast the 1980s takeover reversed the previous process and brought US corporations back to specialization. In this respects, the last thirty years were a roundtrip for corporate America. This paper is an overview of the salient features of the two takeover waves. 1.1 The 1960s Conglomerate Merger Wave The merger wave of the 1960s was the major since the turn of the century (Stigler, 1968). A typical characteristic of the 1960s transaction was a friendly acquisition, frequently for stock, of a smaller private or public firm which was outside the acquiring firms main line of business. During this period unrelated diversification was widespread among the large companies. Rumelt (1974) has reported that the fraction of single business companies in the Fortune 500 decreased from 22.8% in 1959 to 14.8% in 1969. Further, the portion of conglomerates with no dominant businesses increased to 18.7% from 7.3%. There was also a considerable move to diversification among companies that retained their core business. The driving force behind the 1960s wave was high valuations of company stocks and large corporate cash flows. However the management was unwilling to pay out the high cash flows as dividends, and on the other hand able to issue equity at attractive terms therefore, turned their atte ntion to acquisitions (Donaldsoni. 1984).Dividends were considered as a complete waste, and acquisitions as a very attractive way to conserve corporate wealth. There are two sets of arguments used to explain why companies diversify. The first set argues that firms diversify to increase shareholder wealth. A number of authors have discussed different aspects of diversification that can potentially raise shareholder wealth. Williamson (1970), suggest that firms diversify to beat imperfections in external capital markets. Through diversification, managers create internal capital markets, which are less prone to asymmetric information problems. Lewellen (1971), argues that conglomerates can carry on higher levels of debt since corporate diversification reduces earnings variability. if conglomerate firms are more valuable than companies operating in a single industry If the tax shields of debt increase. Shleifer and Vishny (1992), state that conglomerates may have a higher debt capacity since they can sell assets in those industries that suffer the least from liquidity problems in bad states of the world. Finally, Teece (1980) argues that divers ification leads to economics of scale. The second set of arguments states diversification as a product of the agency problems between shareholder and managers. Amihud and Lev (1981) argue that managers follow a diversification strategy to protect the value of their human capital. However, Jensen (1986) suggests that companies diversify to increase the private benefits of managers. Similarly, Shleifer and Vishny (1989) suggest that managers diversify because they are better at managing assets in other industries. Thus, diversifying will make skills more indispensable to the firm. 1.2 The 1980s Merger Wave Form a longer historical perspective, Golbe and White (1988) presented time series evidence of U.S. takeover activity from the late 1800s to the mid-1980s. Their findings have suggested that takeover activity above 2 to 3 percent of GDP is unusual. However, the greatest level of merger activity occurred around 1980s, at roughly 10 percent of GNP. By this measure, takeover activity in the 1980s is historically high. The size of the average target in the 1980s had increased extremely from the modest level of the 60s. By 1989 28%, of Fortune 500 companies were acquired and many transactions, particularly the large ones, were hostile. Further the medium of exchange in takeovers was cash rather than stock, they were characterized by heavy use of leverage. Firms were purchased by other firms by leveraged takeovers by borrowing rather than by issuing new stock or using solely cash on hand. Other firms restructured themselves, borrowing to repurchase their own shares. The 80s was also characterized by latest forms of control changes, which included bustup takeovers. Bustup takeovers involved the sell off of a substantial fraction of the targets assets to other firms. (Bhagat, Shleifer, and Vishny, 1990; Kaplan, 1997). 2 Merger Motives The following sections will explain the motive behind the two merger waves. 2.1 Managerial Motives Agency theory predicts that unless managers are strictly monitored by large block of shareholders they will certainly act out of self-interest. Amihud and Lev (1981) have provided proof that unless closely monitored by large block shareholders managers will attempt to reduce their employment risk through diversification. Lane et al.(1998) in this study have reexamined Amihud and Lev findings about agency theory Using a sample of 309 US firms that diversified between 1962 1970, from the Federal Trade Commission (FTC) Statistical Report on Mergers and Acquisitions (1976). This study falls in the third broad category[1] of agency studies. However this analysis only examines the strategic behaviors of managers when they are not under siege and are also not in a situation, in which their interests are clearly in conflict with those of shareholders. Specifically, firms without large block shareholders are expected to engage in more unrelated acquisitions and show higher levels of diversif ication than firms with large block shareholders (Jensen and Meckling (1976)) Using Multiple Regression, the study found no evidence for the standard agency theory predictions that management controlled firms are linked with strategically lower levels of diversification and lower levels of returns than are firms with large block shareholders. It was found that Ownership structure and diversification are largely independent constructs. Thus, managers may be are worthy of more trust and autonomy than what the agency theorists have prearranged for them. Rather than seeking to restrict managerial discretion through extreme oversight, a more balanced approach by principals is needed. Some safeguards are essential as conflicts of interests between managers and shareholders do arise in certain situations, therefore, the assumption that such conflicts dominate the day-to-day management is not realistic. Matsusaka,(1993) takes a deep look at the astonishingly high pre-merger profit rates of target companies during the conglomerate merger wave. The main goal of the study is to assess how important was managerial discipline as a takeover motive. The analysis uses an extensive data set of 806 manufacturing sector acquisitions that took place in 1968, 1971 and 1974. The sample was collected from New York Stock Exchange listing statements. Sample of 609 observations was taken from 1968, 117 from 1971, and 129 from 1974. The results did not differ in any vital way by year, so observations from the three periods were pooled. Because antitrust enforcement was strict in the late 1960s and early 1970s, it was safely assumed that the sample mergers were not motivated to increase market power Ravenscraft and Scherer (1987). This allowed the investigation to focus on a narrow set of merger motives. Profitability[2] throughout the study was measured as a rate of return on assets. The theory identified two basic characteristics of mergers motivated to discipline target management. First it wsa observed that the target was underperforming its industry and the only reason to discipline the managers was that they were not maximizing profit. It could be because of incompetence that they were pursuing their own objectives. The second, the target company had publicly traded stock and the only posibility to discipline management was by electing an appropriate board of directors. In this situation a takeover was necessary to effect a change as the diffused stock ownership resulted in free-rider problems. Owners can remove bad managers of privately owned firms, as they are closely held. The problem occurs in large publicly traded firms with diffuse ownership. The statistical results revealed that both public and private targets had extremely high profit rates prior to acquisition compared to their size classes and industries. Therefore, takeovers were not motivated to discipline target managers during the conglomerate merger wave. The second finding of the study is that public targets were not as particularly profitable as private targets. It was also found that the largest public targets had the lowest profit rates. A credible interpretation of the evidence is that managerial discipline may have been significant for just a small set of acquisitions that involved large publicly-traded targets. Matsusaka (1993) leaves the bigger question unexplained. Why buyers time and again sought high profit targets during the merger wave. There is a simple clarification, that high quality assets are generally favored to low quality assets, as high quality assets are more expensive. In addition to explaining why firms seek high-profit targets, an asset complementarity theory implies that firms tend to divest their low-profit divisions Palmer and Barber (2001) have determined the factors that led large firms to participate in the1960s wave. The theoretical approach, of the study conceptualizes corporate elites (managers and directors) as actors. However it is assumed that these actors have interests which have arisen from positions held in organizational and institutional environments, and from multidimensional social class structure. Often Acquisitions are deviant and innovative ways by which corporate these elites can increase their status and wealth. Corporate elite diversify to the extent that their place in the class structure provides them with the capacity and interest to augment their wealth and status in this way. The authors have examined how the firms top directors and managers class position influenced its tendency to employ diversification in the 1 960s. More specifically the following arguments on social status[3] have been tested empirically. Firstly, Firms run by top managers who attended an exclusi ve secondary school or whose family was listed in a metropolitan social register were less likely than other firms to complete diversifying acquisitions in the 1960s. Secondly, Firms run by top managers who were Jewish were more likely than other firms to complete diversifying acquisitions in the 1 960s. Thirdly, Firms run by top managers situated in the South or west were more likely than other firms to complete diversifying acquisitions in the 1960s. The study selected a sample of the largest 461 publicly traded U.S. industrial corporations from the Federal Trade Commissions Statistical Report on Mergers and Acquisitions (1976), between January 1, 1963, and December 31, 1968. This particular time period was chosen because as the merger wave took off at the end of 1962 and crested in 1968. The results of the study were found through count and binary