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All of these alternatives to the merger agreement would have required substantial amounts of time and resources to
implement. Each had its own associated risks. None represented an obvious alternative to the merger agreement.
According to SEC filings, the Dell Inc. board’s special committee rejected the Icahn proposal for a leveraged recapitalization
because of the uncertainty associated with the value of the stub equity. There was also uncertainty as to whether Icahn could
finance his proposal. Furthermore, the resulting increase in the Company’s leverage ratios could reduce investor confidence
duplicate administrative and support functions.
Selling Dell’s Financial Services business (DFS), which enabled customers to buy on credit, was rejected also because of
complexity, execution risk, and transaction-related expenses. The Committee did not believe that this option would provide a
value per share in excess of the merger offer price. The sale of DFS would create additional costs required to replace the
Company’s captive financing services with third-party financing services, reduced flexibility to integrate financing services
uncertain economic environment and the limited number of potential buyers with the financial ability to finance a deal of this
size.
Prologue
From start to finish, the deal took more than 1 year to complete. It also saw the board of directors postpone the annual
shareholder meeting three times because it was unclear if the proposed Michael Dell/Silver Lake Partners merger would be
lengthy and tumultuous process diverted management’s attention from dealing with daily operating issues as well as had a
negative impact on the firm’s brand and on corporation’s willingness to buy its products.
The firm’s fortunes improved markedly in 2014. According to tech–industry analytical firm IDC, Dell’s global PC
shipments increased by about 9% over the prior year. In the United States, shipments increased by almost 20% bringing its
total share of the US PC market to 24%. This compares to market leader Hewlett–Packard’s share of about 28%. The
improvement in the firm’s PC sales may provide sufficient cash to finance Dell’s changing product focus.
Was it a fair deal for Dell Inc. shareholders? Carl Icahn has argued that Michael Dell and Silver Lake Partners “got a
steal” buying the firm for $24.9 billion. Time will tell.
Discussion Questions
1. When, if ever, is it appropriate for a board to prevent shareholder votes on matters involved in selling a firm?
Answer: The answer to this question is rooted in whether boards are perceived to be acting in the interests of all
shareholders or simply attempting to entrench themselves and current management. Once an unsolicited bid is
initiated, the composition of a target firm’s shareholders moves from its long-term investors, who often sell when
2. In your opinion, did the Dell Inc. board of directors act in the best interests of the Dell shareholders? Cite examples
to support your position.
Answer: It is very difficult to determine if a board is acting in the best interests of shareholders since it requires
being able to assess the value of alternatives to the decision the board ultimately made. While the board clearly took
appropriate action in setting up a special committee consisting of independent directors and including a “go shop”
3. A buyout involving the target firm’s current management is called a management buyout. In what way do these
types of deals represent agency conflicts between managers and shareholders? What board procedures can be put in
place to mitigate such conflicts? How can activist investors help mitigate such conflicts?
Answer: Managers involved in a management buyout at least in theory have access to better information than
shareholders (so-called information asymmetry) and are in a better position to assess the proper value of the firm.
Such managers have an incentive to take the firm private at the lowest price per share possible to increase their own
potential financial returns. They will only take the firm private if they firmly believe that based on current
4. From publicly available information, find at least two examples of activist investors influencing the policies or
strategies of a firm? Describe the impact you believe they had in each instance?
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b. David Einhorn of Greenlight Capital won a court case in 2013 that prevented Apple from bundling his
proposal to issue a new class of preferred stock paying a high dividend with four other proposals at the
5. Critics of activist investors argue that they force firms to focus on short-term considerations versus long-term
performance. As such, they believe that shareholder rights to remove board members, to remove defenses, and to
approve major strategic decisions through proxy contests should be restricted. Do you agree or disagree with such
critics? Explain your answer.
Answer: There is little empirical evidence that activist investors on average destroy shareholder value. Abnormal
6. Is the highest bid necessarily the best bid? Explain your answer.
Answer: While intuitively it seems that the highest offer price should always be selected, it often is not the case.
The board also needs to assess whether the bidder making the highest bid will actually be able to close the deal
Clothiers Men’s Wearhouse and Jos. A. Bank Reach Agreement After Lengthy Battle
Key Points:
• Discerning when management decisions are in shareholders’ best interests or designed to simply entrench
management often is difficult.
