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for any remaining shares outstanding. Minority shareholders must tender their shares at this point, ask the courts to
10. Both Mylan and Perrigo fought aggressively to ward off unwanted suitors. As such, both could be accused of trying
to entrench senior management and their boards of directors. Do you believe that the actions of both firms were
consistent with the best interests of their shareholders? Explain your answer.
Answer: The numerous examples of Mylan’s poor governance practices strongly suggest that the firm’s board and
senior management has not been operating in the best interest of their shareholders. Their actions to ward off Teva’s
Dell Goes Private amid a Battle of the Billionaire Titans
Case Study Objectives: To Illustrate
• Potential deal related agency conflicts
• How activist shareholders can preserve shareholder value
• The challenges boards of directors face in evaluating strategic alternatives.
•
Introduction
The events of 2013 surrounding the conversion of Dell Inc. from a public to a private company pitted billionaire entrepreneur
Michael Dell against billionaire activist investor Carl Icahn. Sensing an opportunity to save the multibillion dollar tech firm
he had created in the late 1980s, Michael Dell initiated a bold move to buy out public investors. The objective was to
transform the firm from one dependent on personal computers (PCs) to one focused on software and services. To be
successful, he felt he needed to gain unfettered control over the firm so that the “only investor he would have to talk to would
be himself.” The strategy required layering bone-crushing debt on the already foundering firm. To limit the amount of debt,
he would have to limit the amount of the purchase he paid to take the firm private. The overarching question: Was he in fact
offering a fair price to the firm’s public shareholders?
Midway through Michael Dell’s effort to privatize the firm, Carl Icahn entered the fray using social media such as Twitter
and TV interviews to vilify Michael Dell’s leadership and personal ethics. Carl Icahn is arguably the most iconic corporate
raider having achieved notoriety in the 1980s in series of corporate takeovers that made him extremely wealthy.
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Deal Timeline
Dell’s second largest shareholder, Southeastern Asset Management, had seen the value of its investment in the computer firm
tumble well below its value when the investment was made. In an effort to recover its investment, Southeastern told Michael
Dell in June 2012 that it would be willing to roll over its shares into a private firm (i.e., exchange its holdings in Dell for
shares in a new company) managed by current management if the buyout price was reasonable. The following month,
Michael Dell consulted with Silver Lake Investors partner Egon Durvan and George Roberts of investment firm Kohlberg
Kravis and Roberts about joining forces to take Dell Inc. private. He later contacted Alex Mandl, an independent Dell Inc.
board member, to alert him of his plans.
The Dell board expressed increasing concern about the near term fortunes of the firm including declining sales and profit
margins, market share losses (particularly in emerging market economies) and increasing competition from efficient, low-
cost manufacturers relying primarily on a build-to-stock business model (i.e., selling a limited line of standardized products
out of inventory, rather than the build-to-order business model historically used by the Dell). The build-to-order model
allowed customers to customize their purchases online (i.e., Dell would assemble the computer only after it had been
ordered). Longer term concerns included a general lengthening of the replacement cycle for PC products, the uncertain rate of
adoption of the Windows 8 operating system and unexpected slowdowns in corporate Windows 7 upgrades, increasing
consumer interest in tablets and smartphones, the potential substitution of these products for PC products and the related fact
that the Company currently sells tablets only in limited quantities and does not manufacture smartphones. The board also
expressed concern about the risks inherent in executing the Company’s long-term business strategy of shifting its portfolio
toward products and services that provide higher value and recurring revenue streams.
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In June, Icahn spent $1 billion to buy Southeastern’s shares and aggressively campaigned to have Michael Dell fired and
replaced on the board. He promoted his leveraged recapitalization plan (i.e., the use of borrowed funds to buy a controlling
interest in the firm) to shareholders which he valued at $15 per share. The actual value of the proposal depended on how the
value was calculated for the stub equity.
The timing of the Dell Inc. annual shareholders’ meeting to approve the merger agreement was postponed three times due
to the inability to get a majority of the votes cast in favor of the Dell/Silver Lake merger agreement. According to the Dell
bylaws, shareholders abstaining from voting were counted as “no votes.” Since the number of actual votes cast at such
meetings tends to be relatively low, the board feared it could not get approval.
