Mergers Acquisitions And Other Restructuring Activities 7th Edition by Donald DePamphilis -Test Bank
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Sample
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Chapter 3: The Corporate Takeover Market:
Common Takeover Tactics, Anti-Takeover Defenses, and Corporate
Governance
Examination Questions and Answers
True/False Questions: Answer true or false to each of the
following.
1. Friendly
takeovers are negotiated settlements that are often characterized by
bargaining, which remains undisclosed until the agreement has been signed. True
or False
Answer: True
2. Concern
about their fiduciary responsibility to shareholders and shareholder lawsuits
often puts pressure on a target firm’s board of directors to accept an offer if
it includes a significant premium to the target’s current share price. True or
False
Answer: True
3. An
astute bidder should always analyze the target firm’s possible defenses such as
golden parachutes for key employees and poison pills before making a bid. True
or False
Answer: True
4. The
accumulation of a target firm’s stock by arbitrageurs makes purchases of blocks
of stock by the bidder easier. True or False
Answer: True
5. A
successful proxy fight may represent a far less expensive means of gaining
control over a target than a
tender offer. True or False
Answer: True
6. Public
announcements of a proposed takeover are often designed to put pressure on the
board of the target firm. True or False
Answer: True
7. A
tender offer is a proposal made directly to the target firm’s board as the
first step leading to a friendly takeover. True or False
Answer: False
8. A
bear hug involves mailing a letter containing an acquisition proposal to the
target’s board without warning and demanding an immediate response. True or False
Answer: True
9. Dissident
shareholders always undertake a tender offer to change the composition of a
firm’s board of
directors. True or False
Answer: False
10. A
proxy contest is one in which a group of dissident shareholders attempts to
obtain representation on a
firm’s board by soliciting other shareholders for the right to
vote their shares. True or False
Answer: True
11. A
hostile tender offer is a takeover tactic in which the acquirer bypasses the
target’s board and management and
goes directly to the target’s shareholders with an offer to
purchase their shares. True or False
Answer: True
12. According
to the management entrenchment hypothesis, takeover defenses are designed to
protect the
target firm’s management from a hostile takeover. True or
False
Answer: True
13. The
shareholder interests theory suggests that shareholders gain when management
resists takeover
attempts. True or False
Answer: True
14. A
standstill agreement is one in which the target firm agrees not to solicit bids
from other potential
buyers while it is negotiating with the first bidder. True
or False
Answer: True
15. Most
takeover attempts may be characterized as hostile bids. True or False
Answer: False
16. Litigation
is a tactic that is used only by acquiring firms. True or False
Answer: False
17. The
takeover premium is the dollar or percentage amount the purchase price proposed
for a target firm
exceeds the acquiring firm’s share price. True or False
Answer: False
18. Concern
about their fiduciary responsibility and about stockholder lawsuits puts
pressure on the target’s
board to accept the offer. True or False
Answer: True
19. The
final outcome of a hostile takeover is rarely affected by the composition of
the target’s stock
ownership and how stockholders feel about management’s
performance. True or False
Answer: False
20. Despite
the pressure of an attractive purchase price premium, the composition of the
target’s board
greatly influences what the board does and the timing of its
decisions. True or False
Answer: True
21. The
target firm’s bylaws may provide significant hurdles for an acquiring
firm. True or False
Answer: True
22. Bylaws
may provide for a staggered board, the inability to remove directors without
cause, and
supermajority voting requirements for approval of mergers.
True or False
Answer: True
23. An
acquiring firm may attempt to limit the options of the target’s senior
management by making a formal
acquisition proposal, usually involving a public announcement,
to the board of the directors of the target. True or False
Answer: True
24. A
target firm is unlikely to reject a bid without getting a “fairness” opinion
from an investment banker
stating that the offer is inadequate. True or False
Answer: True
25. By
replacing the target’s board members, proxy fights may be an effective means of
gaining control
without owning 51% of the target’s voting stock. True or
False
Answer: True
26. Proxy
contests and tender offers are often viewed by acquirers as inexpensive ways to
takeover another
firm. True or False
Answer: False
27. All
materials in a proxy contest must be filed with the SEC before they are sent to
shareholders.
True or False
Answer: True
28. Federal
and state laws make it extremely difficult for a bidder to acquire a controlling
interest in a target
without such actions becoming public knowledge. True or
False
Answer: True
29. Tender
offers always consist of an offer to exchange acquirer shares for shares in the
target firm.
True or False
Answer: False
30. The
size of the target firm is the best predictor of the likelihood of being taken
over by another firm.
True or False
Answer: True
31. Poison
pills are a commonly used takeover tactic to remove the management and board of
the target firm.
True or False
Answer: False
32. Poison
pills represent a new class of securities issued by a company to its
shareholders, which have no
value unless an investor acquires a specific percentage of the
firm’s voting stock. True or False
Answer: True
33. In
elections involving staggered or classified boards, only one group of board
members is up for
reelection each year. True or False
Answer: True
34. Golden
parachutes are employee severance arrangements, which are triggered whenever a
change in
control takes place. They are generally held by a large
number of employees at all levels of management throughout the firm. True
or False
Answer: False
35. Tender
offers apply only for share for share exchanges. True or False
Answer: False
36. Corporate
governance refers to the way firms elect CEOs. True or False
Answer: False
37. The
threat of hostile takeovers is a factor in encouraging a firm to implement good
governance practices.
True or False
Answer: True
38. Corporate
governance refers to a system of controls both internal and external to the
firm that protects
stakeholders’ interests. True or False
Answer: True
39. Stakeholders
in a firm refer to shareholders only. True or False
Answer: False
40. Corporate
anti-takeover defenses are necessarily a sign of bad corporate
governance. True or False
Answer: False
41. The
threat of corporate takeover has little impact on how responsibly a corporate
board and management manage a firm. True or False
Answer: False
42. Institutional
activism has assumed a larger role in ensuring good corporate governance practices
in recent years. True or False
Answer: True
43. Executive
stock option plans have little impact on the way management runs the firm. True
or False
Answer: False
44. A
standstill agreement prevents an investor who has signed the agreement from
ever again buying stock in the target firm. True or False
Answer: False
45. The
primary forms of proxy contests are those for seats on the board of directors,
those concerning management proposals, and those seeking to force management to
take a particular action. True or False
Answer: True
46. Purchasing
target stock in the open market is a rarely used takeover tactic. True or False
Answer: False
47. In a
one-tier offer, the acquirer announces the same offer to all target
shareholders. True or False.
Answer: True
48. In a
two-tiered offer, target shareholders typically received two offers, which
potentially have different values. True or False
Answer: True
49. A
no-shop agreement prohibits the takeover target from seeking other bids. True
or False
Answer: True
50. Poison
pills represent a new class of stock issued by a company to its shareholders,
usually as a dividend. True or False
Answer: True
Multiple Choice: Circle only one alternative.
1. All
of the following are commonly used takeover tactics, except for
2. Poison
pills
3. Bear
hug
4. Tender
offer
5. Proxy
contest
6. Litigation
Answer: A
2. According
to the management entrenchment theory,
3. Management
resistance to takeover attempts is an attempt to increase the proposed purchase
price premium
4. Management
resistance to takeover attempts is an attempt to extend their longevity with
the target firm
5. Shareholders
tend to benefit when management resists takeover attempts
6. Management
attempts to maximize shareholder value
7. Describes
the primary reason takeover targets resist takeover bids
Answer: B
3. Which
of the following factors often affects hostile takeover bids?
4. The
takeover premium
5. The
composition of the board of the target firm
6. The
composition of the ownership of the target’s stock
7. The
target’s bylaws
8. All
of the above
Answer: E
4. All
of the following are true of a proxy contest except for
5. Are
usually successful
6. Are
sometimes designed to replace members of the board
7. Are
sometimes designed to have certain takeover defenses removed
8. May
enable effective control of a firm without owning 51% of the voting stock
9. Are
often costly
Answer: A
5. Purchasing
the target firm’s stock in the open market is a commonly used tactic to achieve
all of
the following except for
1. Acquiring
a controlling interest in the target firm without making such actions public
knowledge.