regression models. The findings of the study are consistent with that of Zeitlin (1974). According to him top managers capacities and interests are shaped by their social class position. Corporate elite members differ in their social class position. It is this variation that influences the behavior of the firms they command. The results indicate that social club memberships and upper-class background influenced a firms propensity to complete diversifying acquisitions in the 1960s. Network embeddedness and status influenced acquisition likelihood in opposite directions. Corporations that were run by chief executives who were central in social networks but marginal with respect to status were more likely than other firms to complete diversifying acquisitions in the 1960s. Therefore, individuals with high status had small interest in adopting innovation. Corporate elites can inhibit the spread of an innovation when it threatens their interests. As observed by Hayes and Taussig (1967), One must never under estimate the moral suasion that the business and financial communities can bring to bear on those who engage in practices of which they disapprove. In this respect, the analysis provides additional evidence that intraclass conflict shaped corporate behavior during the 1960s merger wave. It seemed that in the 1960s, it was not concentrated ownership but, ownership in the hands of capitalist families that reduced a firms tendency to complete diversifying acquisitions. Further, as predicted by agency theory , concentrated ownership would lower acquisition rates most when in the hands of the CEO or other top managers, as opposed to outsiders, However it was found the reverse to be the case. Overall, there was very little support for any of the agency theory in the 1960s merger wave. Further, the results provided no support for several of the class-theory hypotheses. Firms headquartered in the South or West run or by Jewish CEOs did not have a greater propensity to complete diversifying acquisitions during the 1960s. The process of diversification of American firms reached its height during the merger wave of the late 1960s. Matsusaka(1993)evaluated the 1960s merger wave. In an attempt to do so the author has proposed a number of explanations that drove managers to diversify during the conglomerate merger wave. There are reasons to suspect that managers may have pursued a diversification strategy even when it impaired the shareholder. They may have entered new lines of business to protect their organization-specific human capital or establish themselves. On the other hand, they may have been pursuing size as an end and because of strict antitrust opposition to horizontal and vertical mergers they had to expand by buying into unrelated industries. The study has evaluated whether manager were diversifying for their own advantage or in the interest of shareholders returns .To do so the author inspected the effect of diversification on the value of his firms equity. Thus, if the value of a firm declined upon announcement of an acquisition, then its management was not acting to maximize shareholder wealth. One explanation for conglomeration stated in the study, stems from Managerial-Discipline theory. Firstly, Firms were taken over to discipline or replace their bad managers ie â€Å"Managerial-Discipline. Secondly, Managerial Synergy theory states that the bidder management wanted to work with target management, not replace it. In this case the acquirer management believed that the target management would complement to their skills. Therefore firm that had Managerial-discipline problem were likely to have had low profits, and on the other hand managerial-synergy targets were likely to have had high profits. Another explanation is that buyers were motivated by earnings-per- share (EPS) manipulation. This explanation states that conglomerates have a high price-earnings ratio (P/E). [4] Therefore the bidder management was bootstrapping, by buying firms with low P/Es. Construction of the dataset began with a list of mergers from the sample of 1968, 1971 and 1974 .The sample was identified from the takeovers from New York Stock Exchange listing statements and the results were presented through regression. The announcement-period return to the bidders shareholders was measured through dollar return, [5] .Regression of the dollar-return measure found that the return to a diversification acquisition was significantly positive. On average their shareholders enjoyed an $11.0 million value increase in value when bidders made a diversification acquisition,. This rejects the hypothesis that diversification hurt shareholders and is thus inconsistent with the idea that diversification was driven by managerial objectives. On the other hand, bidders who made related acquisitions cost their shareholders $6.4 million on average. Thus, the hypothesis that the markets reaction was the same to related acquisitions and diversification is rejected, suggesting that there was a market premium to diversification. Using descriptive statistical summaries it was found that both diversifying and horizontal buyers preferred to buy firms that were profitable. For both type of acquisitions the average operating profit was more than 5% in excess of the targets industry average. Therefore fame of high-profit targets argues against the importance of a managerial-discipline motive for both types of acquisition and in favor of a managerial-synergy motive. This is because Managerial-discipline takeovers should have been directed at low-profit firms, whose profitability needed improved. The motive was Managerial-synergy as the targets were takeovers were high- profit firms, this is because synergy-motivated managers were looking for good partners Matsusaka(1993). Another factor linked to the managerial theories is whether or not the targets management was retained.Top management is said to have been retained if it meet the following criteria. Firstly It was reported in the Wall Street Journal that the acquired firms management would continue to operate under the new management. Secondly, it was indicated in the buyers listing statement that the targets management would be retained. Lastly, when the merger took place at least one of the top three executives of the target firm was still managing the firm three years later from when the merger took place. According to the above mentioned definitions, 61.8% of the managers in the sample were retained and only 3.5% of the acquisitions fell in the Replaced category. The main finding is that buyers earned significantly positive announcement-period returns during the conglomerate merger wave when they made diversifying acquisitions. The hypothesis that conglomerates were driven by empire building or some other managerial objective can be rejected because such explanations imply value decreases to unrelated acquisitions. Another explanation of the conglomerate merger wave is that mergers were driven by an accounting trick rather than expected efficiencies. Therefore, investors watched EPS; when the EPS went up they bid up the price of the stock. According to this argument, Conglomerates, tended to buy companies with lower P/E ratios than their own in order to increase their EPS and boost their stock prices. There was no evidence that firms earned positive returns which inflated EPS in this way. The study indicated that early conglomerators earned significantly positive returns simply because they were first. They may have gained some rents to organizational innovation. Possibly the men who built the first conglomerates had a unique talent for diversification, which the market rewarded. Hubbard, Palia (1999), have examined the likelihood that internal capital markets were formed to alleviate the information costs associated with the less well-developed external capital markets of the time; that is, whether they were expected to create value by the external capital markets in the 1960s.In this paper, the authors have inspected a form of cross-subsidization that occurs when a financially unconstrained bidding firm takes over a financially constrained target firm and as a result forms an internal capital market.The study examined whether the external capital markets expected that the formation of internal capital markets in the 1960s were value-maximizing for the bidding firm. However, existing research has argued that internal capital markets can be value-enhancing. As argued by Geneen(1997), the financing and budgeting expertise that a firm possesses is not necessarily related to its degree of diversification. Accordingly, the internal capital market hypothesis for all acquisitions is tested. The study also tests the bootstrapping explanation for conglomeration in the 1960s, which takes place when firms with a high price-earnings ratio (P/E) took over low P/E target firms and fooled the stock market with an increased combined earnings-per-share. In the 1960s, external capital markets were less developed in terms of company-specific information production than in later years. The authors have classified company-specific information into two general categories. Firstly, production information; and secondly, financing and budgeting expertise. However, in this study information-intensive activities were introduced. This was because; it assists the manager to internally allocate capital across divisions of a diversified firm. It was suggested that diversified firms were perceived by the external capital markets to have an informational advantage, because external capital markets were less well developed at that time. Comparing it to the current decade, there was less access by the public to computers, data- bases, analyst reports, and other sources of company-specific information. Not only this there was less large institutional money managers and the market for risky debt was illiquid. The authors selected a sample of 392 acquisitions that occurred during the period from 1961 through 1970. Diversifying acquisitions were defined as those in which the bidder and target do not share any two- digit SIC code Matsusaka(1993), and related acquisitions as those in which they do share a two-digit SIC code. Further the Wall Street Journal was used for announcement date as the event date. Four measures of abnormal returns to the conglomerate bidding firm were calculated. These measures are as follows. Firstly, the usual percentage returns or the cumulative abnormal returns from five days before to five days after the event date. Secondly the percentage returns until date of last revision or the cumulative abnormal returns from five days before to five days after the date of the last revision (Lang et al. (1991)). Thirdly, the dollar returns or the percentage return times the market value of the bidder six days before the announcement (Malatesta(1983); Matsusaka(1993)). Lastly , the investment return defined as the change in the value of the bidder divided by the