• Takeover defenses intended to coax a higher offer from acquirers often simply allow existing management to remain
in place.
• Friendly takeovers (those supported by the target’s board and management) often are preferred to hostile attempts.
Hollywood could not have written a more unpredictable thriller than the takeover battle between the nation’s two largest
independent men’s clothiers. Men’s Wearhouse emphatically rejected Jos. A. Bank’s acquisition offer valued at $2.3 billion
or $48 per share on October 11, 2013. The rejection of the offer was the opening salvo in a bitter war that was to continue for
the next 6 months with Jos. A. Bank (initially the acquirer) being taken over by Men’s Wearhouse.
Jos. A. Bank is a century old seller of men’s tailored and casual clothing with more than 600 stores throughout the United
States. The larger Men’s Wearhouse operates more than 1000 men’s clothing stores across the United States. The potential
for substantial cost savings through elimination of overhead, redundant stores, and economies of scale and purchasing is
believed to be substantial if the two firms are combined. Each had been for some time considering the other as a potential
takeover target for some time.
Men’s Wearhouse claimed that the proposal substantially undervalued the firm, calling the bid “opportunistic” and
“subject to unacceptable risks and contingencies,” as the offer was dependent on due diligence and was not supported with
24
ironclad financing. Not only was the offer rejected, but Men’s Wearhouse adopted a poison pill, which effectively limited a
shareholder to a 10% of less ownership stake in the company. Poison pills take effect when an investor reaches a specified
limit on the amount of stock that can be purchased. When triggered they are intended to make a hostile takeover prohibitively
expensive.
Since the introduction of the poison pill defense, effective hostile bids often are accompanied by a proxy contest to replace
done “for cause” such as willful misconduct. This would not apply in this instance since Men’s Wearhouse directors were
just saying no to what they argued was an inadequate offer.
Jos. A. Bank’s strategy may have been to rely on shareholder pressure to force Men’s Wearhouse to the negotiating table.
The two firms had large shareholders, who may have seen value in combining the two firms, in common such as the mega–
investment firm BlackRock which owns 9% of Men’s Wearhouse and 8.2% of Jos. A. Bank. Also, since initial offers often
game. On December 23, 2013, Jos. A. Bank rejected this bid claiming publicly that it has a well-developed strategy in place
to increase revenue and to improve margins.
Each firm’s management team stubbornly held on to its independence. Eminence Capital, which owns a 4.9% stake in Jos.
A. Bank and a 10% position in Men’s Wearhouse, had been pushing Jos. A. Bank to make a deal for months. Expressing
growing impatience, Eminence Capital took Jos. A. Bank to court to try to force the retailer to negotiate exclusively with
14, 2014, to acquire clothier Eddie Bauer in a deal valued at $825 million. Eddie Bauer gives Jos. A. Bank an entirely new
category of apparel ranging from casual clothes to sports apparel to hiking gear. Furthermore, Jos. A. Bank said it would also
buy back up to $300 million of its own stock at a price of $65 per share, well in excess of the most recent Men’s Wearhouse
offer, in an effort to boost the value of its shares. Jos. A. Bank said it was undertaking the share repurchase to return cash to
Teva Acquires Cephalon in a Hostile Takeover
Key Points
Friendly approaches are most commonly employed in corporate takeovers.
Hostile takeovers may be employed by the bidder to break an impasse.
Unplanned events often are a deciding factor in the timing of takeovers and the magnitude of the winning bid.
$5.7 billion, or $73 per Cephalon share. Cephalon had already rebuffed several friendly merger proposals made privately
from Valeant earlier in 2011. Valeant, known for employing aggressive takeover tactics, decided to break the impasse in its
discussions with Cephalon’s board and management by taking its offer public.
Valeant argued publicly that their offer was fair and that the loss of patent protection for Cephalon’s top-selling sleep-
disorder drug, Provigil, in 2012 and the tepid adoption of a new version of the drug called Nuvigil would make it difficult for
Valeant had a reputation for aggressive cost cutting and improving earnings performance by paring back its own internal
R&D activities and acquiring new drugs through the acquisition of other pharmaceutical companies. This was in marked
contrast to the more traditional approach taken by many pharmaceutical companies, which involved heavy reinvestment in
internal research and development to develop new drugs. Valeant’s approach has been to cut R&D costs ruthlessly, seek
undervalued targets, set aggressive timeframes for integrating acquisitions, and to use cash rather than equity. This set
Gemin X Pharmaceuticals Inc. for $225 million on March 21, 2011, and to buy up the outstanding shares of ChemGenex
Pharmaceuticals Ltd of Australia for $175 million. The use of cash for these purposes substantially reduced the firm’s cash
balances.