2. Lowering
the average cost of acquiring the target firm’s shares
3. Recovering
the cost of an unsuccessful takeover attempt
4. Obtaining
additional voting rights in the target firm
5. Strengthening
the effectiveness of proxy contests
Answer: A
6. All
of the following are true of tender offers except for
7. Tender
offers consist only of offers of cash for target stock
8. Are
generally considered an expensive takeover tactic
9. Are
extended for a specific period of time
10. Are
sometimes over subscribed
11. Must
be filed with the SEC
Answer: A
7. Which
of the following are common takeover tactics?
8. Bear
hugs
9. Open
market purchases
10. Tender
offers
11. Litigation
12. All
of the above
Answer: E
8. All
of the following are common takeover defenses except for
9. Poison
pills
10. Litigation
11. Tender
offers
12. Staggered
boards
13. Golden
parachutes
Answer: C
9. All
of the following are true of poison pills except for
10. They
are a new class of security
11. Generally
prevent takeover attempts from being successful
12. Enable
target shareholders to buy additional shares in the new company if an unwanted
shareholder’s ownership exceeds a specific percentage of the target’s stock
13. Delays
the completion of a takeover attempt
14. May
be removed by the target’s board if an attractive bid is received from a
so-called “white knight.”
Answer: B
10. The
following takeover defenses are generally put in place by a firm before a
takeover attempt is
initiated.
1. Standstill
agreements
2. Poison
pills
3. Recapitalization
4. Corporate
restructuring
5. Greenmail
Answer: B
11. The
following takeover defenses are generally put in place by a firm after a
takeover attempt is
underway.
1. Staggered
board
2. Standstill
agreement
3. Supermajority
provision
4. Fair
price provision
5. Reincorporation
Answer: B
12. Which
of the following is true about so-called shark repellants?
13. They
are put in place to strengthen the board
14. They
include poison pills
15. Often
consist of the right to issue greenmail
16. Involve
White Knights
17. Involve
corporate restructuring
Answer: A
13. Which
of the following is true? A hostile takeover attempt
14. Is
generally found to be illegal
15. Is
one that is resisted by the target’s management
16. Results
in lower returns to the target firm’s shareholders than a friendly attempt
17. Usually
successful
18. Supported
by the target firm’s board and its management
Answer: B
14. Which
is true of the following? A white knight
15. Is a
group of dissident shareholders which side with the bidding firm
16. Is a
group of the target firm’s current shareholders which side with management
17. Is a
third party that is willing to acquire the target firm at the same price as the
bidder but usually removes the target’s management
18. Is a
firm which is viewed by management as a more appropriate suitor than the bidder
19. Is a
firm that is willing to acquire only a large block of stock in the target firm
Answer: D
15. Which
of the following is true about supervoting stock?
16. Is a
commonly used takeover tactic.
17. Is
generally encouraged by the SEC
18. May
have 10 to 100 times of the voting rights of other classes of stock
19. Is
issued to acquiring firms if they agree not to purchase a controlling interest
in the target firm
20. Is a
widely used takeover defense
Answer: C
16. Which
of the following factors influences corporate governance practices?
17. Securities
legislation
18. Government
regulatory agencies
19. The threat
of a hostile takeover
20. Institutional
activism
21. All
of the above
Answer: D
17. Which
of the following are commonly considered alternative models of corporate
governance?
1. Market
model
2. Control
model
3. Takeover
model
4. A
& B only
5. A
& C only
Answer: D
18. The market
governance model is applicable when which of the following conditions are true?
1. Capital
markets are liquid
2. Equity
ownership is widely dispersed
3. Ownership
and control are separate
4. Board
members are largely independent
5. All
of the above
Answer: E
19. The
control market is applicable when which of the following conditions are true?
1. Capital
markets are illiquid
2. Equity
ownership is heavily concentrated
3. Board
members are largely insiders
4. Ownership
and control overlap
5. All
of the above
`Answer: E
20. The
control model of corporate governance is applicable under all of the following
conditions except for
1. Capital
markets are illiquid
2. Board
members are largely insiders
3. Ownership
and control overlap
4. Equity
ownership is widely dispersed
5. A, B,
& D only
Answer: D
21. Which
of the following are the basic principles on which the market model is based?
1. Management
incentives should be aligned with those of shareholders and other major
stakeholders
2. Transparency
of financial statements
3. Equity
ownership should be widely dispersed
4. A
& B only
5. A, B,
and C only
Answer: E
22. Which
of the following statements best describes the business judgment rule?
1. Board
members are expected to conduct themselves in a manner that could reasonably be
seen as being in the best interests of the shareholders.
2. Board
members are always expected to make good decisions.
3. The
courts are expected to “second guess’ decisions made by corporate boards.
4. Directors
and managers are always expected to make good decisions.
5. Board
decisions should be subject to constant scrutiny by the courts.
Answer: A
23. Over
the years, the U.S. Congress has transferred some of the enforcement of
securities laws to organizations other than the SEC such as
1. Public
stock exchanges
2. Financial
Accounting Standards Board
3. Public
Accounting Oversight Board
4. State
regulatory agencies
5. All
of the above
Answer: E
24. Which
of the following government agencies can discipline firms with inappropriate
governance practices?
1. Securities
and Exchange Commission
2. Federal
Trade Commission
3. The
Department of Justice
4. A
& C only
5. A, B,
& C
Answer: E
25. Studies
show that which of the following combinations of corporate defenses can be most
effective in discouraging
hostile takeovers?
1. Poison
pills and staggered boards
2. Poison
pills and golden parachutes
3. Golden
parachutes and staggered boards
4. Standstill
agreements and White Knights
5. Poison
Pills and tender offers
Answer: A
26. Some
of Acme Inc.’s shareholders are very dissatisfied with the performance of the
firm’s current management team and want to gain control of the board. To do so,
these shareholders offer their own slate of candidates for open spaces on the
firm’s board of directors. Lacking the necessary votes to elect these
candidates, they are contacting other shareholders and asking them to vote for
their slate of candidates. The firm’s existing management and board is asking
shareholders to vote for the candidates they have proposed to fill vacant seats
on the board. Which of the following terms best describes this scenario?
27. Leveraged
buyout
b
Proxy contest
1. Merger
2. Divestiture
3. None
of the above
Answer: B
27. Xon
Enterprises is attempting to take over Rayon Group. Rayon’s shareholders have
the right to buy additional
shares at below market price if Xon (considered by Rayon’s board
to be a hostile bidder) buys more than 15 percent of Rayon’s outstanding
shares. What term applies to this antitakeover measure?
1. Share
repellent plan
2. Golden
parachute plan
3. Pac
Man defense
4. Poison
pill
5. Greenmail
provision
Answer: D
Case Study Short Essay Examination Questions:
Mittal Acquires Arcelor—A Battle of Global Titans in the
European Corporate Takeover Market
Ending five months of maneuvering, Arcelor agreed on June 26,
2006, to be acquired by larger rival Mittal Steel Co. for $33.8 billion in cash
and stock. The takeover battle was one of the most acrimonious in recent
European Union history. Hostile takeovers are now increasingly common in
Europe. The battle is widely viewed as a test case as to how far a firm can go
in attempting to prevent an unwanted takeover.
Arcelor was created in 2001 by melding steel companies in Spain,
France, and Luxembourg. Most of its 90 plants are in Europe. In contrast, most
of Mittal’s plants are outside of Europe in areas with lower labor costs.
Lakshmi Mittal, Mittal’s CEO and a member of an important industrial family in
India, started the firm and built it into a powerhouse through two decades of
acquisitions in emerging nations. The company is headquartered in the Netherlands
for tax reasons. Prior to the Arcelor acquisition, Mr. Mittal owned 88 percent
of the firm’s stock.
