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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.
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3. Using the information in this case study, discuss the arguments for and against encouraging hostile corporate
takeovers
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.
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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?
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.
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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.
5. What specific takeover defenses did MCI employ? Be specific.
6. How did the actions of certain shareholders affect the bidding process? Be specific.
7. In your opinion, did the MCI board act in the best interests of their shareholders? Of all their stakeholders? Be
specific.
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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?
9. Should the antitrust regulators approve the Verizon/MCI merger? Explain your answer.
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?
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?
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?
3. Why did the price of other food manufacturers also increase following the announcement of the attempted
takeover?
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?
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?
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?
2. Why would the annual cost savings not be realized until the end of the third year?
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3. What is a friendly takeover? Speculate as to why it may have turned hostile?
4. 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?
5. 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?
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
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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)?
2. Identify at least one takeover tactic being employed by Oracle in its attempt to acquire PeopleSoft. Explain how this
takeover tactic(s) works.
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.
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.
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
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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?
2. Describe the various takeover tactics Alcoa employed in its successful takeover of Reynolds. Why were these
tactics employed?
3. Why do you believe Reynolds’ management rejected Alcoa’s initial bid as inadequate?
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?
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
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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.
Pfizer responded by exploiting a weakness in the Warner Lambert takeover defenses by utilizing a consent solicitation
process that allows shareholders to change the board without waiting months for a shareholders’ meeting. Pfizer also
challenged in court two provisions in the contract with AHP on the grounds that they were not in the best interests of the
Warner Lambert shareholders because they would discourage other bidders. Pfizer’s offers for Warner Lambert were
contingent on the removal of these provisions. On November 12, 1999, Steere sent a letter to de Vink and the Warner board
indicating his deep disappointment as a result of their refusal to consider what Pfizer believes is a superior offer to Warner.
He also reiterated his firm’s resolve in completing a merger with Warner. Not hearing anything from Warner management,
Pfizer decided to go straight to the Warner shareholders on November 15, 1999, in an attempt to change the composition of
the board and to get the board to remove the poison pill and break-up fee.
In the mid-November proxy statement sent to Warner shareholders, Pfizer argued that the current Warner Lambert board
has approved a merger agreement with American Home, which provides 30% less current value to the Warner-Lambert
stockholders than the Pfizer merger proposal. Moreover, Warner shareholders would benefit more in the long run in a merger
with Pfizer, because the resulting firm would be operationally and financially stronger than a merger created with AHP.
Pfizer also argued that its international marketing strength is superior in the view of most industry analysts to that of
American Home and will greatly enhance Warner-Lambert’s foreign sales efforts. Pfizer stated that Warner Lambert was not
acting in the best interests of its shareholders by refusing to even grant Pfizer permission to make a proposal. Pfizer also
alleged that Warner Lambert is violating its fiduciary responsibilities by approving the merger agreement with American
Home in which AHP is entitled to a termination fee of approximately $2 billion.
Pressure intensified from all quarters including such major shareholders as the California Public Employees Retirement
System and the New York City Retirement Fund. After 3 stormy months, Warner Lambert agreed on February 8, 2000, to be
acquired by Pfizer for $92.5 billion, forming the world’s second largest pharmaceutical firm. Although they were able to
have the Warner poison pill overturned in court as being an unreasonable defense, Pfizer was unsuccessful in eliminating the
break-up fee and had to pay AHP the largest such fee in history. The announced acquisition of Warner Lambert by Pfizer
ended one of the most contentious corporate takeover battles in recent memory.
Discussion Questions:
1. What takeover defenses did Warner employ to ward off the Pfizer merger proposal? What tactics
did Pfizer employ to overcome these defenses? Comment on the effectiveness of these defenses.
2. What other defenses do you think Warner could or should have employed? Comment on the effectiveness of each
alternative defense you suggest Warner could have employed?
3. What factors may have contributed to Warner Lambert’s rejection of the Pfizer proposal?
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4. What factors may make it difficult for this merger to meet or exceed industry average returns? What are the
implications for the long-term financial performance of the new firm of only using Pfizer stock to purchase Warner
Lambert shares?
5. What is a standstill agreement and why might it have been included as a condition for the Pfizer-Warner Lambert
Lipitor distribution arrangement? How did the standstill agreement affect Pfizer’s effort to merge with Warner
Lambert? Why would Warner Lambert want a standstill agreement?
Hewlett-Packard Family Members
Oppose Proposal to Acquire Compaq
On September 4, 2001, Hewlett-Packard (“HP”) announced its proposal to acquire Compaq Computer Corporation for $25
billion in stock. Almost immediately, investors began to doubt the wisdom of the proposal. The new company would face the
mind-numbing task of integrating overlapping product lines and 150,000 employees in 160 countries. Reflecting these
concerns, the value of the proposed merger had sunk to $16.9 million within 30 days following the announcement, in line
with the decline in the value of HP’s stock.