purchase price (Morck et al. (1990)). Tobins r ratio[6] is used as a proxy for a firms capital market opportunities. The evidence from these measures is mixed. Positive abnormal returns for all four measures were shown for related acquisitions. On the other hand, two of the four measures had shown statically significant positive abnormal returns for diversifying acquisitions in. Not only that diversifying acquisitions do not significantly earn less than related acquisitions in two of the four measures. Thus, evidence suggests, the capital markets believed acquisitions to be generally good for bidder shareholders during the 1960s. More significantly, it was found that when financially unconstrained buyers acquired constrained target firms, highest bidder returns were earned. Further, bidders generally retain target management, signifying that management may have provided company- specific operational information and the bidder on his part also provided capital budgeting expertise. Therefore, external capital markets expected information benefits from the formation of the internal capital markets. The study found no evidence in support of the bootstrapping hypothesis, as the coefficient on the dummy variable[7] was not statistically different from zero. This result is consistent with Matsusaka, (1993), who also finds no evidence for bootstrapping.Therefore, firms merged to form their own internal capital markets as there was a deficiency of well-developed external capital markets in the 1960s. Some firms apparently had an information advantage over the external capital markets and were expected to produce value in an internal capital market. In the 1960s diversified acquisitions were rewarded by financial markets, the informational advantage that acquiring firms appeared to possess was likely to be in the capital budgeting, allocation process and operational aspects of each division. Bidder firms generally retained the target management as it would facilitate them running the operational part of each target firm. The Motives discussed in the above mentioned articles are appealing; however evidence from the stock market suggests that shareholders preferred their firms to diversify. Using a data set from the 60s and early 70s, Matsusaka (1993) reported that, when the company announced an unrelated acquisition, the stock price of the bidder increased on average of $8 million. However, on the announcement of a related acquisition, the bidding firms stock price fell by $4 million. The difference between the two returns is quite significant. Thus it appears that investors fully believed that unrelated acquisitions benefited their firms relative to the alternatives. Thus the managers just did what the stock market told them to do that is to diversify. Evidence from 1980s stock market suggested that shareholders, again, liked what was happening. Shleifer, and Vishny (1992) found that in the 1980s, stock prices of the bidding firms rose when they bought other firms in the same industry, and fell with unrelated diversification. It is clear that the market disapproved unrelated diversification. Therefore it does not astonish that, in light of such market reception, managers stopped diversifying and did what the stock market directed them to do. 2.2 Legal Motives Matsusaka (1996) investigated whether the antitrust enforcement of the 1960s led firms to take on the diversification goal, by preventing them from expanding within their own core industries. If correct, diversification should have occurred more less frequently when small firms merged than when large firms merged since small mergers were less likely to have attracted antitrust attention. Further the author examined the diversification patterns in the United Kingdom, Canada, Germany, and France in the late 1960s and early 1970s, where none of these countries had legal restrictions on horizontal growth similar to those in the Unites States. The US Clayton Antitrust Act was the antitrust legislation in the postwar period (1950 Celler-Kefauver amendment to Section 7). The act, prohibited mergers that would substantially lessen competition, or tend to create a monopoly. This new law was used by the antitrust authorities and the courts to limit the number of mergers between vertically related and firms in the same lines of business. The strictness of the antitrust environment in 1968 is illustrated by the observation that in the earlier 12 years, all antitrust cases that reached the Supreme Court had been resolved in support of the government. The study indicates the following two implications. Firstly, large horizontal mergers were more liable to have been challenged on antitrust grounds than small horizontal mergers. Secondly mergers between unrelated firms were unlikely to have been blocked, regardless of size. Firms diversified in 1960s, since antitrust authorities prevented them from expanding in their home industries. Later when antitrust policy became less rigid in the 1980s, firms expanded horizontally, leading them to refocus on their core business. Stigler (1966) was perhaps the first to present evidence on the antitrust hypothesis, concluding that, the 1950 Merger Act has had a strongly adverse effect on horizontal mergers by large companies. The author selected a sample of 549 mergers (that took place in 1968) from the New York Stock Exchange. Results of the study were reported through Logit regressions .It was found that bidders were as likely to have entered new industries when they made small acquisitions as when they made large acquisitions, and small buyers were as likely to have diversified as large buyers. Further the total number of diversification acquisitions concerning small companies was high.Though, according to the antitrust hypothesis; diversification should have been widespread primarily in large mergers where same industry acquisitions were prohibited by tough antitrust enforcement. Secondly assembled international evidence indicated that diversification took place in many industrialized nations in the 1960s and 1970s, although restrictions against horizontal combinations were unique to the United States. Yet, most other industrialized Western nations[8] experienced diversification merger waves and general movements toward diversification in their largest companies (Chandler (1991)).Thus most of the evidence, is not consistent with the antitrust hypothesis, signifying that other explanations for corporate diversification should be emphasized not the anti trust hypothesis. Scholes and Wolfson (1990) state, that the changes in U.S. tax laws[9] in the 1980s had obvious affect on the desirability of mergers and acquisitions. However such transactions were not only motivated by tax factors but also non tax factors[10]. Tax laws can have number of affects on mergers and acquisitions , which can include the following capital losses, presence of tax-attribute carry forwards such as net operating losses , investment tax credits, and foreign tax credits, among others, that might be cashed in more quickly and more fully by way of a merger; the desire to step up the tax basis of assets for depreciation purposes to their fair market value; the desire to sell assets to permit a change in the depreciation schedule to one that is more highly accelerated. The authors in this study have examined the effect of changes in tax laws passed in 1980s on merger and acquisition activity in the United States. The authors selected the annual values of mergers and acquisitions from 1968 through 1987 in nominal dollars. The data source for nominal values was W. T. Grimm and Company for 1968-85 and Mergers Acquisitions (1987-88, rev. quarterly) for 1986 and 1987. Using time series analysis it was found that the dollar volume of merger activity between 1980-1981 increased from $44.35 billion to $82.62 billion (86%) in nominal terms. The percentage increase was approximately twice as large as the next largest percentage increase in annual merger and acquisition activity over the 1970-86 periods. There was spectacular increase in merger activity that began with the passage of the Economic Recovery Tax Act of 1981, however this was not the only merger wave that occurred in that time frame. Unusual merger activity was also witnessed in the 1960s. The termination of 1960s wave was accompanied by quite a few regulatory events that depressed such transactions. Firstly, the Williams Amendments had en larged the cost and difficulty of effecting tender offers. Secondly the issuance of Accounting Principles Board Opinions 16 and 17, forced many acquiring firms to boost depreciation expense, goodwill amortization and cost of goods sold. Thirdly the Tax Reform Act of 1969, made transferability of tax attributes (net-operating-loss carry forwards) more restrained. Therefore there was a sudden decline in merger activity from the peak in 1968. Relative to the tax benefits when the non tax benefits of the transaction were small, current management were the most efficient purchasers, as they had an advantage along the hidden information dimension. Therefore 1981 act had increased the incidence of cases in which non tax benefits were less than the common tax benefits of mergers and acquisitions. As a result, there was an increase in the number of transactions involving management buyouts. The annual dollar value of unit management buyouts between 1978-80 increased by a factor of 3, and by a factor in excess of 20 for the period 1981-86. The antitrust proposition mentioned above is appealing as one of the most important reason for diversification, during the 60s and 70s, which simply disallowed mergers of firms in the same industry, regardless of the effects of these mergers o Theories of Merger and Takeover Waves Theories of Merger and Takeover Waves Merger Wave The American economy experienced two great takeover waves in the postwar period, first in the 1960s and the second in the 1980s. Both waves had a deep affect on the structure of corporate America. The main trend in the 60s was diversification and conglomeration. In contrast the 1980s takeover reversed the previous process and brought US corporations back to specialization. In this respects, the last thirty years were a roundtrip for corporate America. This paper is an overview of the salient features of the two takeover waves. 1.1 The 1960s Conglomerate Merger Wave The merger wave of the 1960s was the major since the turn of the century (Stigler, 1968). A typical characteristic of the 1960s transaction was a friendly acquisition, frequently for stock, of a smaller private or public firm which was outside the acquiring firms main line of business. During this period unrelated diversification was widespread among the large companies. Rumelt (1974) has reported that the fraction of single business companies in the Fortune 500 decreased from 22.8% in 1959 to 14.8% in 1969. Further, the portion of conglomerates with no dominant businesses increased to 18.7% from 7.3%. There was also a considerable move to diversification among companies that retained their core business. The driving force behind the 1960s wave was high valuations of company stocks and large corporate cash flows. However the management was unwilling to pay out the high cash flows as dividends, and on the other hand able to issue equity at attractive terms therefore, turned their atte ntion to acquisitions (Donaldsoni. 