Mittal acquired Arcelor to accelerate steel industry
consolidation to reduce industry overcapacity. The combined firms could have
more leverage in setting prices and negotiating contracts with major customers
such as auto and appliance manufacturers and suppliers such as iron ore and
coal vendors, and eventually realize $1 billion annually in pretax cost
savings.
After having been rebuffed by Guy Dolle, Arcelor’s president, in
an effort to consummate a friendly merger, Mittal launched a tender offer in
January 2006 consisting of mostly stock and cash for all of Arcelor’s
outstanding equity. The offer constituted a 27 percent premium over Arcelor’s
share price at that time. The reaction from Arcelor’s management, European
unions, and government officials was swift and furious. Guy Dolle stated flatly
that the offer was “inadequate and strategically unsound.” European politicians
supported Mr. Dolle. Luxembourg’s prime minister, Jean Claude Juncker, said a
hostile bid “calls for a hostile response.” Trade unions expressed concerns
about potential job loss.
Dolle engaged in one of the most aggressive takeover defenses in
recent corporate history. In early February, Arcelor doubled its dividend and
announced plans to buy back about $8.75 billion in stock at a price well above
the then current market price for Arcelor stock. These actions were taken to
motivate Arcelor shareholders not to tender their shares to Mittal. Arcelor
also backed a move to change the law so that Mittal would be required to pay in
cash. However, the Luxembourg parliament rejected that effort.
To counter these moves, Mittal Steel said in mid-February that
if it received more than one-half of the Arcelor shares submitted in the
initial tender offer, it would hold a second tender offer for the remaining
shares at a slightly lower price. Mittal pointed out that it could acquire the
remaining shares through a merger or corporate reorganization. Such rhetoric
was designed to encourage Arcelor shareholders to tender their shares during
the first offer.
In late 2005, Arcelor outbid German steelmaker Metallgeschaft to
buy Canadian steelmaker Dofasco for $5 billion. Mittal was proposing to sell
Dofasco to raise money and avoid North American antitrust concerns. Following
completion of the Dofasco deal in April 2006, Arcelor set up a special Dutch
trust to prevent Mittal from getting access to the asset. The trust is run by a
board of three Arcelor appointees. The trio has the power to determine if
Dofasco can be sold during the next five years. Mittal immediately sued to test
the legality of this tactic.
In a deal with Russian steel maker OAO Severstahl, Arcelor
agreed to exchange its shares for Alexei Mordashov’s 90 percent stake in
Severstahl. The transaction would give Mr. Mordashov a 32 percent stake in
Arcelor. Arcelor also scheduled an unusual vote that created very tough
conditions for Arcelor shareholders to prevent the deal with Severstahl from being
completed. Arcelor’s board stated that the Severstahl deal could be blocked
only if at least 50 percent of all Arcelor shareholders would vote against it.
However, Arcelor knew that only about one-third of shareholders actually attend
meetings. This is a tactic permissible under Luxembourg law, where Arcelor is
incorporated.
Investors holding more than 30 percent of Arcelor shares signed
a petition to force the company to make the deal with Severstahl subject to a
traditional 50.1 percent or more of actual votes cast. After major shareholders
pressured the Arcelor board to at least talk to Mr. Mittal, Arcelor demanded an
intricate business plan from Mittal as a condition that had to be met. Despite
Mittal’s submission of such a plan, Arcelor still refused to talk. In late May,
Mittal raised its bid by 34 percent and said that if the bid succeeded, Mittal
would eliminate his firm’s two-tiered share structure, giving the Mittal family
shares ten times the voting rights of other shareholders.
A week after receiving the shareholder petition, the Arcelor
board rejected Mittal’s sweetened bid and repeated its support of the
Severstahl deal. Shareholder anger continued, and many investors said they
would reject the share buyback. Some investors opposed the buyback because it
would increase Mr. Mordashov’s ultimate stake in Arcelor to 38 percent by
reducing the number of Arcelor shares outstanding. Under the laws of most
European countries, any entity owning more than a third of a company is said to
have effective control. Arcelor cancelled a scheduled June 21 shareholder vote
on the buyback. Despite Mr. Mordashov’s efforts to enhance his bid, the Arcelor
board asked both Mordashov and Mittal to submit their final bids by June 25.
Arcelor finally agreed to Mittal’s final bid, which had been
increased by 14 percent. The new offer consisted of $15.70 in cash and 1.0833
Mittal shares for each Arcelor share. The new bid is valued at $50.54 per
Arcelor share, up from Mittal’s initial bid in January 2006 of $35.26. The final
offer represented an unprecedented 93 percent premium over Arcelor’s share
price of $26.25 immediately before Mittal’s initial bid. Lakshmi Mittal will
control 43.5 percent of the combined firm’s stock. Mr. Mordashov would receive
a $175 million breakup fee due to Arcelor’s failure to complete its agreement
with him. Finally, Mittal agreed not to make any layoffs beyond what Arcelor
already has planned.
Discussion Questions:
1. Identify
the takeover tactics employed by Mittal. Explain why each was used.
Answer: Mittal attempted a friendly takeover by initiating
behind the scenes negotiations with Guy Dolle, CEO of Arcelor. However,
after being rebuffed publicly, Mittal employed a two-tiered cash and stock
tender offer to circumvent the Arcelor board. To counter virulent
opposition from both Arcelor management and local politicians, Mittal announced
that it would condition the second tier of its tender offer on receiving more
than one-half of the Arcelor voting stock. However, the second tier offer would
be at a slightly lower price than offered in the first tier. This was
done to encourage Arcelor shareholders to participate in the first tier
offering. If Mittal could gain a majority of voting shares it would be able to
acquire the remaining shares through a backend merger. Moreover, Mittal sued to
test the legality of Arcelor’s moving its recently acquired Dofasco operations
into a trust to prevent Mittal from selling the operation to help finance the
takeover. Mittal also attempted to rally large shareholder support against what
were portrayed as Arcelor management’s self-serving maneuvers. Finally,
Mittal continued efforts to appeal to shareholders by raising its bid from its
initial 22% premium to the then current Arcelor share price to what amounted to
a 93% premium and agreeing to eliminate its super-voting stock which had given
the Mittal family shares that had ten times the voting rights of other
shareholders.
2. Identify
the takeover defenses employed by Arcelor? Explain why each was used.
Answer: Initially, Guy Dolle attempted to gain
support among local politicians and the press to come out against the proposed
takeover by emphasizing potential job losses and disruption to local
communities. Arcelor also provided its shareholders with an attractive
alternative to tendering their shares to Mittal by announcing an $8.75 billion
share buy-back at a price well above their then current share price.
Arcelor also tried to increase the cost of the transaction to Mittal by seeking
a change in the local law that would have required that Mittal pay shareholders
only in cash. By putting Dofasco in a trust, Arcelor sought to deprive
Mittal of a way of defraying the cost of the takeover by preventing Mittal from
selling the asset without the permission of the trustees who were all Arecelor
appointees. Arcelor also sought to put a large portion of its stock into
“friendly hands” by seeking a white knight. To stretch out the process and
raise the cost of a takeover to Mittal, Arcelor refused to engage in direct
negotiations with Mittal until they delivered a detailed business plan as to
what they proposed to do with the combined firms. Arcelor proceeded to
ignore the plan when it was submitted.
3. Using
the information in this case study, discuss the arguments for and against
encouraging hostile corporate takeovers
Answer: Hostile takeovers may be appropriate whenever target
management is not working in the best interests of its shareholders (i.e.,
so-called agency problems). However, while such transactions often are
concluded in a negotiated settlement, the subsequent enmity inevitably raises
the cost of integration and the ultimate cost of the takeover due to the
probable boost in the offer price required to close the deal. While this
is good for the target shareholders, it works to the detriment of the
acquirer’s shareholders.