In November 2001, Walter Hewlett and David Packard, sons of the co-founders, and both the Hewlett and Packard family
foundations, came out against the transaction. These individuals and entities controlled about 18% of HP’s total shares
outstanding. Both Carly Fiorina, HP’s CEO, and Michael Capellas, Compaq’s CEO, moved aggressively to counter this
opposition by taking their case directly to the remaining HP shareholders. HP management’s efforts included a 49-page
report written by HP’s advisor Goldman Sachs to rebut one presented by Walter Hewlett’s advisors. HP also began
advertising in national newspapers and magazines, trying to convey the idea that this deal is not about PCs but about giving
corporate customers everything from storage and services to printing and imaging.
After winning a hotly contested 8-month long proxy fight by a narrow 2.8 percentage point margin, HP finally was able to
purchase Compaq on May 7, 2002, for approximately $19 billion. However, the contentious proxy fight had lingering effects.
The delay in integrating the two firms resulted in the defection of key employees, the loss of customers and suppliers, the
expenditure of millions of dollars, and widespread angst among shareholder.
Discussion Questions:
1. In view of the dramatic decline in HP’s stock following the announcement, why do you believe Compaq
shareholders would still vote to approve the merger?
2. In an effort to combat the proxy contest initiated by the Hewlett and Packard families against the merger, HP’s
board and management took their case to the shareholders in a costly battle paid for by HP funds (i.e., HP
shareholders). Do you think it is fair that HP’s management can finance their own proxy contest using company
funds while dissident shareholders must finance their effort using their own funds.
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TYCO Rescues AMP from Allied Signal
In late November 1998, Tyco International Ltd., a diversified manufacturing and service company, agreed to acquire AMP
Inc., an electrical components supplier, for $11.3 billion. In doing so, AMP successfully fended off a protracted takeover
attempt by AlliedSignal Inc. As part of the merger agreement with Tyco, AMP rescinded its $165 million share buyback
offer and its plan to issue an additional 25 million shares to fund its defense efforts. Tyco, the world’s largest electronics
connector company, saw the combination with AMP as a means of becoming the lowest cost producer in the industry.
Lawrence Bossidy, CEO of AlliedSignal, telephoned an AMP director in mid–1998 to inquire about AMP’s interest in a
possible combination of their two companies. The inquiry was referred to the finance committee of the AMP board, which
expressed no interest in merging with AlliedSignal. By early August, AlliedSignal announced its intention to initiate an
unsolicited tender offer to acquire all of the outstanding shares of AMP common stock for $44.50 per share to be paid in
cash. The following week AlliedSignal initiated such an offer and sent a letter to William J. Hudson, then CEO of AMP,
requesting a meeting to discuss a possible business combination. Bossidy also advised AMP of AlliedSignal’s intention to
file materials shortly with the SEC as required by federal law to solicit consents from AMP’s shareholders. The consent
solicitation materials included proposals to increase the size of AMP’s board from 11 to 28 members and to add 17
AlliedSignal nominees, all of whom were directors or executive officers of AlliedSignal. Within a few days, the AMP board
announced its intentions to continue to aggressively pursue its current strategic initiatives, because the AlliedSignal offer did
not fully reflect the values inherent in AMP businesses. In addition, the AMP board also replaced Hudson with Robert Ripp
as chair and CEO of AMP.
The AMP board also authorized an amendment to the AMP rights agreement dated October 25, 1989. The amendment
provided that the rights could not be redeemed if there were a change in the composition of the AMP board following the
announcement of an unsolicited acquisition proposal such that the current directors no longer comprised a majority of the
board. A transaction not approved by AMP’s board and involving the acquisition by a person or entity of 20% or more of
AMP’s common stock was defined as an unsolicited acquisition proposal.
By early September, AlliedSignal amended its tender offer to reduce the number of shares of AMP common stock it was
seeking to purchase to 40 million shares. AlliedSignal also stated that it would undertake another offer to acquire the
remaining shares of AMP common stock at a price of $44.50 in cash following consummation of its offer to purchase up to
40 million shares. In concert with its tender offer, AlliedSignal also announced its intention to solicit consents for a proposal
to amend AMP’s bylaws. The proposed amendment would strip the AMP board of all authority over the AMP rights
agreement and any similar agreements and to vest such authority in three individuals selected by AlliedSignal. In response,
the AMP board unanimously determined that the amended offer from AlliedSignal was not in the best interests of AMP
shareholders. The AMP board also approved another amendment to the AMP rights agreement, lowering the threshold that
would make the rights redeemable from 20% to 10% of AMP’s shares outstanding. AlliedSignal immediately modified its
tender offer by reducing the number of shares it wanted to purchase from 40 million to 20 million shares at $44.50 per share.