Teva had significantly greater appeal to the Cephalon board, since it had expressed interest in the entire company. Teva
also was willing to pay a substantially higher purchase price because of the greater perceived synergy between the two
Teva needed to achieve a better balance between branded and generic products. Acquiring Cephalon, with its strong drug
pipeline and fast-growing cancer drug Treanda and pain medicine Fentora, offered the potential for offsetting any loss of
Copaxone revenue and of expanding Teva’s offering of high–margin branded drugs. These drugs would complement Teva’s
own portfolio of drugs, serving therapeutic areas ranging from central nervous system disorders to oncology to pain
management, that generated $2.8 billion in 2010. With Cephalon, branded drugs would account for 36% of the combined
26
three years. Although the deal did offer cost–cutting opportunities, the ability to broaden the firm’s product offering was a far
12% premium to Valeant’s $73 per share offer and a 39% premium to Cephalon’s share price the day after Valeant’s
announced its bid. The deal, including the conversion of its convertible debentures and stock options, is worth $6.8 billion to
Cephalon’s shareholders. The purchase agreement included a breakup fee of $275 million, about 4% of the purchase price.
Having publicly stated that they thought their offer fully valued the business, Valeant withdrew its offer after the joint
Cephalon–Teva announcement on May 2, 2011. Valeant could not continue to pursue Cephalon unless it was willing to run
the risk of being publicly perceived as overpaying for the target. Investors reacted favorably, with Cephalon’s stock and
Discussion Questions:
1. What were the motivations for Valeant and Teva to be interested in acquiring Cephalon? Be specific.
Answer: While Valeant was more likely to be an aggressive cost cutter in view of the low value they placed on
Cephalon’s drug pipeline, both firms anticipated improving earnings performance through significant cost savings
by combining operations and eliminating duplicate overhead. Valeant also saw value in Cephalon’s non-cancer
drug and were seeking access to a firm with a substantial number of new drugs under development.
2. Identify the takeover tactics employed by Valeant and Teva. Explain why each was used.
Answer: Both firms initially approached Cephalon on a friendly basis, interested in avoiding an auction for the
target and the potential for customer attrition, loss of key employees, and disruption to suppliers if the acquisition
became hostile. However, Valeant, probably aware of Cephalon’s ongoing discussions with Teva, decided to
3. What alternative strategies could Valeant and Teva have pursued?
Answer: Both companies could have engaged in a bidding war for Cephalon. However, this is likely to have resulted
in the winner overpaying for the target. Furthermore, a protracted takeover could have attracted other interested
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4. Identify the takeover defenses employed by Cephalon. Explained why each was used.
Answer: Cephalon turned to Teva as a white knight once it became apparent that Valeant was going directly to its
5. What does the reaction of investors tell you about how they valued the combination of either Valeant or Teva with
Cephalon? Be specific.
6. Why do the shares of acquiring companies tend to perform better when cash is used to make the acquisition rather
than equity?
Balancing Board and Shareholder Rights: Air Products Aborted Takeover of Airgas
Key Points
Defining the right balance of power between corporate boards and shareholders remains elusive.
The Delaware court has ruled that a board can take as long as necessary to consider a bid and can prevent shareholders from
voting on takeover bids.
Activist investors are increasingly urging shareholders to pressure firms to drop staggered boards because of the potential to
entrench management.
______________________________________________________________________________
When, if ever, is it appropriate for a board to agree to a current bid to buy the firm if it, in good faith, believes that the bid
undervalues the firm based on the board’s knowledge of the long-term outlook for the firm? When, if ever, is it appropriate
for a board to prevent shareholder votes on such matters? The answers to these questions are rooted in whether boards are
hostile takeover negotiations. What follows is a discussion of what is an important judicial precedent pertaining to board and
shareholder rights.
The unsolicited offer by Air Products for Airgas on February 2, 2010, has been one of the longest-running hostile bids in
U.S. history. After having revised up its offer twice, Air Products sought to bring this process to a close when it asked the
ruling, Air Products withdrew its bid.