4. Was
Arcelor’s board and management acting to protect their own positions (i.e., the
management entrenchment hypothesis) or in the best interests of the
shareholders (i.e., the shareholder interests hypothesis)? Explain your answer.
Answer: While it seems on the surface that Arcelor’s management
was acting to entrench themselves, the end result was an eye-popping 93%
premium paid by Mittal over Arcelor’s share price when the takeover
began. Consequently, it is difficult to argue that the end result was not
in the best interests of Arcelor’s shareholders.
Verizon Acquires MCI—The Anatomy of Alternative Bidding
Strategies
While many parties were interested in acquiring MCI, the major
players included Verizon and Qwest. U.S.-based Qwest is an integrated
communications company that provides data, multimedia, and Internet-based
communication services on a national and global basis. The acquisition would
ease the firm’s huge debt burden of $17.3 billion because the debt would be
supported by the combined company with a much larger revenue base and give it
access to new business customers and opportunities to cut costs.
Verizon Communications, created through the merger of Bell
Atlantic and GTE in 2000, is the largest telecommunications provider in the
United States. The company provides local exchange, long distance, Internet,
and other services to residential, business, and government customers. In
addition, the company provides wireless services to over 42 million customers
in the United States through its 55 percent–owned joint venture with Vodafone
Group PLC. Verizon stated that the merger would enable it to more efficiently
provide a broader range of services, give the firm access to MCI’s business
customer base, accelerate new product development using MCI’s fiber-optic
network infrastructure, and create substantial cost savings.
By mid-2004, MCI had received several expressions of interest
from Verizon and Qwest regarding potential strategic relationships. By July,
Qwest and MCI entered into a confidentiality agreement and proceeded to perform
more detailed due diligence. Ivan Seidenberg, Verizon’s chairman and CEO,
inquired about a potential takeover and was rebuffed by MCI’s board, which was
evaluating its strategic options. These included Qwest’s proposal regarding a
share-for-share merger, following a one-time cash dividend to MCI shareholders
from MCI’s cash in excess of its required operating balances. In view of
Verizon’s interest, MCI’s board of directors directed management to advise
Richard Notebaert, the chairman and CEO of Qwest, that MCI was not prepared to
move forward with a potential transaction. The stage was set for what would
become Qwest’s laboriously long and ultimately unsuccessful pursuit of MCI, in
which the firm would improve its original offer four times, only to be rejected
by MCI in each instance even though the Qwest bids exceeded Verizon’s.
After assessing its strategic alternatives, including the option
to remain a stand-alone company, MCI’s board of directors concluded that the
merger with Verizon was in the best interests of the MCI stockholders. MCI’s
board of directors noted that Verizon’s bid of $26 in cash and stock for each
MCI share represented a 41.5 percent premium over the closing price of MCI’s
common stock on January 26, 2005. Furthermore, the stock portion of the offer
included “price protection” in the form of a collar (i.e., the portion of the
purchase price consisting of stock would be fixed within a narrow range if
Verizon’s share price changed between the signing and closing of the
transaction).
The merger agreement also provided for the MCI board to declare
a special dividend of $5.60 once the firm’s shareholders approved the deal.
MCI’s board of directors also considered the additional value that its
stockholders would realize, since the merger would be a tax-free reorganization
in which MCI shareholders would be able to defer the payment of taxes until
they sold their stock. Only the cash portion of the purchase price would be
taxable immediately. MCI’s board of directors also noted that a large number of
MCI’s most important business customers had indicated that they preferred a
transaction between MCI and Verizon rather than a transaction between MCI and
Qwest.
While it is clearly impossible to know for sure, the sequence of
events reveals a great deal about Verizon’s possible bidding strategy. Any
bidding strategy must begin with a series of management assumptions about how
to approach the target firm. It was certainly in Verizon’s best interests to
attempt a friendly rather than a hostile takeover of MCI, due to the challenges
of integrating these two complex businesses. Verizon also employed an increasingly
popular technique in which the merger agreement includes a special dividend
payable by the target firm to its shareholders contingent upon their approval
of the transaction. This special dividend is an inducement to gain shareholder
approval.
Given the modest 3 percent premium over the first Qwest bid,
Verizon’s initial bidding strategy appears to have been based on the low end of
the purchase price range it was willing to offer MCI. Verizon was initially
prepared to share relatively little of the potential synergy with MCI
shareholders, believing that a bidding war for MCI would be unlikely in view of
the recent spate of mergers in the telecommunications industry and the weak
financial position of other competitors. SBC and Nextel were busy integrating AT&T
and Sprint, respectively. Moreover, Qwest appeared to be unable to finance a
substantial all-cash offer due to its current excessive debt burden, and its
stock appeared to have little appreciation potential because of ongoing
operating losses. Perhaps stunned by the persistence with which Qwest pursued
MCI, Verizon believed that its combination of cash and stock would ultimately
be more attractive to MCI investors than Qwest’s primarily all-cash offer, due
to the partial tax-free nature of the bid.
Throughout the bidding process, many hedge funds criticized
MCI’s board publicly for accepting the initial Verizon bid. Since its emergence
from Chapter 11, hedge funds had acquired significant positions in MCI’s stock,
with the expectation that MCI constituted an attractive merger candidate. In
particular, Carlos Slim Helu, the Mexican telecommunications magnate and
largest MCI shareholder, complained publicly about the failure of MCI’s board
to get full value for the firm’s shares. Pressure from hedge funds and other
dissident MCI shareholders triggered a shareholder lawsuit to void the February
14, 2005, signed merger agreement with Verizon.
In preparation for a possible proxy fight, Verizon entered into
negotiations with Carlos Slim Helu to acquire his shares. Verizon acquired Mr.
Slim’s 13.7 percent stake in MCI in April 2005. Despite this purchase,
Verizon’s total stake in MCI remained below the 15 percent ownership level that
would trigger the MCI rights plan.
About 70 percent (i.e., $1.4 billion) of the cash portion of
Verizon’s proposed purchase price consisted of a special MCI dividend payable
by MCI when the firm’s shareholders approved the merger agreement. Verizon’s
management argued that the deal would cost their shareholders only $7.05 billion
(i.e., the $8.45 billion purchase price consisting of cash and stock, less the
MCI special dividend). The $1.4 billion special dividend reduced MCI’s cash in
excess of what was required to meet its normal operating cash requirements.
Qwest consistently attempted to outmaneuver Verizon by
establishing a significant premium between its bid and Verizon’s, often as much
as 25 percent. Qwest realized that its current level of indebtedness would
preclude it from significantly increasing the cash portion of the bid.
Consequently, it had to rely on the premium to attract enough investor
interest, particularly among hedge funds, to pressure the MCI board to accept
the higher bid. However, Qwest was unable to convince enough investors that its
stock would not simply lose value once more shares were issued to consummate
the stock and cash transaction.
Qwest could have initiated a tender or exchange offer directly
to MCI shareholders, proposing to purchase or exchange their shares without
going through the merger process. The tender process requires lengthy
regulatory approval. However, if Qwest initiated a tender offer, it could
trigger MCI’s poison pill. Alternatively, a proxy contest might have been
preferable because Qwest already had a bid on the table, and the contest would
enable Qwest to lobby MCI shareholders to vote against the Verizon bid. This
strategy would have avoided triggering the poison pill.
Ultimately, Qwest was forced to capitulate simply because it did
not have the financial wherewithal to increase the $9.9 billion bid. It could
not borrow anymore because of its excessive leverage. Additional stock would
have contributed to earnings dilution and caused the firm’s share price to
fall.
It is unusual for a board to turn down a higher bid, especially
when the competing bid was 17 percent higher. In accepting the Verizon bid, MCI
stated that a number of its large business customers had expressed a preference
for the company to be bought by Verizon rather than Qwest. MCI noted that these
customer concerns posed a significant risk in being acquired by Qwest. The MCI
board’s acceptance of the lower Verizon bid could serve as a test case of how
well MCI directors are conducting their fiduciary responsibilities. The central
issue is how far boards can go in rejecting a higher offer in favor of one they
believe offers more long-term stability for the firm’s stakeholders.