1984).Dividends were considered as a complete waste, and acquisitions as a very attractive way to conserve corporate wealth. There are two sets of arguments used to explain why companies diversify. The first set argues that firms diversify to increase shareholder wealth. A number of authors have discussed different aspects of diversification that can potentially raise shareholder wealth. Williamson (1970), suggest that firms diversify to beat imperfections in external capital markets. Through diversification, managers create internal capital markets, which are less prone to asymmetric information problems. Lewellen (1971), argues that conglomerates can carry on higher levels of debt since corporate diversification reduces earnings variability. if conglomerate firms are more valuable than companies operating in a single industry If the tax shields of debt increase. Shleifer and Vishny (1992), state that conglomerates may have a higher debt capacity since they can sell assets in those industries that suffer the least from liquidity problems in bad states of the world. Finally, Teece (1980) argues that divers ification leads to economics of scale. The second set of arguments states diversification as a product of the agency problems between shareholder and managers. Amihud and Lev (1981) argue that managers follow a diversification strategy to protect the value of their human capital. However, Jensen (1986) suggests that companies diversify to increase the private benefits of managers. Similarly, Shleifer and Vishny (1989) suggest that managers diversify because they are better at managing assets in other industries. Thus, diversifying will make skills more indispensable to the firm. 1.2 The 1980s Merger Wave Form a longer historical perspective, Golbe and White (1988) presented time series evidence of U.S. takeover activity from the late 1800s to the mid-1980s. Their findings have suggested that takeover activity above 2 to 3 percent of GDP is unusual. However, the greatest level of merger activity occurred around 1980s, at roughly 10 percent of GNP. By this measure, takeover activity in the 1980s is historically high. The size of the average target in the 1980s had increased extremely from the modest level of the 60s. By 1989 28%, of Fortune 500 companies were acquired and many transactions, particularly the large ones, were hostile. Further the medium of exchange in takeovers was cash rather than stock, they were characterized by heavy use of leverage. Firms were purchased by other firms by leveraged takeovers by borrowing rather than by issuing new stock or using solely cash on hand. Other firms restructured themselves, borrowing to repurchase their own shares. The 80s was also characterized by latest forms of control changes, which included bustup takeovers. Bustup takeovers involved the sell off of a substantial fraction of the targets assets to other firms. (Bhagat, Shleifer, and Vishny, 1990; Kaplan, 1997). 2 Merger Motives The following sections will explain the motive behind the two merger waves. 2.1 Managerial Motives Agency theory predicts that unless managers are strictly monitored by large block of shareholders they will certainly act out of self-interest. Amihud and Lev (1981) have provided proof that unless closely monitored by large block shareholders managers will attempt to reduce their employment risk through diversification. Lane et al.(1998) in this study have reexamined Amihud and Lev findings about agency theory Using a sample of 309 US firms that diversified between 1962 1970, from the Federal Trade Commission (FTC) Statistical Report on Mergers and Acquisitions (1976). This study falls in the third broad category[1] of agency studies. However this analysis only examines the strategic behaviors of managers when they are not under siege and are also not in a situation, in which their interests are clearly in conflict with those of shareholders. Specifically, firms without large block shareholders are expected to engage in more unrelated acquisitions and show higher levels of diversif ication than firms with large block shareholders (Jensen and Meckling (1976)) Using Multiple Regression, the study found no evidence for the standard agency theory predictions that management controlled firms are linked with strategically lower levels of diversification and lower levels of returns than are firms with large block shareholders. It was found that Ownership structure and diversification are largely independent constructs. Thus, managers may be are worthy of more trust and autonomy than what the agency theorists have prearranged for them. Rather than seeking to restrict managerial discretion through extreme oversight, a more balanced approach by principals is needed. Some safeguards are essential as conflicts of interests between managers and shareholders do arise in certain situations, therefore, the assumption that such conflicts dominate the day-to-day management is not realistic. Matsusaka,(1993) takes a deep look at the astonishingly high pre-merger profit rates of target companies during the conglomerate merger wave. The main goal of the study is to assess how important was managerial discipline as a takeover motive. The analysis uses an extensive data set of 806 manufacturing sector acquisitions that took place in 1968, 1971 and 1974. The sample was collected from New York Stock Exchange listing statements. Sample of 609 observations was taken from 1968, 117 from 1971, and 129 from 1974. The results did not differ in any vital way by year, so observations from the three periods were pooled. Because antitrust enforcement was strict in the late 1960s and early 1970s, it was safely assumed that the sample mergers were not motivated to increase market power Ravenscraft and Scherer (1987). This allowed the investigation to focus on a narrow set of merger motives. Profitability[2] throughout the study was measured as a rate of return on assets. The theory identified two basic characteristics of mergers motivated to discipline target management. First it wsa observed that the target was underperforming its industry and the only reason to discipline the managers was that they were not maximizing profit. It could be because of incompetence that they were pursuing their own objectives. The second, the target company had publicly traded stock and the only posibility to discipline management was by electing an appropriate board of directors. In this situation a takeover was necessary to effect a change as the diffused stock ownership resulted in free-rider problems. Owners can remove bad managers of privately owned firms, as they are closely held. The problem occurs in large publicly traded firms with diffuse ownership. The statistical results revealed that both public and private targets had extremely high profit rates prior to acquisition compared to their size classes and industries. Therefore, takeovers were not motivated to discipline target managers during the conglomerate merger wave. The second finding of the study is that public targets were not as particularly profitable as private targets. It was also found that the largest public targets had the lowest profit rates. A credible interpretation of the evidence is that managerial discipline may have been significant for just a small set of acquisitions that involved large publicly-traded targets. Matsusaka (1993) leaves the bigger question unexplained. Why buyers time and again sought high profit targets during the merger wave. There is a simple clarification, that high quality assets are generally favored to low quality assets, as high quality assets are more expensive. In addition to explaining why firms seek high-profit targets, an asset complementarity theory implies that firms tend to divest their low-profit divisions Palmer and Barber (2001) have determined the factors that led large firms to participate in the1960s wave. The theoretical approach, of the study conceptualizes corporate elites (managers and directors) as actors. However it is assumed that these actors have interests which have arisen from positions held in organizational and institutional environments, and from multidimensional social class structure. Often Acquisitions are deviant and innovative ways by which corporate these elites can increase their status and wealth. Corporate elite diversify to the extent that their place in the class structure provides them with the capacity and interest to augment their wealth and status in this way. The authors have examined how the firms top directors and managers class position influenced its tendency to employ diversification in the 1 960s. More specifically the following arguments on social status[3] have been tested empirically. Firstly, Firms run by top managers who attended an exclusi ve secondary school or whose family was listed in a metropolitan social register were less likely than other firms to complete diversifying acquisitions in the 1960s. Secondly, Firms run by top managers who were Jewish were more likely than other firms to complete diversifying acquisitions in the 1 960s. Thirdly, Firms run by top managers situated in the South or west were more likely than other firms to complete diversifying acquisitions in the 1960s. The study selected a sample of the largest 461 publicly traded U.S. industrial corporations from the Federal Trade Commissions Statistical Report on Mergers and Acquisitions (1976), between January 1, 1963, and December 31, 1968. This particular time period was chosen because as the merger wave took off at the end of 1962 and crested in 1968. The results of the study were found through count and binary regression models. The findings of the study are consistent with that of Zeitlin (1974). According to him top managers capacities and interests are shaped by their social class position. Corporate elite members differ in their social class position. It is this variation that influences the behavior of the firms they command. The results indicate that social club memberships and upper-class background influenced a firms propensity to complete diversifying acquisitions in the 1960s. Network embeddedness and status influenced acquisition likelihood in opposite directions. Corporations that were run by chief executives who were central in social networks but marginal with respect to status were more likely than other firms to complete diversifying acquisitions in the 1960s. Therefore, individuals with high status had small interest in adopting innovation. Corporate elites can inhibit the spread