The court argued that the Airgas board determined, using a good-faith effort, that the Air Products offer of $70 per share
was inadequate and allowed Airgas to use a poison pill to defeat the hostile bid by Air Products. A firm is believed to have
28
keep the poison pill in place against the will of the shareholders. The court also argued that the poison pill was not preventing
Air Products from changing the composition of the board but, rather, extending the amount of time required to do so. The
court also ruled that directors have the right to prevent shareholder votes if they believe that shareholders would accept a bid
that undervalued the firm out of ignorance of the firm’s true value.
The outcome of the court’s ruling has implications for future hostile takeovers. The ruling upholds Delaware’s long
tradition of respecting managerial discretion as long as the board is found to be acting in good faith and abiding by its
fiduciary responsibilities to the firm’s shareholders. The ruling allows target firm boards to use a poison pill as long as the
board deems justified, and it is far-reaching because Delaware law governs most U.S. publicly traded firms.
Discussion Questions:
1. Do you believe that shareholders should always have the right to vote on a sale of the firm under any circumstances?
Explain your answer.
Answer: Since shareholders are owners of the firm, it would appear appropriate for them to have the right to vote on
sales of firm assets which are material (i.e., exceeding 5-10% of the firm’s total assets or are critical to the continued
2. Do you agree with the Delaware Chancery Court’s ruling? Explain your answer.
Answer: In a free market economy, shareholders elect board members and in turn they hire managers to act as
agents of the shareholders to manage the firm in the shareholders’ best interests. With this in mind, the courts in
Delaware have long upheld the director and managerial discretion to make decisions as long as they are acting in
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3. Under what circumstances do the combination of a poison pill and a staggered board make sense for the target firm’s
shareholders? Be specific.
4. How might this court ruling impact the willingness of acquirers in the future to go aggressively hostile?
Answer: This court ruling is likely to dampen the enthusiasm for acquirers to engage in highly aggressive hostile
takeover attempts due to the likelihood that they will be unsuccessful. Unsuccessful attempts are extremely costly in
Linkedin IPO Raises Governance Issues
_____________________________________________________________________________________
<TE type A>
Key Points
Various antitakeover defenses raise shareholder rights issues.
Critics argue such measures entrench existing management.
Firms employing such measures argue that they allow the founder to retain control, attract and retain key managers, and
enable the firm to continue its business strategy.
______________________________________________________________________________
Investors often overlook governance structures when the prospect of future profits is high. This may have been the case when
Internet social media company LinkedIn completed on May 9, 2011, the largest IPO since Google’s in 2004. With 2010
revenues of $243 million and net income of $15 million, the eight-year-old firm was valued at $8.9 billion, nearly 600 times
earnings.
Investors in the IPO received Class A shares, which have only one vote, while LinkedIn’s pre-IPO shareholders hold Class
B shares, entitled to 10 votes each. The dual share structure guarantees that cofounder and CEO, Reid Hoffman, will own
retain key managers, and to enable the current board and management to look beyond quarterly earnings pressures. The dual
structure also allows founders to cash out without losing control of the companies they started.
LinkedIn also adopted a staggered board, which effectively requires at least two years before a majority of the firm’s
current board can be replaced. To make it more difficult to eliminate the staggered board defense, LinkedIn shareholders
must vote to change the firm’s certificate of incorporation after the board recommends such a vote. Once the
recommendation is made, all LinkedIn shares (Class A and Class B) have only one vote. However, the removal of the
nomination. Finally, according to LinkedIn’s charter, any shareholder lawsuits must be litigated in the state of Delaware,
where the laws are particularly favorable to corporations.
30
These measures raise questions about the rights of pre-IPO investors versus those of public shareholders. Do they allow
the firm to retain the best managers and to implement fully its business strategy? Do they embolden management to negotiate
the best deal for all shareholders in the event of a takeover attempt? Or do they entrench current management intent on
maintaining their power and compensation at the expense of other shareholders?
Discussion 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.
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.
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.
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
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.
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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
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
3. Using the information in this case study, discuss the arguments for and against encouraging hostile corporate
takeovers
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Answer: Hostile takeovers may be appropriate whenever target management is not working in the best interests of
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,
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,
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
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
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.
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
34
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
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
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
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