Ron Perlman, the 1980s takeover mogul, saw his higher all-cash
bid rejected by the board of directors of Revlon Corporation, which accepted a
lower offer from another bidder. In a subsequent lawsuit, a court overruled the
decision by the Revlon board in favor of the Perlman bid. Consequently, from a
governance perspective, legal precedent compels boards to accept higher bids
from bona fide bidders where the value of the bid is unambiguous, as in the
case of an all-cash offer. However, for transactions in which the purchase
price is composed largely of acquirer stock, the value is less certain.
Consequently, the target’s board may rule that the lower bidder’s shares have
higher appreciation potential or at least are less likely to decline than those
shares of other bidders.
MCI’s president and CEO Michael Capellas and other executives
could collect $107 million in severance, payouts of restricted stock, and
monies to compensate them for taxes owed on the payouts. In particular,
Capellas stood to receive $39.2 million if his job is terminated “without
cause” or if he leaves the company “for good reason.”
Discussion Questions:
1. Discuss
how changing industry conditions have encouraged consolidation within the
telecommunications industry?
Answer: Consolidation in the telecommunications industry
has been driven by technological and regulatory change.
Technological change included the ongoing convergence of voice and data
networks and the proliferation of alternatives to landline telephony.
Convergence provides for the elimination of the capital expenditures and costs
associated with maintaining multiple networks. Moreover, the advent of a single
network providing both a data and voice transmission capability provides for
more rapid and cost effective development of
enhanced
communication products and services. Alternative or substitutes for
traditional landlines include Internet
telephony, wireless, and cable phone service. With respect to regulatory
changes, the 1996 Telecommunications Act made it easier for Regional Bell
Operating Companies (RBOCs) to merge, and the 2004 court ruling which
eliminated the requirement that local phone companies sell access to their
networks on a discounted basis to long-distance companies. The latter
court ruling made in prohibitively expensive for such long-distance carriers
such as AT&T and MCI to package local and long-distance services.
2. What
alternative strategies could Verizon, Qwest, and MCI have pursued? Was the
decision to acquire MCI the best alternative for
Verizon? Explain your answer.
Answer: All three firms could have chosen to remain
standalone businesses and partnered with other firms possessing the skills and
resources they needed to compete more effectively. Verizon, as the second
largest carrier in the U.S. telecommunications industry was in the best
position to continue as a standalone business. While a strong competitor
in the long-distance and Internet IP markets, it lacked access to large local
markets and the financial resources to fund future growth. Consequently,
merging with a strong competitor seemed to make sense. Qwest was too small to
compete in a highly capital intensive industry in which scale was becoming
increasingly important. Furthermore, the firm’s excessive leverage
limited its ability to finance new product development. Consequently, it viewed
a merger as a survival strategy. The decision to acquire MCI seemed to
make good strategic sense if it could be accomplished at a reasonable
price. The “auction” that took place drove the purchase price to levels
that may make it extremely difficult for Verizon to earn back the substantial
41 premium paid over MCI’s share price before the bidding started.
3. Who
are the winners and losers in the Verizon/MCI merger? Be specific.
Answer: The winners clearly included the MCI shareholders
who earned a 41% premium over the pre-bid value of their share price.
This is especially true for those who wish to remain long-term investors;
however, those with a
short-term focus such as hedge funds, believe that they were short-changed by
the MCI board which did not choose
the highest bid. If the coupling of Verizon rather than Qwest with MCI does
indeed result in a more viable firm longer term, MCI’s customers, employees,
suppliers, and lenders could also be included among the winners.
Qwest and its stakeholders are probably the losers in
this instance as the firm’s remaining options are limited and
largely involve
the disposition of redundant assets to pay off its current $17 billion debt
load.
4. What
takeover tactics were employed or threatened to be employed by Verizon? By
Qwest? Be specific.
Answer: Verizon pursued a friendly approach to MCI believing
that it could convince MCI’s management and board that it represented the
stronger strategic partner. Consequently, its stock was likely to appreciate
more than Qwest’s. MCI’s board seemed to have accepted this premise from
the outset until investor pressure forced them to consider seriously the higher
Qwest bids. Verizon used public pressure by noting that if MCI did not accept
their bid that it was due to MCI’s management and board being excessively
influenced by the focus of hedge funds on short-term profitability. Verizon
also made its final bid contingent on MCI making public its customers
discomfort with MCI being acquired by Qwest. Verizon also bought out the
largest hostile MCI shareholder, Carlos Slim Helu. Moreover, Verizon made the
special dividend to MCI shareholders payable upon approval rather than at
closing as an additional inducement to gain MCI shareholder approval of the proposed
transaction. Also, Verizon included a disincentive not to close in its merger
agreement with MCI in the form of a $200 million break-up fee. Finally, once
Verizon had a signed merger agreement with MCI it initiated its S-4 filing in
early April even before the bidding was over in order to start the clock on the
regulatory approval of the MCI proxy enclosed with the filing and on setting a
date for a special MCI shareholders meeting.
Because Qwest did not have an attractive acquisition currency
(i.e., stock), it relied heavily on maintaining a sizeable premium over the
Verizon bid to attempt to win MCI board approval of its proposals. Qwest used
publicity and indirectly or directly aligned themselves with hedge funds, to
pressure the MCI board to accept their bid. They also held out the threat
of a tender offer, but the submission of the S-4 by Verizon limited the amount
of time for implementing a tender offer. Also, Qwest used the threat of a proxy
fight to get MCI shareholders to vote against the Verizon agreement. Finally,
Qwest threatened to try to block regulatory approval. In the final
analysis, Qwest simply did not have the financial resources or the strategic
appeal to MCI to win this bidding contest.
5. What
specific takeover defenses did MCI employ? Be specific.
Answer: MCI employed a poison pill, staggered board, and golden
parachute defenses. The poison pill discouraged suitors from buying a large
piece of the MCI, which would have triggered the poison pill and increased the
cost of the takeover. The staggered board made a proxy fight to remove the
board members hostile to a Qwest bid or to withdraw the poison pill in a single
year impossible. Golden parachutes also added to the cost of the
transaction.
6. How
did the actions of certain shareholders affect the bidding process? Be
specific.
Answer: The hedge funds continuously pressured MCI to
accept the higher bid because of their focus on short-term profitability.
Individual shareholders attempted to influence the outcome by threatening class
action lawsuits arguing that the MCI board was not maximizing shareholder
value. These actions forced the MCI board to give the Qwest bid more
serious consideration.
7. In
your opinion, did the MCI board act in the best interests of their
shareholders? Of all their stakeholders? Be specific.
Answer: Some might argue that MCI did not act in the best
interests of all their shareholders. Those interested in short-term
profits, e.g., hedge funds, were dissatisfied with the outcome, while long-term
investors may be more enthusiastic because of the perceived more favorable
growth prospects of a combined Verizon/MCI than a combined Qwest/MCI.
8. Do
you believe that the potential severance payments that could be paid to
Capellas were excessive? Explain your answer. What are the arguments for
and against such severance plans for senior executives?
Answer: Michael Capellas was formerly CEO of Compaq before
it was acquired by HP. The severance package was part of the contract he
signed when he agreed to be the CEO of MCI. Consequently, MCI is contractually
bound to conform to the terms of the contract. Not to do so, would be to breach
the contract. Moreover, such lucrative severance benefits should encourage CEOs
to hold out for the highest bid rather than simply to protect their
positions. In practice, there is little evidence that ‘golden parachutes’
cause CEOs to negotiate more aggressively. In
this instance, MCI did not go with the highest bidder. It may be more
appropriate if such contracts are subject to shareholder approval.
9. Should
the antitrust regulators approve the Verizon/MCI merger? Explain your answer.