of an innovation when it threatens their interests. As observed by Hayes and Taussig (1967), One must never under estimate the moral suasion that the business and financial communities can bring to bear on those who engage in practices of which they disapprove. In this respect, the analysis provides additional evidence that intraclass conflict shaped corporate behavior during the 1960s merger wave. It seemed that in the 1960s, it was not concentrated ownership but, ownership in the hands of capitalist families that reduced a firms tendency to complete diversifying acquisitions. Further, as predicted by agency theory , concentrated ownership would lower acquisition rates most when in the hands of the CEO or other top managers, as opposed to outsiders, However it was found the reverse to be the case. Overall, there was very little support for any of the agency theory in the 1960s merger wave. Further, the results provided no support for several of the class-theory hypotheses. Firms headquartered in the South or West run or by Jewish CEOs did not have a greater propensity to complete diversifying acquisitions during the 1960s. The process of diversification of American firms reached its height during the merger wave of the late 1960s. Matsusaka(1993)evaluated the 1960s merger wave. In an attempt to do so the author has proposed a number of explanations that drove managers to diversify during the conglomerate merger wave. There are reasons to suspect that managers may have pursued a diversification strategy even when it impaired the shareholder. They may have entered new lines of business to protect their organization-specific human capital or establish themselves. On the other hand, they may have been pursuing size as an end and because of strict antitrust opposition to horizontal and vertical mergers they had to expand by buying into unrelated industries. The study has evaluated whether manager were diversifying for their own advantage or in the interest of shareholders returns .To do so the author inspected the effect of diversification on the value of his firms equity. Thus, if the value of a firm declined upon announcement of an acquisition, then its management was not acting to maximize shareholder wealth. One explanation for conglomeration stated in the study, stems from Managerial-Discipline theory. Firstly, Firms were taken over to discipline or replace their bad managers ie â€Å"Managerial-Discipline. Secondly, Managerial Synergy theory states that the bidder management wanted to work with target management, not replace it. In this case the acquirer management believed that the target management would complement to their skills. Therefore firm that had Managerial-discipline problem were likely to have had low profits, and on the other hand managerial-synergy targets were likely to have had high profits. Another explanation is that buyers were motivated by earnings-per- share (EPS) manipulation. This explanation states that conglomerates have a high price-earnings ratio (P/E). [4] Therefore the bidder management was bootstrapping, by buying firms with low P/Es. Construction of the dataset began with a list of mergers from the sample of 1968, 1971 and 1974 .The sample was identified from the takeovers from New York Stock Exchange listing statements and the results were presented through regression. The announcement-period return to the bidders shareholders was measured through dollar return, [5] .Regression of the dollar-return measure found that the return to a diversification acquisition was significantly positive. On average their shareholders enjoyed an $11.0 million value increase in value when bidders made a diversification acquisition,. This rejects the hypothesis that diversification hurt shareholders and is thus inconsistent with the idea that diversification was driven by managerial objectives. On the other hand, bidders who made related acquisitions cost their shareholders $6.4 million on average. Thus, the hypothesis that the markets reaction was the same to related acquisitions and diversification is rejected, suggesting that there was a market premium to diversification. Using descriptive statistical summaries it was found that both diversifying and horizontal buyers preferred to buy firms that were profitable. For both type of acquisitions the average operating profit was more than 5% in excess of the targets industry average. Therefore fame of high-profit targets argues against the importance of a managerial-discipline motive for both types of acquisition and in favor of a managerial-synergy motive. This is because Managerial-discipline takeovers should have been directed at low-profit firms, whose profitability needed improved. The motive was Managerial-synergy as the targets were takeovers were high- profit firms, this is because synergy-motivated managers were looking for good partners Matsusaka(1993). Another factor linked to the managerial theories is whether or not the targets management was retained.Top management is said to have been retained if it meet the following criteria. Firstly It was reported in the Wall Street Journal that the acquired firms management would continue to operate under the new management. Secondly, it was indicated in the buyers listing statement that the targets management would be retained. Lastly, when the merger took place at least one of the top three executives of the target firm was still managing the firm three years later from when the merger took place. According to the above mentioned definitions, 61.8% of the managers in the sample were retained and only 3.5% of the acquisitions fell in the Replaced category. The main finding is that buyers earned significantly positive announcement-period returns during the conglomerate merger wave when they made diversifying acquisitions. The hypothesis that conglomerates were driven by empire building or some other managerial objective can be rejected because such explanations imply value decreases to unrelated acquisitions. Another explanation of the conglomerate merger wave is that mergers were driven by an accounting trick rather than expected efficiencies. Therefore, investors watched EPS; when the EPS went up they bid up the price of the stock. According to this argument, Conglomerates, tended to buy companies with lower P/E ratios than their own in order to increase their EPS and boost their stock prices. There was no evidence that firms earned positive returns which inflated EPS in this way. The study indicated that early conglomerators earned significantly positive returns simply because they were first. They may have gained some rents to organizational innovation. Possibly the men who built the first conglomerates had a unique talent for diversification, which the market rewarded. Hubbard, Palia (1999), have examined the likelihood that internal capital markets were formed to alleviate the information costs associated with the less well-developed external capital markets of the time; that is, whether they were expected to create value by the external capital markets in the 1960s.In this paper, the authors have inspected a form of cross-subsidization that occurs when a financially unconstrained bidding firm takes over a financially constrained target firm and as a result forms an internal capital market.The study examined whether the external capital markets expected that the formation of internal capital markets in the 1960s were value-maximizing for the bidding firm. However, existing research has argued that internal capital markets can be value-enhancing. As argued by Geneen(1997), the financing and budgeting expertise that a firm possesses is not necessarily related to its degree of diversification. Accordingly, the internal capital market hypothesis for all acquisitions is tested. The study also tests the bootstrapping explanation for conglomeration in the 1960s, which takes place when firms with a high price-earnings ratio (P/E) took over low P/E target firms and fooled the stock market with an increased combined earnings-per-share. In the 1960s, external capital markets were less developed in terms of company-specific information production than in later years. The authors have classified company-specific information into two general categories. Firstly, production information; and secondly, financing and budgeting expertise. However, in this study information-intensive activities were introduced. This was because; it assists the manager to internally allocate capital across divisions of a diversified firm. It was suggested that diversified firms were perceived by the external capital markets to have an informational advantage, because external capital markets were less well developed at that time. Comparing it to the current decade, there was less access by the public to computers, data- bases, analyst reports, and other sources of company-specific information. Not only this there was less large institutional money managers and the market for risky debt was illiquid. The authors selected a sample of 392 acquisitions that occurred during the period from 1961 through 1970. Diversifying acquisitions were defined as those in which the bidder and target do not share any two- digit SIC code Matsusaka(1993), and related acquisitions as those in which they do share a two-digit SIC code. Further the Wall Street Journal was used for announcement date as the event date. Four measures of abnormal returns to the conglomerate bidding firm were calculated. These measures are as follows. Firstly, the usual percentage returns or the cumulative abnormal returns from five days before to five days after the event date. Secondly the percentage returns until date of last revision or the cumulative abnormal returns from five days before to five days after the date of the last revision (Lang et al. (1991)). Thirdly, the dollar returns or the percentage return times the market value of the bidder six days before the announcement (Malatesta(1983); Matsusaka(1993)). Lastly , the investment return defined as the change in the value of the bidder divided by the purchase price (Morck et al. (1990)). Tobins r ratio[6] is used as a proxy for a firms capital market opportunities. The evidence from these measures is mixed. Positive abnormal returns for all four measures were shown for related acquisitions. On the other hand, two of the four measures had shown statically significant positive abnormal returns for diversifying acquisitions in. Not only that diversifying acquisitions do not significantly earn less than related acquisitions in two of the four measures. Thus, evidence suggests, the capital markets believed acquisitions to be generally good for bidder shareholders during the 1960s. More significantly, it was found that when financially unconstrained buyers acquired constrained target firms, highest bidder returns were earned. Further, bidders generally retain target management, signifying that management may have provided company- specific