AMP announced a self–tender offer to purchase up to 30 million shares of AMP common stock at $55 per share. The AMP
self-tender offer was intended to provide AMP shareholders with an opportunity to sell a portion of their shares of common
stock at a price in excess of AlliedSignal’s $44.50 per share offer. Also, on September 28, 1998, AMP stated its intention to
create a new ESOP that would hold 25 million shares of AMP common stock. Allied Signal indicated that if the self-tender
were consummated, it would reduce the consideration to be paid in any further Allied Signal offers to $42.62 per share
.
Credit Suisse, AMP’s investment banker, approached a number of firms, including Tyco, concerning their possible
interest in acquiring AMP. In early November, Tyco stepped forward as a possible white knight. Based on limited
information, L. Dennis Kozlowski, Tyco’s CEO, set the preliminary valuation of AMP at $50.00 per share. This value
assumed a transaction in which AMP shares would be exchanged for Tyco shares and was subject to the completion of
appropriate due diligence.
In mid-November, Ripp and Bossidy met at Bossidy’s request. Bossidy indicated that AlliedSignal would be prepared to
increase its proposed acquisition price for AMP by a modest amount and to include stock for a limited portion of the total
purchase price. The revised offer also would include a minimum share exchange ratio for the equity portion of the purchase
price along with an opportunity for AMP shareholders to participate in any increase in AlliedSignal’s stock before the
closing. The purpose of including equity as a portion of the purchase price was to address the needs of certain AMP
shareholders, who had a low tax basis in the stock and who wanted a tax-free exchange. Ripp indicated that the AMP board
expected a valuation of more than $50.00 per share.
Tyco indicated a willingness to increase its offer to at least $51.00 worth of Tyco common shares for each share of AMP
common stock. The offer also would include protections similar to those offered in AlliedSignal’s most recent proposal. On
November 20, 1998, the AMP board voted unanimously to approve the merger agreement and to recommend approval of the
merger to AMP’s shareholders. They also voted to terminate the AMP self–tender offer, the ESOP, and AMP’s share
repurchase plan and to amend the AMP rights agreement so that it would not apply to the merger with Tyco.
In early August, AlliedSignal filed a complaint against AMP in the United States District Court against the provisions of
the AMP rights agreement. The complaint also questioned the constitutionality of certain anti-takeover provisions of
Pennsylvania state statutes. Concurrently, AMP shareholders filed four shareholder class-action lawsuits against AMP and its
board of directors. The suits alleged that AMP and its directors improperly refused to consider the original AlliedSignal offer
and wrongfully relied on the provisions of the AMP rights agreement and Pennsylvania law to block the original AlliedSignal
offer.
In late August, AMP filed a complaint in the United States District court against AlliedSignal, seeking an injunction to
prevent AlliedSignal from attempting to pack the AMP board of directors with AlliedSignal executive officers and directors.
The complaint also alleged that the Schedule 14D-1 SEC filing by Allied-Signal was false and misleading. The complaint
alleged that the filing failed to disclose that some of AlliedSignal’s proposed directors had conflicts of interest and that the
packing of the board would prevent current board members from executing their fiduciary responsibilities to AMP
shareholders.
In early October, the court agreed with AMP and enjoined AlliedSignal’s board-packing consent proposals until it stated
unequivocally that its director nominees have a fiduciary duty solely to AMP under Pennsylvania law. The court also denied
AlliedSignal’s request to deactivate anti-takeover provisions in the AMP rights agreement. The court further held that
shareholders might not sue the board for rejecting the AlliedSignal proposal.
AlliedSignal immediately filed in the United States Court of Appeals for the Third Circuit. The court ordered that
although AlliedSignal could proceed with the consent solicitation, its representatives could not assume positions on the AMP
board until the court of appeals completed its deliberations. The district court ruled that the shares of AMP common stock
acquired by AlliedSignal are “control shares” under Pennsylvania law. As a result, the court enjoined AlliedSignal from
voting its AMP shares unless AlliedSignal’s voting rights are restored under Pennsylvania law. AlliedSignal was able to
overturn the lower court ruling on appeal.
Discussion Questions:
1. What types of takeover tactics did AlliedSignal employ?
2. What steps did AlliedSignal take to satisfy federal securities laws?
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3. What anti-takeover defenses were in place at AMP prior to AlliedSignal’s offer?
4. How did the AMP Board use the AMP Rights Agreement to encourage AMP shareholders to vote against
AlliedSignal’s proposals?
5. What options did AlliedSignal have to neutralize or circumvent AMP’s use of the Rights Agreement?
6. Why did AlliedSignal, after announcing it had purchased 20 million AMP shares at $44.50, indicate that it would
reduce the price paid in any further offers it might make?
7. What other takeover defenses did AMP employ in its attempt to thwart AlliedSignal?
8. How did both AMP and AlliedSignal use litigation in this takeover battle?
9. Should state laws be used to protect companies from hostile takeovers?
10. Was AMP’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)?
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