Answer: Because of the plethora of competing alternatives,
it does not appear that consumers will be hurt. However, because of the
general lack of alternatives, business
customers may experience an increase in cost of telecommunication
services. The FCC and FTC may require that the combined firms dispose of
certain operations in heavily concentrated regional markets in order to make
conditions more competitive.
10. Verizon’s
management argued that the final purchase price from the perspective of Verizon
shareholders was not $8.45 billion but rather $7.05. This was so, they argued,
because MCI was paying the difference of $1.4 billion from their excess cash
balances as a special dividend to MCI shareholders. Why is this
misleading?
Answer: In a merger, such cash would automatically
transfer to the acquiring firm and the value of such cash is fully reflected in
the actual purchase price received by shareholders at closing.
Consequently, this special dividend simply represented an earlier payout to the
MCI shareholders rather than a reduction in the purchase price.
Kraft Sweetens the Offer to Overcome Cadbury’s Resistance
Despite speculation that offers from U.S.-based candy company
Hershey and the Italian confectioner Ferreiro would be forthcoming, Kraft’s bid
on January 19, 2010, was accepted unanimously by Cadbury’s board of directors.
Kraft, the world’s second (after Nestle) largest food manufacturer, raised its
offer over its initial September 7, 2009, bid to $19.5 billion to win over the
board of the world’s second largest candy and chocolate maker. Kraft also
assumed responsibility for $9.5 billion of Cadbury’s debt.
Kraft’s initial bid evoked a raucous response from Cadbury’s
chairman Roger Carr, who derided the offer that valued Cadbury at $16.7 billion
as showing contempt for his firm’s well-known brand and dismissed the hostile
bidder as a low-growth conglomerate. Immediately following the Kraft
announcement, Cadbury’s share price rose by 45 percent (7 percentage points
more than the 38 percent premium implicit in the Kraft offer). The share prices
of other food manufacturers also rose due to speculation that they could become
takeover targets.
The ensuing four-month struggle between the two firms was
reminiscent of the highly publicized takeover of U.S. icon Anheuser-Busch in
2008 by Belgian brewer InBev. The Kraft-Cadbury transaction stimulated
substantial opposition from senior government ministers and trade unions over
the move by a huge U.S. firm to take over a British company deemed to be a
national treasure. However, like InBev’s takeover of Anheuser-Busch, what
started as a donnybrook ended on friendly terms, with the two sides reaching
final agreement in a single weekend.
Determined to become a global food and candy giant, Kraft
decided to bid for Cadbury after the U.K.-based firm spun off its Schweppes
beverages business in the United States in 2008. The separation of Cadbury’s
beverage and confectionery units resulted in Cadbury becoming the world’s
largest pure confectionery firm following the spinoff. Confectionery companies
tend to trade at a higher value, so adding the Cadbury’s chocolate and gum
business could enhance Kraft’s attractiveness to competitors. However, this
status was soon eclipsed by Mars’s acquisition of Wrigley in 2008.
A takeover of Cadbury would help Kraft, the biggest food
conglomerate in North America, to compete with its larger rival, Nestle.
Cadbury would strengthen Kraft’s market share in Britain and would open India,
where Cadbury is among the most popular chocolate brands. It would also expand
Kraft’s gum business and give it a global distribution network. Nestle lacks a
gum business and is struggling with declining sales as recession-plagued
consumers turned away from its bottled water and ice cream products. Cadbury
and Kraft fared relatively well during the 2008–2009 global recession, with Cadbury’s
confectionery business proving resilient despite price increases in the wake of
increasing sugar prices. Kraft had benefited from rising sales of convenience
foods because consumers ate more meals at home during the recession.
The differences in the composition of the initial and final
Kraft bids reflected a series of crosscurrents. Irene Rosenfeld, the Kraft CEO,
not only had to contend with vituperative comments from Cadbury’s board and
senior management, but she also was soundly criticized by major shareholders
who feared Kraft would pay too much for Cadbury. Specifically, the firm’s
largest shareholder, Warren Buffett’s Berkshire Hathaway with a 9.4 percent
stake, expressed concern that the amount of new stock that would have to be
issued to acquire Cadbury would dilute the ownership position of existing Kraft
shareholders. In an effort to placate dissident Kraft shareholders while
acceding to Cadbury’s demand for an increase in the offer price, Ms. Rosenfeld
increased the offer by 7 percent by increasing the cash portion of the purchase
price.
The new bid consisted of $8.17 of cash and 0.1874 new Kraft
shares, compared to Kraft’s original offer of $4.89 of cash and 0.2589 new
Kraft shares for each Cadbury share outstanding. The change in the composition
of the offer price meant that Kraft would issue 265 million new shares compared
with its original plan to issue 370 million. The change in the terms of the
deal meant that Kraft would no longer have to get shareholder approval for the
new share issue, since it was able to avoid the NYSE requirement that firms
issuing shares totaling more than 20 percent of the number of shares currently
outstanding must receive shareholder approval to do so.
Discussion Questions:
1. Which
firm is the acquirer and which is the target firm?
Answer: The acquirer is Kraft and the target is Cadbury
2. Why
did the Cadbury common share price close up 38% on the announcement date, 7%
more than the premium built into the offer price?
Answer: The offer price for Cadbury shares announced on Monday
September 7, 2009, exceeded the closing price for these share on September 4,
2009, the last day on which the shares had traded. The shares closed on
September 9th, up 38%, 7 percent more than the announcement price because
investors anticipated another bid from other food companies such as Nestle’s.
3. Why
did the price of other food manufacturers also increase following the
announcement of the attempted takeover?
Answer: Investors anticipated further consolidation in the food
manufacturing sector due to the need to realize economies of scale and scope
that often is achieved through increased size.
4. After
four months of bitter and often public disagreement, Cadbury’s and Kraft’s
management reached a final agreement in a weekend. What factors do you believe
might have contributed to this rapid conclusion?
Answer: Frequently, the first reaction of parties to a
negotiation to a proposal is not reflective of their true intentions. Much of
the initial reaction represents “posturing” to move the other party more toward
their true intentions. Moreover, with the passage of time, both parties to the
negotiation are subject to substantial pressure from various stakeholder groups
including shareholders and regulators to make a decision. Both parties
generally no that time may work against them. For the acquirer, the prospect of
being forced to increase the initial offer will elicit shareholder rebuke.
Similarly, target firm boards and management are also subject to significant
pressure from their largest shareholders who may be supportive of the deal.
5. Kraft
appeared to take action immediately following Cadbury’s spin-off of Schweppes
making Cadbury a pure candy company. Why do you believe that Kraft chose not to
buy Cadbury and later divest such noncore businesses as Schweppes?
Answer: Kraft would have had to pay a larger purchase price for
the combined Cadbury and Schweppes businesses. It would also have required a
longer and more involved due diligence. Finally, the price that they might have
been able to receive for Schweppes might have been below its intrinsic value
because bidders would have known that Kraft considered Schweppes a noncore
asset and would have bid accordingly.
Inbev Acquires an American Icon
For many Americans, Budweiser is synonymous with American beer
and American beer is synonymous with Anheuser-Busch (AB). Ownership of the
American icon changed hands on July 14, 2008, when beer giant Anheuser Busch
agreed to be acquired by Belgian brewer InBev for $52 billion in an all-cash
deal. The combined firms would have annual revenue of about $36 billion and
control about 25 percent of the global beer market and 40 percent of the U.S.
market. The purchase is the most recent in a wave of consolidation in the
global beer industry. The consolidation reflected an attempt to offset rising
commodity costs by achieving greater scale and purchasing power. While likely
to generate cost savings of about $1.5 billion annually by 2011, InBev stated
publicly that the transaction is more about the two firms being complementary
rather than overlapping.
The announcement marked a reversal from AB’s position the
previous week when it said publicly that the InBev offer undervalued the firm
and subsequently sued InBev for “misleading statements” it had allegedly made
about the strength of its financing. To court public support, AB publicized its
history as a major benefactor in its hometown area (St. Louis, Missouri). The
firm also argued that its own long-term business plan would create more
shareholder value than the proposed deal. AB also investigated the possibility
of acquiring the half of Grupo Modelo, the Mexican brewer of Corona beer, which
it did not already own to make the transaction too expensive for InBev.
