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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
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.
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
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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
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
5. What specific takeover defenses did MCI employ? Be specific.
Answer: MCI employed a poison pill, staggered board, and golden parachute defenses. The poison pill discouraged
suitors from buying a large piece of the MCI, which would have triggered the poison pill and increased the cost of
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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.
Answer: Some might argue that MCI did not act in the best interests of all their shareholders. Those interested in
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
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
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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
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.
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?
Answer: The offer price for Cadbury shares announced on Monday September 7, 2009, exceeded the closing
price for these share on September 4, 2009, the last day on which the shares had traded. The shares closed on
3. Why did the price of other food manufacturers also increase following the announcement of the attempted
takeover?
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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?
Answer: Kraft would have had to pay a larger purchase price for the combined Cadbury and Schweppes
businesses. It would also have required a longer and more involved due diligence. Finally, the price that they
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.
Discussion Questions:
1. Why would rising commodity prices spark industry consolidation?
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Answer: Higher prices for basic ingredients tended to erode brewer profit margins. By merging, brewers would be
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
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
their proposed slate of board candidates, InBev believed it could mute some of the hostility to the takeover and
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
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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
Discussion Questions:
1. Explain why PeopleSoft’s management may have rejected Oracle’s improved offer of $26 per share and why this
rejection might have been in the best interests of the PeopleSoft shareholders? What may have PeopleSoft’s
management been expecting to happen (Hint: Consider the various post-offer antitakeover defenses that could be put
in place)?
Answer: PeopleSoft’s initial rejection may have been intended to solicit additional bids in order to
boost the offer price for the firm’s shares. PeopleSoft’s defenses included moving up the regularly
2. Identify at least one takeover tactic being employed by Oracle in its attempt to acquire PeopleSoft. Explain how this
takeover tactic(s) works.
Answer: Oracle employed a hostile tender offer to circumvent the PeopleSoft management and board. This
3. Identify at least one takeover defense or tactic that is in place or is being employed by PeopleSoft. Explain how this
defense or tactic is intended to discourage Oracle in its takeover effort.
Answer: The PeopleSoft customer assurance program was designed to raise the cost of the acquisition. Other
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
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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
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
Discussion Questions:
1. What was the dollar value of the purchase price Alcoa offered to pay for Reynolds?
and $1.5 billion in assumed debt.
2. Describe the various takeover tactics Alcoa employed in its successful takeover of Reynolds. Why were these
tactics employed?
Answer: Alcoa employed a bear hug letter and threatened to implement simultaneously a proxy contest and tender
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?
Answer: Other logical bidders for Reynolds were involved in a 3-way merger. Reynolds’
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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.
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
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
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
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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
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.
Answer:
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
b. What tactics did Pfizer employ to overcome these defenses? Following the public announcement
of a merger agreement with AHP, Pfizer argued that they had been released from the agreement.
Pfizer also attempted to encourage Warner shareholders to reject the proposed merger with AHP
by offering a substantial premium for their stock over what they were being offered by AHP. The
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
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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.
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?
Answer: The huge premium paid for Warner means that Pfizer had to issue a substantial number of new shares to
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?
Answer: A standstill agreement entered into by a potential target firm is designed to prevent a signatory from
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
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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.
Answer: Yes. HP’s board and management are the agents of the shareholders and in theory they are doing what is in
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.
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.
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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
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.
Discussion Questions:
1. What types of takeover tactics did AlliedSignal employ?
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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?
Answer: AlliedSignal choose to reduce the number of shares it would purchase through its partial tender offer to
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
8. How did both AMP and AlliedSignal use litigation in this takeover battle?
Answer: AMP used Pennsylvania anti-takeover statutes to try to block Allied Signal’s ability to vote its shares and
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9. Should state laws be used to protect companies from hostile takeovers?
Answer: The empirical evidence suggests that target shareholders benefit greatly from a hostile takeover, while the
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)?