operational information and the bidder on his part also provided capital budgeting expertise. Therefore, external capital markets expected information benefits from the formation of the internal capital markets. The study found no evidence in support of the bootstrapping hypothesis, as the coefficient on the dummy variable[7] was not statistically different from zero. This result is consistent with Matsusaka, (1993), who also finds no evidence for bootstrapping.Therefore, firms merged to form their own internal capital markets as there was a deficiency of well-developed external capital markets in the 1960s. Some firms apparently had an information advantage over the external capital markets and were expected to produce value in an internal capital market. In the 1960s diversified acquisitions were rewarded by financial markets, the informational advantage that acquiring firms appeared to possess was likely to be in the capital budgeting, allocation process and operational aspects of each division. Bidder firms generally retained the target management as it would facilitate them running the operational part of each target firm. The Motives discussed in the above mentioned articles are appealing; however evidence from the stock market suggests that shareholders preferred their firms to diversify. Using a data set from the 60s and early 70s, Matsusaka (1993) reported that, when the company announced an unrelated acquisition, the stock price of the bidder increased on average of $8 million. However, on the announcement of a related acquisition, the bidding firms stock price fell by $4 million. The difference between the two returns is quite significant. Thus it appears that investors fully believed that unrelated acquisitions benefited their firms relative to the alternatives. Thus the managers just did what the stock market told them to do that is to diversify. Evidence from 1980s stock market suggested that shareholders, again, liked what was happening. Shleifer, and Vishny (1992) found that in the 1980s, stock prices of the bidding firms rose when they bought other firms in the same industry, and fell with unrelated diversification. It is clear that the market disapproved unrelated diversification. Therefore it does not astonish that, in light of such market reception, managers stopped diversifying and did what the stock market directed them to do. 2.2 Legal Motives Matsusaka (1996) investigated whether the antitrust enforcement of the 1960s led firms to take on the diversification goal, by preventing them from expanding within their own core industries. If correct, diversification should have occurred more less frequently when small firms merged than when large firms merged since small mergers were less likely to have attracted antitrust attention. Further the author examined the diversification patterns in the United Kingdom, Canada, Germany, and France in the late 1960s and early 1970s, where none of these countries had legal restrictions on horizontal growth similar to those in the Unites States. The US Clayton Antitrust Act was the antitrust legislation in the postwar period (1950 Celler-Kefauver amendment to Section 7). The act, prohibited mergers that would substantially lessen competition, or tend to create a monopoly. This new law was used by the antitrust authorities and the courts to limit the number of mergers between vertically related and firms in the same lines of business. The strictness of the antitrust environment in 1968 is illustrated by the observation that in the earlier 12 years, all antitrust cases that reached the Supreme Court had been resolved in support of the government. The study indicates the following two implications. Firstly, large horizontal mergers were more liable to have been challenged on antitrust grounds than small horizontal mergers. Secondly mergers between unrelated firms were unlikely to have been blocked, regardless of size. Firms diversified in 1960s, since antitrust authorities prevented them from expanding in their home industries. Later when antitrust policy became less rigid in the 1980s, firms expanded horizontally, leading them to refocus on their core business. Stigler (1966) was perhaps the first to present evidence on the antitrust hypothesis, concluding that, the 1950 Merger Act has had a strongly adverse effect on horizontal mergers by large companies. The author selected a sample of 549 mergers (that took place in 1968) from the New York Stock Exchange. Results of the study were reported through Logit regressions .It was found that bidders were as likely to have entered new industries when they made small acquisitions as when they made large acquisitions, and small buyers were as likely to have diversified as large buyers. Further the total number of diversification acquisitions concerning small companies was high.Though, according to the antitrust hypothesis; diversification should have been widespread primarily in large mergers where same industry acquisitions were prohibited by tough antitrust enforcement. Secondly assembled international evidence indicated that diversification took place in many industrialized nations in the 1960s and 1970s, although restrictions against horizontal combinations were unique to the United States. Yet, most other industrialized Western nations[8] experienced diversification merger waves and general movements toward diversification in their largest companies (Chandler (1991)).Thus most of the evidence, is not consistent with the antitrust hypothesis, signifying that other explanations for corporate diversification should be emphasized not the anti trust hypothesis. Scholes and Wolfson (1990) state, that the changes in U.S. tax laws[9] in the 1980s had obvious affect on the desirability of mergers and acquisitions. However such transactions were not only motivated by tax factors but also non tax factors[10]. Tax laws can have number of affects on mergers and acquisitions , which can include the following capital losses, presence of tax-attribute carry forwards such as net operating losses , investment tax credits, and foreign tax credits, among others, that might be cashed in more quickly and more fully by way of a merger; the desire to step up the tax basis of assets for depreciation purposes to their fair market value; the desire to sell assets to permit a change in the depreciation schedule to one that is more highly accelerated. The authors in this study have examined the effect of changes in tax laws passed in 1980s on merger and acquisition activity in the United States. The authors selected the annual values of mergers and acquisitions from 1968 through 1987 in nominal dollars. The data source for nominal values was W. T. Grimm and Company for 1968-85 and Mergers Acquisitions (1987-88, rev. quarterly) for 1986 and 1987. Using time series analysis it was found that the dollar volume of merger activity between 1980-1981 increased from $44.35 billion to $82.62 billion (86%) in nominal terms. The percentage increase was approximately twice as large as the next largest percentage increase in annual merger and acquisition activity over the 1970-86 periods. There was spectacular increase in merger activity that began with the passage of the Economic Recovery Tax Act of 1981, however this was not the only merger wave that occurred in that time frame. Unusual merger activity was also witnessed in the 1960s. The termination of 1960s wave was accompanied by quite a few regulatory events that depressed such transactions. Firstly, the Williams Amendments had en larged the cost and difficulty of effecting tender offers. Secondly the issuance of Accounting Principles Board Opinions 16 and 17, forced many acquiring firms to boost depreciation expense, goodwill amortization and cost of goods sold. Thirdly the Tax Reform Act of 1969, made transferability of tax attributes (net-operating-loss carry forwards) more restrained. Therefore there was a sudden decline in merger activity from the peak in 1968. Relative to the tax benefits when the non tax benefits of the transaction were small, current management were the most efficient purchasers, as they had an advantage along the hidden information dimension. Therefore 1981 act had increased the incidence of cases in which non tax benefits were less than the common tax benefits of mergers and acquisitions. As a result, there was an increase in the number of transactions involving management buyouts. The annual dollar value of unit management buyouts between 1978-80 increased by a factor of 3, and by a factor in excess of 20 for the period 1981-86. The antitrust proposition mentioned above is appealing as one of the most important reason for diversification, during the 60s and 70s, which simply disallowed mergers of firms in the same industry, regardless of the effects of these mergers o

Enron

The Enron scandal has far-reaching political and financial implications. In just 15 years, Enron grew from nowhere to be America's seventh largest company, employing 21,000 staff in more than 40 countries. But the firm's success turned out to have involved an elaborate scam. Enron lied about its profits and stands accused of a range of shady dealings, including concealing debts so they didn't show up in the company's accounts. As the depth of the deception unfolded, investors and creditors retreated, forcing the firm into Chapter 11 bankruptcy in December. More than six months after a criminal inquiry was announced, the guilty parties have still not been brought to justice. Leaders Leadership is critical to the creation and maintenance of culture; there is a constant interplay between culture and leadership. Leaders create the mechanisms for cultural embedding and reinforcement. Cultural norms arise and change because of what leaders tend to focus their attention on, their reactions to crises, their role modeling, and their recruitment strategies. Referring to Enron, the major mistake made by leaders are as follows: Compensation Programs As in most other U. S. companies, Enron’s management was heavily compensated using stock options. Heavy use of stock option awards linked to short-term stock price may explain the focus of Enron’s management on creating expectations of rapid growth and its efforts to puff up reported earnings to meet Wall Street’s expectations. The stated intent of stock options is to align the interests of management with shareholders. But most programs award sizable option grants based on short-term accounting performance, and there are typically few requirements for managers to hold stock purchased through option programs for the long term. The experience of Enron, along with many other firms in the last few years, raises the possibility that stock compensation programs as currently designed can motivate managers to make decisions that pump up short-term stock performance, but fail to create medium- or long-term value (Hall and Knox, 2002). Dishonestly concealed debt and overstated earnings. Management t Enron Corp. admitted it overstated earnings for nearly five years. In an SEC filing, Enron said financial statements from 1997 through the third quarter of 2001 â€Å"should not be relied upon, and that outside businesses run by Enron officials during that period should have been included in the company's earnings reports. As a result, Enron is reducing earnings for those years by $586 million, from $2. 