While it publicly professed to want a friendly transaction,
InBev wasted no time in turning up the heat. The firm launched a campaign to
remove Anheuser’s board and replace it with its own slate of candidates,
including a Busch family member. However, AB was under substantial pressure
from major investors, including Warren Buffet, to agree to the deal since the
firm’s stock had been lackluster during the preceding several years. In an
effort to gain additional shareholder support, InBev raised its initial $65 bid
to $70. To eliminate concerns over its ability to finance the deal, InBev
agreed to fully document its credit sources rather than rely on the more
traditional but less certain credit commitment letters. In an effort to placate
AB’s board, management, and the myriad politicians who railed against the
proposed transaction, InBev agreed to name the new firm Anheuser-Busch InBev
and keep Budweiser as the new firm’s flagship brand and St. Louis as its North
American headquarters. In addition, AB would be given two seats on the board,
including August A. Busch IV, AB’s CEO and patriarch of the firm’s founding
family. InBev also announced that AB’s 12 U.S. breweries would remain open.
Discussion Questions:
1. Why
would rising commodity prices spark industry consolidation?
Answer: Higher prices for basic ingredients tended to erode
brewer profit margins. By merging, brewers would be
able to negotiate larger bulk discounts from suppliers, because
they would be able to able to purchase larger
quantities. Selling, administrative, and distribution costs tend
be lower for suppliers able to sell larger quantities to
individual customers than smaller quantities to many different
customers.
1. Why
would the annual cost savings not be realized until the end of the third year?
Answer: Cost savings would be more rapidly realized if InBev had
plants and warehouses geographically close to
AB’s operations which could be consolidated. However, there are
few InBev facilities in the U.S., and InBev
pledged as part of the deal to keep AB brewers open and to
maintain the St. Louis headquarters facility. While bulk purchasing discounts
offered significant savings potential, they can be realized only as existing
supplier contracts expire and can be renegotiated. Consequently, savings would be
realized gradually as supply contracts expire and through employee attrition.
1. What
is a friendly takeover? Speculate as to why it may have turned hostile?
Answer: A takeover is said to be friendly if the suitor’s bid is
supported by the target’s board and management.
Friendly takeovers often are viewed by acquirers as desirable to
minimize the loss of key employees as well as
customer and supplier attrition. When it became clear that AB’s
board and management were going to resist
despite an attractive offer price premium, InBev moved quickly
to threaten to change the composition of the board
while increasing shareholder pressure on the board by upping the
purchase price. Concurrently, InBev took
actions to mute public concerns about the proposed takeover. The
more aggressive approach was in sharp contrast
to Microsoft’s more patient approach in its effort to acquire
Yahoo, earlier in 2008, which resulted in their failure
to complete the transaction.
1. InBev
launched a proxy contest to take control of the Anheuser-Busch Board and
includes a Busch family member on its slate of candidates. The firm also raised
its bid from $65 to $40 and agreed to fully document its loan commitments.
Explain how each of these actions helped complete the transaction?
Answer: The Busch family was not unified in rejecting the InBev
bid. By including a Busch family member on
their proposed slate of board candidates, InBev believed it
could mute some of the hostility to the takeover and
potentially enlist additional Busch family support. Moreover, by
raising the bid, InBev was making it increasingly difficult to convince
shareholders that they should reject the certainty of the InBev offer in the
hope that the AB business plan would result in significant future share price appreciation.
Finally, by fully documenting their funding sources, InBev removed any doubt
that they would be able to finance the transaction.
1. InBev
agreed to name the new company Anheuser-Busch InBev, keep Budwieser brand,
maintain headquarters in
St. Lous, and not to close any of the firm’s 12 breweries in
North America. How might these decisions impact
InBev’s ability to realize projected cost savings?
Answer: By essentially agreeing to maintain the status quo in
order to assuage public opinion, InBev effectively
limited their ability to realize significant cost savings from
facility consolidation.
Oracle Attempts to Takeover PeopleSoft
PeopleSoft, a maker of human resource and database software,
announced on February 9, 2004 that an increased bid by Oracle, a maker of
database software, of $26 per share made directly to the shareholders was
inadequate. PeopleSoft’s board and management rejected the bid even though it
represented a 33% increase over Oracle’s previous offer of $19.50 per share. The
PeopleSoft board urged its shareholders to reject the bid in a mailing of its
own to its shareholders. If successful, the takeover would be valued at
$9.4 billion. After an initial jump to $23.72 a share, PeopleSoft shares had
eased to $22.70 a share, well below Oracle’s sweetened offer.
The rejection prolonged a highly contentious and public
eight-month takeover battle that has pitted the two firms against each other.
PeopleSoft was quick to rebuke publicly Oracle’s original written offer made
behind the scenes to PeopleSoft’s management that included a requirement that
PeopleSoft respond immediately. At about the same time, Oracle filed its
intentions with respect to PeopleSoft with the SEC when its ownership of
PeopleSoft stock rose above 5%. Since then, Oracle proposed replacing five of
PeopleSoft’s board members with its own nominees at the PeopleSoft annual
meeting to be held on March 25, 2004, in addition to increasing the offer
price. This meeting was held about two months earlier than its normally
scheduled annual meetings. By moving up the schedule for the meeting,
investors had less time to buy PeopleSoft shares in order to be able to vote at
the meeting, where the two companies will present rival slates for the
PeopleSoft board. Oracle seeks to gain a majority on the PeopleSoft board
in order to lift the company’s unique “customer assurance” anti-takeover
defense. PeopleSoft advised its shareholders to vote no on the slate of
potential board members proposed by Oracle. PeopleSoft also announced that it
would buyback another $200 million of its shares, following the $350 million
buyback program completed last year.
Oracle has said that it will take $9.8 billion (including
transaction fees) to complete the deal. The cost of acquiring PeopleSoft could
escalate under PeopleSoft’s unusual customer assurance program in which its
customers have been offered money-back guarantees if an acquirer reduces its
support of PeopleSoft products. Oracle repeated its intention to continue
support for PeopleSoft customers and products. The potential liability under
the program increased to $1.55 billion. In addition, Oracle will have to pay
PeopleSoft’s CEO Craig Conway a substantial multiple of his current annual
salary if he loses his job after a takeover. This could cost Oracle an
additional $25 to $30 million. Meanwhile, the Federal Trade Commission is
reviewing the proposed acquisition of PeopleSoft by Oracle and has expressed
concern that it will leave to reduced competition in the software industry.
Discussion Questions:
1. Explain
why PeopleSoft’s management may have rejected Oracle’s improved offer of $26
per share and why this rejection might have been in the best interests of the
PeopleSoft shareholders? What may have PeopleSoft’s management been expecting
to happen (Hint: Consider the various post-offer antitakeover defenses that
could be put in place)?
Answer: PeopleSoft’s initial rejection may have been intended to
solicit additional bids in order to
boost the offer price for the firm’s shares. PeopleSoft’s
defenses included moving up the regularly
scheduled shareholders’ meeting to give Oracle less time to buy
its shares in the open market, it
cautioned its shareholders not to tender their shares, it
proposed a buy back its own shares, and it
put in place a customer assurance program to raise the cost of a
takeover. All of these things
were designed to discourage Oracle and to give other potential
bidders an opportunity to enter
the fray.
2. Identify
at least one takeover tactic being employed by Oracle in its attempt to acquire
PeopleSoft. Explain how this takeover tactic(s) works.
Answer: Oracle employed a hostile tender offer to
circumvent the PeopleSoft management and board. This involves making a
bid directly to the shareholders and offering an attractive premium to
encourage them to tender their shares. Other tactics employed by Oracle
included a bear hug letter, a proxy contest, and open market share purchases.
