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4. What takeover tactics were employed or threatened to be employed by Verizon? By Qwest? Be specific.
Answer: Verizon pursued a friendly approach to MCI believing that it could convince MCI’s management and board
that it represented the stronger strategic partner. Consequently, its stock was likely to appreciate more than Qwest’s.
MCI’s board seemed to have accepted this premise from the outset until investor pressure forced them to consider
seriously the higher Qwest bids. Verizon used public pressure by noting that if MCI did not accept their bid that it
was due to MCI’s management and board being excessively influenced by the focus of hedge funds on short-term
simply did not have the financial resources or the strategic appeal to MCI to win this bidding contest.
5. What specific takeover defenses did MCI employ? Be specific.
Answer: MCI employed a poison pill, staggered board, and golden parachute defenses. The poison pill discouraged
6. How did the actions of certain shareholders affect the bidding process? Be specific.
Answer: The hedge funds continuously pressured MCI to accept the higher bid because of their focus on short-term
7. In your opinion, did the MCI board act in the best interests of their shareholders? Of all their stakeholders? Be
specific.
8. Do you believe that the potential severance payments that could be paid to Capellas were excessive? Explain your
answer. What are the arguments for and against such severance plans for senior executives?
Answer: Michael Capellas was formerly CEO of Compaq before it was acquired by HP. The severance package
was part of the contract he signed when he agreed to be the CEO of MCI. Consequently, MCI is contractually bound
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9. Should the antitrust regulators approve the Verizon/MCI merger? Explain your answer.
Answer: Because of the plethora of competing alternatives, it does not appear that consumers will be hurt.
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.
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
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
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
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?
Answer: Frequently, the first reaction of parties to a negotiation to a proposal is not reflective of their true
intentions. Much of the initial reaction represents “posturing” to move the other party more toward their true
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?
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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
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?
Answer: Cost savings would be more rapidly realized if InBev had plants and warehouses geographically close to
AB’s operations , which could be consolidated. However, there are few InBev facilities in the U.S., and InBev
3. What is a friendly takeover? Speculate as to why it may have turned hostile?
Answer: A takeover is said to be friendly if the suitor’s bid is supported by the target’s board and management.
Friendly takeovers often are viewed by acquirers as desirable to minimize the loss of key employees as well as
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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?
Answer: The Busch family was not unified in rejecting the InBev bid. By including a Busch family member on
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.
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
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
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
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management been expecting to happen (Hint: Consider the various post-offer antitakeover defenses that could be put
in place)?
Answer: PeopleSoft’s initial rejection may have been intended to solicit additional bids in order to
boost the offer price for the firm’s shares. PeopleSoft’s defenses included moving up the regularly
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
major Reynolds’ shareholders began to pressure the board. Its largest single shareholder, Highfields Capital Management, a
holder of more than four million shares, demanded that the Board create a special committee of independent directors with its
own counsel and instruct Merrill Lynch to open an auction for Reynolds.
Despite pressure, the Reynolds’ board rejected Alcoa’s bid as inadequate. Alcoa’s response was to say that it would
initiate an all cash tender offer for all of Reynolds’ stock and simultaneously solicit shareholder support through a proxy
contest for replacing the Reynolds’ board and dismantling Reynolds’ takeover defenses. Notwithstanding the public
posturing by both sides, Reynolds capitulated on August 19, slightly more than two weeks from receipt of the initial
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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
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
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.
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
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,
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
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.
a. What takeover defenses did Warner employ to ward off the Pfizer merger proposal? Warner
invoked the protection of a standstill agreement Pfizer had signed in order to obtain the exclusive
right to promote Lipitor in certain foreign markets and in partnership with Warner in the U.S. The
standstill agreement prohibited Pfizer from making a merger proposal unless invited to do so by
holding Pfizer stock because of the better strategic fit between Pfizer and Warner. Finally, Pfizer
utilized a consent solicitation process that allowed Warner shareholders to change the board
without waiting months for a shareholders’ meeting. The net effect of all of these actions was to
cause Warner’s board to relent to the increasing pressure to accept the Pfizer offer from Warner
shareholders.
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?
Answer: Warner could have employed additional postbid defenses in an effort to raise Pfizer’s offer price. Such
defenses could have included a share buyback plan or litigation. The buyback plan could have effectively raised the
3. What factors may have contributed to Warner Lambert’s rejection of the Pfizer proposal?
Answer: It is unclear what the true motives were behind Warner’s rejection of the Pfizer bid. The shareholders
interests’ hypothesis would argue that Warner’s board was simply holding out for a more attractive bid from Pfizer.
the Pfizer bid.
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?
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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?
Warner time to negotiate the sale of the firm to what the board thought was a better partner than Pfizer.
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
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.
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.
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
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
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.
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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
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?
Answer: AlliedSignal reinforced its bear hug of AMP with its public announcement of its intent to initiate a tender
offer for all of AMP. The move was designed to put pressure on the AMP Board and management. Following
2. What steps did AlliedSignal take to satisfy federal securities laws?
Answer: As required by federal securities laws, AlliedSignal informed the AMP Board of its intentions to acquire
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?
Answer: Initially, AMP employed the “just say no” defense to buy time to add more defenses. The Board cleverly
used the AMP Rights Plan to discourage AlliedSignal from immediately moving ahead with its proposed $10 billion
tender offer for all of AMP’s shares. The Board initiated a stock buy-back plan for 30 million shares at $55.00.
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)?