89 billion to $2. 31 billion. The company also acknowledged that part of earnings came from deals with partnerships controlled by recently sacked CFO Andrew Fastow. These transactions are already being investigated by the Securities and Exchange Commission. Enron said these deals enabled Fastow to earn more than $30 million. Enron also conceded that three entities run by company officials should have been included in its financial statements, based on generally accepted accounting principles. In addition, the company revised its debt upward in each year from 1997 to 2000. As a result, Enron's debt at the end of 2000 was $10. 86 billion, $628 million more than previously reported. Enron’s Performance Review System. PRC featured two basic motivational forces – fear and greed. Skilling wanted to keep only â€Å"the very best,† meaning those who produced their profit and volume target– so every six months one or two out of every ten employees were dismissed. In pitting employees against each other, the rank-and rank System acted to stress the imagined weaknesses of individuals and to obfuscate organizational problems. In sum, this led to an erosion of employee confidence in their own perceptions and, most crucially, to further compliance with the organization’s leaders in a way that strengthened conformist behavior. In practice, the PRC system worked to encourage â€Å"entourages† or â€Å"fiefdoms† (Dallas 2003) of loyal employees who gravitated towards powerful players for protection. The PRC was a powerful mechanism for preventing the emergence of subcultures running counter to the organizational tone set by Enron’s hierarchy. Members of the Risk Management and Assessment Group who reviewed the terms and conditions of deals (and who were largely inexperienced recent MBA graduates) as well as internal auditors, were fearful of retaliation in the PRC from persons whose deals they were reviewing (Chaffin and Fidler 2002; Dallas 2003). At best, control was compliance-based, seldom encouraging employees to follow either the letter or the intent of laws (Dallas 2003). This punitive environment brought the consequences of dissent sharply into focus. Enron’s culture has been characterized as â€Å"ruthless and reckless †¦ lavish rewards on those who played the game, while persecuting those who raised objections† (Chaffin and Fidler 2002, 4-5). Led by Skilling’s cavalier attitude to rules, top management conveyed the impression that all that mattered was for employees to book profits. In sum, this led to an erosion of employees’ confidence in their own perceptions and, most crucially, to further compliance with the organization’s leaders in a way that strengthened conformist behavior. Former employees have noted how â€Å"loyalty required a sort of group think† (Chaffin and Fidler 2002, 2) and â€Å"that you had to ‘keep drinking the Enron water’† (Stephens and Behr 2002, 2). A myth of smooth, flawless operations was perpetuated with problems â€Å"papered over† (McLean 2001, 58). The net effect of the rank-and-yank system was to decrease the likelihood that employees would raise objections to any illegal or unethical behavior of powerful players. The competitiveness the PRC created was exacerbated by Enron’s bonus regime. As one insider put it, â€Å"sure, the culture at Enron was treacherous, but that was the point† (Swartz and Watkins 2003, 56). Ultimately, the overestimation of profits and underestimation of costs was endemic to the organization. The cheat on debt and financial report lead to character erosion which destroys the image of this company and loss of business and social standing. The harsh policy alliance the relationship between managers and ordinary workers, make well-intentioned employees were inhibited from doing the right thing. Board Board of Directors in Enron’s collapse concluded that the firm had developed a pervasive culture of deception (Senate Subcommittee 2002). As such it was designed and operating at the level of connivance. CEO Lay used direct force to fire any possible successor with whom he disagreed and either he or other top Enron managers used indirect force to deceive and manipulate employees and other stakeholders for top executive advantage. Whatever standard operating procedures were developed at the level of conformance were honored only to the extent that they did not infringe upon executive perks or interfere with top executives exercising a type of feudal control over internal subjects. When external compliance threatened to restrict Enron corporate prerogatives, aggressive tactics to reduce or liminate regulatory standards were routinely employed. The extent and degree to which illegal non-compliance was the cultural norm at Enron will be determined in the courts. Enron did not reach the commitment level; it never democratized its power structures so that employee and community input could shape strategic direction or restrain executive perks. For all intents and purposes, the work culture of Enron was that of a moral jungle where abuse of power dominated principled economic democratic norms; it was a moral powder keg ready to explode. (1) Fiduciary Failure.  The Enron Board of Directors failed to safeguard Enron shareholders and contributed to the collapse of the seventh largest public company in the United States, by allowing Enron to engage in high risk accounting, inappropriate conflict of interest transactions, extensive undisclosed off-the-books activities, and excessive executive compensation. The Board witnessed numerous indications of questionable practices by Enron management over several years, but chose to ignore them to the detriment of Enron shareholders, employees and business associates. 2) High Risk Accounting. The Enron Board of Directors knowingly allowed Enron to engage in high risk accounting practices. (3) Inappropriate Conflicts of Interest. Despite clear conflicts of interest, the Enron Board of Directors approved an unprecedented arrangement allowing Enron’s Chief Financial Officer to establish and operate the LJM private equity funds which transacted business with Enron and profited at Enron’s expense.  The Board exercised inadequate oversight of LJM transaction and compensation controls and failed to protect Enron shareholders from unfair dealing. (4) Extensive Undisclosed Off-The-Books Activity. The Enron Board of Directors knowingly allowed Enron to conduct billions of dollars in off-the-books activity to make its financial condition appear better than it was and failed to ensure adequate public disclosure of material off-the-books liabilities that contributed to Enron’s collapse. (5) Excessive Compensation.  The Enron Board of Directors approved excessive compensation for company executives, failed to monitor the cumulative cash drain caused by Enron’s 2000 annual bonus and performance unit plans, and failed to monitor or halt abuse by Board Chairman and Chief Executive Officer Kenneth Lay of a company-financed, multi-million dollar, personal credit line. (6) Lack of Independence. The independence of the Enron Board of Directors was compromised by financial ties between the company and certain Board members. The Board also failed to ensure the independence of the company’s auditor, allowing Andersen to provide internal audit and consulting services while serving as Enron’s Outside Accountants/Auditors Andersen's auditors were pressured by Enron's management to defer recognizing the charges from the special purpose entities as their credit risks became clear. Since the entities would never return a profit, accounting guidelines required that Enron should take a write-off, where the value of the entity was removed from the balance sheet at a loss. To pressure Andersen into meeting Enron's earnings expectations, Enron would occasionally allow accounting firms Ernst & Young or PricewaterhouseCoopers to complete accounting tasks to create the illusion of hiring a new firm to replace Andersen. Although Andersen was equipped with internal controls to protect against conflicted incentives of local partners, they failed to prevent conflict of interest. Revelations concerning Andersen's overall performance led to the break-up of the firm, and to the following assessment by the Powers Committee (appointed by Enron's board to look into the firm's accounting in October 2001): â€Å"The evidence available to us suggests that Andersen did not fulfill its professional responsibilities in connection with its audits of Enron's financial statements, or its obligation to bring to the attention of Enron's Board (or the Audit and Compliance Committee) concerns about Enron's internal contracts over the related-party transactions†. Ethical Code/Process Enron senior management gets a failing grade on truth and disclosure. The purpose of ethics is to enable recognition of how a particular situation will be perceived. At a certain level, it hardly matters what the courts decide. Enron is bankrupt—which is what happened to the company and its officers before a single day in court. But no company engaging in similar practices can derive encouragement for any suits that might be terminated in Enron’s favor. The damage to company reputation through a negative perception of corporate ethics has already been done. Enron’s top managers chose stakeholder deception and short-term financial gains for themselves, which destroyed their personal, and business reputations and their social standing. They all risk criminal and civil prosecution that could lead to imprisonment and/or bankruptcy. Board members were similarly negligent by failing to provide sufficient oversight and restraint to top management excesses, thereby further harming investor and public interests (Senate Subcommittee 2002). Individual and institutional investors lost millions of dollars because they were misinformed about the firm’s financial performance reality through questionable accounting practices (Lorenzetti 2002). Employees were deceived about the firm’s actual financial condition and deprived of the freedom to diversify their retirement portfolios; they had to stand by helplessly while their retirement savings evaporated at the same time that top managers cashed in on their lucrative stock options (Jacobius and Anand 2001). The government was also harmed because America’s political tradition of chartering only corporations that serve the public good was violated by an utter lack of economic democratic protections from the massive public stakeholder harms caused by aristocratic abuses of power that benefited select wealthy elite.

