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Chapter 3: The Corporate Takeover Market:
Common Takeover Tactics, Anti-Takeover Defenses, and Corporate Governance
Examination Questions and Answers
1. Friendly takeovers are negotiated settlements that are often characterized by bargaining, which remains undisclosed
until the agreement has been signed. True or False
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
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
4. The accumulation of a target firm’s stock by arbitrageurs makes purchases of blocks of stock by the bidder easier.
True or False
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
6. Public announcements of a proposed takeover are often designed to put pressure on the board of the target firm.
True or False
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
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
9. Dissident shareholders always undertake a tender offer to change the composition of a firm’s board of
directors. True or 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
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
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
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13. The shareholder interests theory suggests that shareholders gain when management resists takeover
attempts. True or False
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
15. Most takeover attempts may be characterized as hostile bids. True or False
16. Litigation is a tactic that is used only by acquiring firms. True or 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
18. Concern about their fiduciary responsibility and about stockholder lawsuits puts pressure on the target’s
board to accept the offer. True or False
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
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
21. The target firm’s bylaws may provide significant hurdles for an acquiring firm. True or False
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
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
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
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
26. Proxy contests and tender offers are often viewed by acquirers as inexpensive ways to takeover another
firm. True or False
27. All materials in a proxy contest must be filed with the SEC before they are sent to shareholders.
True or False
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
29. Tender offers always consist of an offer to exchange acquirer shares for shares in the target firm.
True or 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
31. Poison pills are a commonly used takeover tactic to remove the management and board of the target firm.
True or 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
33. In elections involving staggered or classified boards, only one group of board members is up for
reelection each year. True or False
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
35. Tender offers apply only for share for share exchanges. True or False
36. Corporate governance refers to the way firms elect CEOs. True or False
37. The threat of hostile takeovers is a factor in encouraging a firm to implement good governance practices.
True or False
38. Corporate governance refers to a system of controls both internal and external to the firm that protects
stakeholders’ interests. True or False
39. Stakeholders in a firm refer to shareholders only. True or False
40. Corporate anti-takeover defenses are necessarily a sign of bad corporate governance. True or False
41. The threat of corporate takeover has little impact on how responsibly a corporate board and management manage a
firm. True or False
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42. Institutional activism has assumed a larger role in ensuring good corporate governance practices in recent years.
True or False
43. Executive stock option plans have little impact on the way management runs the firm. True or 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
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
46. Purchasing target stock in the open market is a rarely used takeover tactic. True or False
47. In a one-tier offer, the acquirer announces the same offer to all target shareholders. True or False.
48. In a two-tiered offer, target shareholders typically received two offers, which potentially have different values.
True or False
49. A no-shop agreement prohibits the takeover target from seeking other bids. True or False
50. Poison pills represent a new class of stock issued by a company to its shareholders, usually as a dividend. True or
Multiple Choice: Circle only one alternative.
1. All of the following are commonly used takeover tactics, except for
a. Poison pills
b. Bear hug
c. Tender offer
d. Proxy contest
e. Litigation
2. According to the management entrenchment theory,
a. Management resistance to takeover attempts is an attempt to increase the proposed purchase price premium
b. Management resistance to takeover attempts is an attempt to extend their longevity with the target firm
c. Shareholders tend to benefit when management resists takeover attempts
d. Management attempts to maximize shareholder value
e. Describes the primary reason takeover targets resist takeover bids
3. Which of the following factors often affects hostile takeover bids?
a. The takeover premium
b. The composition of the board of the target firm
c. The composition of the ownership of the target’s stock
d. The target’s bylaws
e. All of the above
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4. All of the following are true of a proxy contest except for
a. Are usually successful
b. Are sometimes designed to replace members of the board
c. Are sometimes designed to have certain takeover defenses removed
d. May enable effective control of a firm without owning 51% of the voting stock
e. Are often costly
5. Purchasing the target firm’s stock in the open market is a commonly used tactic to achieve all of
the following except for
a. Acquiring a controlling interest in the target firm without making such actions public knowledge.
b. Lowering the average cost of acquiring the target firm’s shares
c. Recovering the cost of an unsuccessful takeover attempt
d. Obtaining additional voting rights in the target firm
e. Strengthening the effectiveness of proxy contests
6. All of the following are true of tender offers except for
a. Tender offers consist only of offers of cash for target stock
b. Are generally considered an expensive takeover tactic
c. Are extended for a specific period of time
d. Are sometimes over subscribed
e. Must be filed with the SEC
7. Which of the following are common takeover tactics?
a. Bear hugs
b. Open market purchases
c. Tender offers
d. Litigation
e. All of the above
8. All of the following are common takeover defenses except for
a. Poison pills
b. Litigation
c. Tender offers
d. Staggered boards
e. Golden parachutes
9. All of the following are true of poison pills except for
a. They are a new class of security
b. Generally prevent takeover attempts from being successful
c. 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
d. Delays the completion of a takeover attempt
e. May be removed by the target’s board if an attractive bid is received from a so-called “white knight.”