3. Identify
at least one takeover defense or tactic that is in place or is being employed
by PeopleSoft. Explain how this defense or tactic is intended to discourage
Oracle in its takeover effort.
Answer: The PeopleSoft customer assurance program was
designed to raise the cost of the acquisition. Other defenses employed
included a golden parachute, share buy-back, and moving up the date of the
shareholders’ meeting.
4. After
initially jumping, PeopleSoft’s share price dropped to about $22 per share,
well below Oracle’s sweetened offer. When does this tell you about investors’
expectations about the deal. Why do you believe investors felt the way they
did? Be specific.
Answer: Investors did not believe the regulatory agency would
approve the transaction.
Alcoa Easily Overwhelms Reynolds’ Takeover Defenses
Alcoa reacted quickly to a three-way intercontinental
combination of aluminum companies aimed at challenging its dominance of the
Western World aluminum market by disclosing an unsolicited takeover bid for
Reynolds Metals in early August 1999. The offer consisted of $4.3
billion, or $66.44 a share, plus the assumption of $1.5 billion in Reynolds’
outstanding debt. Reynolds, a perennial marginally profitable competitor
in the aluminum industry, appeared to be particularly vulnerable, since other
logical suitors or potential white knights such as Canada’s Alcan Aluminum,
France’s Pechiney SA, and Switzerland’s Alusuisse Lonza Group AG were already
involved in a three-way merger.
Alcoa’s letter from its chief executive indicated that it wanted
to pursue a friendly deal but suggested that it may pursue a full-blown hostile
bid if the two sides could not begin discussions within a week. Reynolds
appeared to be highly vulnerable because of its poor financial performance amid
falling aluminum prices worldwide and because of its weak takeover
defenses. It appeared that a hostile bidder could initiate a mail-in
solicitation for shareholder consent at any time. Moreover, major
Reynolds’ shareholders began to pressure the board. Its largest single
shareholder, Highfields Capital Management, a holder of more than four million
shares, demanded that the Board create a special committee of independent
directors with its own counsel and instruct Merrill Lynch to open an auction
for Reynolds.
Despite pressure, the Reynolds’ board rejected Alcoa’s bid as
inadequate. Alcoa’s response was to say that it would initiate an all
cash tender offer for all of Reynolds’ stock and simultaneously solicit
shareholder support through a proxy contest for replacing the Reynolds’ board
and dismantling Reynolds’ takeover defenses. Notwithstanding the public
posturing by both sides, Reynolds capitulated on August 19, slightly more than
two weeks from receipt of the initial solicitation, and agreed to be acquired
by Alcoa. The agreement contained a thirty-day window during which Reynolds
could entertain other bids. However, if Reynolds should choose to go with
another offer, it would have to pay Alcoa a $100 million break-up fee.
Under the agreement, which was approved by both boards, each share
of Reynolds was exchanged for 1.06 shares of Alcoa stock. When announced,
the transaction was worth $4.46 billion and valued each Reynolds share at
$70.88, based on an Alcoa closing price of $66.875 on August 19, 1999.
The $70.88 price per share of Reynolds suggested a puny 3.9 percent premium to
Reynolds’ closing price of $68.25 as of the close of August 19. The
combined annual revenues of the two companies totaled $20.5 billion and
accounted for about 21.5 percent of the Western World market for aluminum.
To receive antitrust approval, the combined companies were required divest
selected operations.
Discussion Questions:
1. What
was the dollar value of the purchase price Alcoa offered to pay for Reynolds?
Answer: The total dollar value of the transaction was $5.8
billion, consisting of $4.3 billion for the firm’s equity and $1.5 billion in
assumed debt.
2. Describe
the various takeover tactics Alcoa employed in its successful takeover of
Reynolds. Why were these
tactics employed?
Answer: Alcoa employed a bear hug letter and threatened to
implement simultaneously a proxy contest and tender offer. These tactics
were employed to increase pressure on Reynolds’ board to accept the offer.
3. Why
do you believe Reynolds’ management rejected Alcoa’s initial bid as inadequate?
Answer: Reynolds’ was trying to gain time to solicit
additional bids.
4. In
your judgment, why was Alcoa able to complete the transaction by offering such
a small premium
over Reynolds’ share price at the time the takeover was
proposed?
Answer: Other logical bidders for Reynolds were involved
in a 3-way merger. Reynolds’
shareholders accepted the paltry premium, because they believed
that they would be better off over
the long-term as part of Alcoa.
Pfizer Acquires Warner-Lambert in a Hostile Takeover
In 1996 Pfizer and Warner Lambert (Warner) agreed to co-market
worldwide the cholesterol-lowering drug Lipitor, which had been developed by
Warner. The combined marketing effort was extremely successful with combined
1999 sales reaching $3.5 billion, a 60% increase over 1998. Before entering
into the marketing agreement, Pfizer had entered into a confidentiality
agreement with Warner that contained a standstill clause that, among other
things, prohibited Pfizer from making a merger proposal unless invited to do so
by Warner or until a third party made such a proposal.
In late 1998, Pfizer became aware of numerous rumors of a
possible merger between Warner and some unknown entity. William C. Steere,
chair and CEO of Pfizer, sent a letter on October 15, 1999, to Lodeijk de Vink,
chair and CEO of Warner, inquiring about the potential for Pfizer to broaden
its current strategic relationship to include a merger. More than 2 weeks
passed before Steere received a written response in which de Vink expressed
concern that Steere’s letter violated the spirit of the standstill agreement by
indicating interest in a merger. Speculation about an impending merger between
Warner and American Home Products (AHP) came to a head on November 19, 1999,
when an article appeared in the Wall
Street Journal announcing an impending merger of equals
between Warner and AHP valued at $58.3 billion.
The public announcement of the agreement to merge between Warner
and AHP released Pfizer from the standstill agreement. Tinged with frustration
and impatience at what Pfizer saw as stalling tactics, Steere outlined in the
letter the primary reasons why the proposed combination of the two companies
made sense to Warner’s shareholders. In addition to a substantial premium over
Warner’s current share price, Pfizer argued that combining the companies would
result in a veritable global powerhouse in the pharmaceutical industry.
Furthermore, the firm’s product lines are highly complementary, including Warner’s
over-the-counter drug presence and substantial pipeline of new drugs and
Pfizer’s powerful global marketing and sales infrastructure. Steere also argued
that the combined companies could generate annual cost savings of at least $1.2
billion annually within 1 year following the completion of the merger. These
savings would come from centralizing computer systems and research and
development (R&D) activities, consolidating more than 100 manufacturing
facilities, and combining two headquarters and multiple sales and
administrative offices in 30 countries. Pfizer also believed that the two
companies’ cultures were highly complementary.
In addition to the letter from Steere to de Vink, on November 4,
1999, Pfizer announced that it had commenced a legal action in the Delaware
Court of Chancery against Warner, Warner’s directors, and AHP. The action
sought to enjoin the approximately $2 billion termination fee and the stock
option granted by Warner-Lambert to AHP to acquire 14.9% of Warner’s common
stock valued at $83.81 per share as part of their merger agreement. The lawsuit
charged that the termination fee and stock options were excessively onerous and
were not in the best interests of the Warner shareholders because they would
discourage potential takeover attempts.
On November 5, 1999, Warner explicitly rejected Pfizer’s
proposal in a press release and reaffirmed its commitment to its announced
business combination with AHP. On November 9, 1999, de Vink sent a letter to
the Pfizer board in which he expressed Warner’s disappointment at what he
perceived to be Pfizer’s efforts to take over Warner as well as Pfizer’s
lawsuit against the firm. In the letter, he stated Warner-Lambert’s belief that
the litigation was not in the best interest of either company’s stockholders,
especially in light of their co-promotion of Lipitor, and it was causing
uncertainty in the financial markets. Not only did Warner reject the Pfizer
bid, but it also threatened to cancel the companies’ partnership to market
Lipitor.
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