Compare and contrast antigone&letter from a Birmingham jail essay Essay

It is very impressive how Antigone and the â€Å"Letter from a Birmingham Jail† essay are very similar despite being written in two different time periods. Antigone and Martin Luther King Junior both fought for what was good for their society. Antigone buried her brother despite the king stating that her brother was a traitor and that nobody should bury him or honor him in any way. Antigone believed that nobody could dishonor or override the gods, that includes the king. Antigone was punished. She was thrown into a cave and walled off to die slowly but she committed suicide instead. Antigone fought for what was morally right. Martin Luther king Jr. fought for civil rights in the south. At the time the south was segregated between whites and blacks,the whites often had the newest and best things. Dr. MLK believed that no matter your race, heritage or county of origin everyone should be treated equally and get to have the same opportunities to be successful. MLK got thrown in jail for parading, his anti-racism views. MLK successfully brought two different cultures of people together that had never been around each other before. neither group accepted each other with open arms but after a short backlash everyone learned to accept each other and live together as one. Dr. Martin Luther King was assassinated on a hotel balcony after standing up for what was right and what was needed to be done at the time. Antigone stood up to the king so she could respect the gods and MLK stood up for blacks civil rights. what makes them comparable is that they both changed society positively whether it be the culture or the spiritual side of things. There is a clear difference in how each protagonist died, but then Antigone and MLK go back to being very similar in the reason why they died. The man that shot Dr. Martin Luther King thought that he deserved to be punished, so that man in his mind did what he thought was the correct thing to do. In Antigone the king demonstrated the action that he thought was appropriate for Antigone disobeying his command. Both MLK and Antigone understood the risks but they still choose to stand up for what they believed what was right. MLK and Antigone are heroes who sacrificed themselves for the better of the world, both showed bravery when no one else would. Martin Luther King Jr. did what he did so future generations could be in peace with each other. Antigone did what she did to prove to the king that no mere mortal has the right to deny any person their rights to honor and pay their respects to the dead.

Essay on The Vegetarian Diet Nutrition - 612 Words

The Vegetarian Diet Nutrition Vegetarianism can be a very healthy option but only if your vegetarian diet plan is well balanced. This means eating a variety of foods including grains, fruit and vegetables, beans, pulses, nuts or seeds, a small amount of fat, with or without dairy products. Vegetarian Pyramid Offers Best Vegetarian Nutrition =================================================== For optimum nutrition as a vegetarian, follow the Vegetarian Food Pyramid. Table 1. Vegetarian Food Pyramid ================================ Eggs, Sweets Eat occasionally or in small quantities Nuts Seeds Egg Whites, Soy Milks Dairy Plant Oils Eat daily†¦show more content†¦Complementary proteins do not need to be consumed at the same time if they regularly appear in the diet. Vegetarian Diet Nutrition - Iron ================================ Although vegetarian diets are higher in total iron content than nonvegetarian diets, iron reserves are lower in vegetarians because the iron from plant foods is less well absorbed. That said, iron deficiency anemia rates are similar in vegetarians and nonvegetarians. Remember that its easier to absorb iron from food if we eat it with foods that contain Vitamin C, so have some fruit or veg containing vitamin C, or some fruit juice with your meal. Vegetarian Diet Nutrition - Vitamin B12 ======================================= Plant foods are not a reliable source of B-12 for vegetarians. Vitamin B-12 in spirulina, sea vegetables, tempeh, and miso has been shown to be inactive B-12 analog rather than the active vitamin. Although dairy products and eggs contain vitamin B-12, research indicates that lacto-ovo-vegetarians have low blood levels of vitamin B-12. Thus use of fortified foods or supplements are advised for vegans or vegetarians who limit animal foods. Vegetarian Diet Nutrition - Vitamin D ===================================== Vitamin D is poorly supplied in all vegetarian diets unless vitamin D-fortified foods are eaten. However, vegan vitamin D-fortified foods - such as soyShow MoreRelated Adequate Nutrition in Vegetarian Diets Essay2999 Words   |  12 Pages Vegetarians have diets as safe and nutritious as non-vegetarian diets. Whether someone chooses a vegetarian diet to preserve animal rights or to improve his health, his diet can be planned and maintained. Every vegetarian diet is different from another, but as long as a vegetarian learns what foods to include in his diet, he can meet all his nutritional needs contrary to common misconceptions. With careful planning, a vegetarian diet can provide all the nutrients a human body needs. FirstRead MoreVegetarian Diets are the Healthiest Diets Vegetarians have a tendency to live a longer and1700 Words   |  7 PagesVegetarian Diets are the Healthiest Diets Vegetarians have a tendency to live a longer and healthier life. They have a habit of being more concerned and attentive with their diet and what they are eating. Statistics show that vegetarian diets have been adopted by at least 7.3 million Americans today. Dictionary.reference.com states that vegetarianism is â€Å"a person who does not eat or does not believe in eating meat, fish, fowl, or, in some cases, any food derived from animals, as eggs or cheese,Read MoreEssay on Pros and Cons of Vegetarian Diet762 Words   |  4 PagesPros and cons of vegetarian diet Vegetarian diets are based on cereals, whole grains, pulses, nuts, vegetables and fruits. Lacto-ovo-vegetarians do not consume any meat, poultry or fish but include eggs and dairy products in their diets. Vegans do not consume any food obtained from animals. Other vegetarian diets include fruitarians and macrobiotic diets that are more restricted. Reference to vegetarian diets usually implies lacto-ovo-vegetarians. A number of reasons can be attributed to preferenceRead MoreThe Vegetarian Diet is Healthy and Saves the Planet Essay1441 Words   |  6 PagesHuman life and health is based on nutrition, physical activity and the existence of our planet. Without food or enough oxygen the humans can’t survive, they die. As human’s lifestyle, technology and knowledge changed over the last few decades, so did the causes of death. Obesity, which leads to the diseases on top of death reasons, has been growing in America, because of the wrong choice of diet. Meat contains too muc h fat and unnatural nutrition, which is not healthy for us. The number one factorRead MoreVegetarian Diets Are Considered As Healthy Diets1180 Words   |  5 Pages How Vegetarian Diets Are Considered As Healthy Diets There are number of type of meat like beef, chicken, pork and fish as well but there are also some people who do not eat any type of meat. So this type of people is called vegetarian. They cannot eat meat but also they cannot use other type of products which are produced from animals like egg, gelatin and milk. Vegetarian diet is a best kind of food which fulfills the needs of all types of people such as children, old ages and young people asRead MoreThe Diet Of Vegetarian Diet891 Words   |  4 PagesVegetarian Diet Aids In Combatting Preventable Disease Recently, there has been a lot of debate about vegetarian diets. Many people are switching their diets to reap the health benefits; â€Å"Surveys in the United States have estimated that nearly 30 million people eat diets that are largely or entirely meat-free† (Harvard Health Letter 6). This essay will peel away the layers of wool surrounding a vegetarian diet and answer if it provides a better quality of health. In the Science Teacher publishedRead MoreThe Key to a Healthy Vegetarian Diet719 Words   |  3 Pagesthousands of years; then why is maintaining a vegetarian diet so difficult in the 21st century? The key to a healthy vegetarian diet is knowing what to eat and what not to eat, rather than simply avoiding meat. As Hobson (2009) points out, remember, the root of vegetarian is veg, not junk. The 21st century model of vegetarianism does not always involve the daily simplicity of whole grains, pulses, and nutrient-packed vegetables. Some vegetarians reach for pre-packag ed, processed foods convenientlyRead MoreMain Elements Of A Healthy Eating System1201 Words   |  5 PagesNutrition is the process of using nutrients to support growth and provide energy to fulfil the daily needs of physical and mental activities (Human Nutrition, 2015, para. 1). Nutrition includes food intake, the process of food once in the body and the relation of nutrients and disease (Richard Robinson, 2002, p. 217). This essay will briefly outline the elements of a healthy eating system such as the food pyramid, then discuss the benefits and risks of a vegetarian diet and discuss a range of causesRead MoreThe Health Benefits Of Vegetarian Diet1295 Words   |  6 Pagesmuch as the evolution to a vegetarian diet (Albert Einstein)†.The vegetarian diet has been proposed by many, from philosophers like Plato and Nietzsche to political leaders such as Benjamin Franklin and Gandhi, and modern idols like Paul McCartney and Bob Marley. Science also supports the vegetarian die t, there are many studies demonstrating its health benefits. Being vegetarian means not eating any animal products, including all kinds of fish, or poultry. Vegetarians who consume eggs and milk orRead MoreA Comparison between Vegetarians and Meat Eaters828 Words   |  4 PagesComparison between Vegetarians and Meat Eaters During the last 20 years more and more people decide to cut their daily menu any meat and animal products for many different reasons such as fear of food poisoning, diseases or etc. However, eating meat is part of the daily life of billions of people all over the world.  Meat is a prehistoric, basic food full of proteins, iron, and amino-acids. People who eat meat live longer than vegetarians, but a meatless diet is healthier than a diet containing meat