10. The following takeover defenses are generally put in place by a firm before a takeover attempt is
initiated.
a. Standstill agreements
b. Poison pills
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c. Recapitalization
d. Corporate restructuring
e. Greenmail
11. The following takeover defenses are generally put in place by a firm after a takeover attempt is
underway.
a. Staggered board
b. Standstill agreement
c. Supermajority provision
d. Fair price provision
e. Reincorporation
12. Which of the following is true about so-called shark repellants?
a. They are put in place to strengthen the board
b. They include poison pills
c. Often consist of the right to issue greenmail
d. Involve White Knights
e. Involve corporate restructuring
13. Which of the following is true? A hostile takeover attempt
a. Is generally found to be illegal
b. Is one that is resisted by the target’s management
c. Results in lower returns to the target firm’s shareholders than a friendly attempt
d. Usually successful
e. Supported by the target firm’s board and its management
14. Which is true of the following? A white knight
a. Is a group of dissident shareholders which side with the bidding firm
b. Is a group of the target firm’s current shareholders which side with management
c. 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
d. Is a firm which is viewed by management as a more appropriate suitor than the bidder
e. Is a firm that is willing to acquire only a large block of stock in the target firm
15. Which of the following is true about supervoting stock?
a. Is a commonly used takeover tactic.
b. Is generally encouraged by the SEC
c. May have 10 to 100 times of the voting rights of other classes of stock
d. Is issued to acquiring firms if they agree not to purchase a controlling interest in the target firm
e. Is a widely used takeover defense
16. Which of the following factors influences corporate governance practices?
a. Securities legislation
b. Government regulatory agencies
c. The threat of a hostile takeover
d. Institutional activism
e. All of the above
17. Which of the following are commonly considered alternative models of corporate governance?
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a. Market model
b. Control model
c. Takeover model
d. A & B only
e. A & C only
18. The market governance model is applicable when which of the following conditions are true?
a. Capital markets are liquid
b. Equity ownership is widely dispersed
c. Ownership and control are separate
d. Board members are largely independent
e. All of the above
19. The control market is applicable when which of the following conditions are true?
a. Capital markets are illiquid
b. Equity ownership is heavily concentrated
c. Board members are largely insiders
d. Ownership and control overlap
20. The control model of corporate governance is applicable under all of the following conditions except for
a. Capital markets are illiquid
b. Board members are largely insiders
c. Ownership and control overlap
d. Equity ownership is widely dispersed
e. A, B, & D only
21. Which of the following are the basic principles on which the market model is based?
a. Management incentives should be aligned with those of shareholders and other major stakeholders
b. Transparency of financial statements
c. Equity ownership should be widely dispersed
d. A & B only
e. A, B, and C only
22. Which of the following statements best describes the business judgment rule?
a. Board members are expected to conduct themselves in a manner that could reasonably be seen as being in
the best interests of the shareholders.
b. Board members are always expected to make good decisions.
c. The courts are expected to “second guess’ decisions made by corporate boards.
d. Directors and managers are always expected to make good decisions.
e. Board decisions should be subject to constant scrutiny by the courts.
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
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a. Public stock exchanges
b. Financial Accounting Standards Board
c. Public Accounting Oversight Board
d. State regulatory agencies
e. All of the above
24. Which of the following government agencies can discipline firms with inappropriate governance practices?
a. Securities and Exchange Commission
b. Federal Trade Commission
c. The Department of Justice
d. A & C only
e. A, B, & C
25. Studies show that which of the following combinations of corporate defenses can be most effective in discouraging
hostile takeovers?
a. Poison pills and staggered boards
b. Poison pills and golden parachutes
c. Golden parachutes and staggered boards
d. Standstill agreements and White Knights
e. Poison Pills and tender offers
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?
a. Leveraged buyout
b Proxy contest
c. Merger
d. Divestiture
e. None of the above
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?
a. Share repellent plan
b. Golden parachute plan
c. Pac Man defense
d. Poison pill
Case Study Short Essay Examination Questions:
Mittal Acquires Arcelor—A Battle of Global Titans in the European Corporate Takeover Market
9
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.
2. Identify the takeover defenses employed by Arcelor? Explain why each was used.
3. Using the information in this case study, discuss the arguments for and against encouraging hostile corporate
takeovers
11
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.
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.
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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?
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.
3. Who are the winners and losers in the Verizon/MCI merger? Be specific.
4. What takeover tactics were employed or threatened to be employed by Verizon? By Qwest? Be specific.