In early September, never having actually submitted a legally binding bid for the firm, Icahn conceded defeat, but he
continued to argue Michael Dell and Silver Lake substantially undervalued the Company. The breaking point according to
Icahn was the dismissal of his lawsuit in the Delaware Court of Chancery in which he alleged the Dell Inc. directors breached
their fiduciary duties by delaying the special shareholders meeting concerning the proposed merger.
Nevertheless, at the end of the day, Icahn was richly rewarded for his efforts as an activist shareholder with a stake worth
$2.2 billion, resulting in tens of millions of dollars in profit. Other shareholders will benefit by more than $500 million from
his efforts which resulted in Michael Dell and Silver Lake having increased their initial bid by $0.23 per share. Despite the
sale of its share to Icahn, Southeastern lost an estimated $500 million on its investment.
The Final Deal
On October 31, 2013, Dell Inc. one of the world’s leading PC manufacturers, ended its 25 year history as a public firm. Dell
paid $13.88 per share, up from its initial bid of $13.65 in February. The final deal represented a 36% premium over Dell’s
share price 90 days prior to the February 5, 2013, merger announcement date and valued the Company at $24.9 billion. The
What the New Dell Looks Like
The new Dell Corporation has more than 140,000 channel distribution partners (i.e., parties selling Dell products), with about
$16 billion of the firm’s $60 billion in annual revenue coming from these partners. This compares to zero in 2008. The firm
has also doubled the number of sales specialists with technical training to 7,000 from 2009. The firm is experiencing
24
customers that buy PCs go on to buy other products and services.
With 110,000 employees worldwide, the firm’s current objectives are cash flow and growth: cash flow to pay off the
firm’s current debt and growth to increase the firm’s value when it is again taken public at some point in the future. Cash
flow will come from increased sales and slashing costs, with a target of $2 billion in annual cost savings. As a private firm, it
will have fewer regulatory hurdles and disclosures than a public firm, allowing for a speedier execution of its business
strategy of growing its enterprise solutions business.
Why Did the Board Reject Alternatives to the “Going–Private” Proposal?
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
that the firm could survive as a public company thereby jeopardizing the value of the stub equity.
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
and product offerings and the negative effect on customer experience as a result of not having an integrated sales and
financing team.
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
approved. The justification for this delay resides in whether or not the Dell board was acting in good faith. The Dell board did
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While the firm’s operating performance spiraled downward throughout 2013, it is difficult to assess to what extent this
reflected the ongoing contraction in the PC market or the turmoil surrounding the buyout process. It is probable that the
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.
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
by its fiduciary responsibilities to the firm’s shareholders.
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”
provision in the merger agreement, it can never be known with certainty whether they made the appropriate
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
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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?
Answer:
a. Bill Ackman of Pershing Square lost money when he shorted the stock in 2013 of Herbalife in a public spat
with Carl Icahn who had a long position in the stock. Ackman argued that Herbalife’s financial statements
were subject to substantial accounting irregularities.
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
financial returns tend to be positive and statistically significant on the day such interventions by activists are
presumably having been forced by activist investors to take actions in the best interests of shareholders.
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
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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.
Since the introduction of the poison pill defense, effective hostile bids often are accompanied by a proxy contest to replace
the target’s directors with those supporting the bid and subsequently have the board rescind the pill. However, Jos. A. Bank’s
bid appeared ill-timed. By not starting the takeover process until after the Men’s Wearhouse annual meeting, which had just
taken place in early September 2013, Jos. A. Bank would have to wait almost a year to initiate a proxy fight. Moreover, the
timing of the Jos. A. Bank offer effectively foreclosed a hostile takeover. While Men’s Wearhouse by-laws would allow
shareholders to remove directors by written consent (so-called consent solicitation) at any time, such a removal could only be
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.
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In a move intended to make a takeover by Men’s Wearhouse less attractive, Jos. A. Bank reached an agreement on February
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
its shareholders, but the effect of this tactic and the purchase of Eddie Bauer would also make a takeover by Men’s
Wearhouse increasingly expensive.
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.
______________________________________________________________________________
Discussions about a possible merger between Israel’s mega generic-drug maker Teva Pharmaceutical Industries Ltd. (Teva)
and a specialty drug firm, Cephalon Inc. (Cephalon), had been under way for more than a year. However, they took on a
sense of heightened urgency following an unexpected public announcement on March 29, 2011, of an unsolicited tender offer
for U.S.-based Cephalon by Canada’s Valeant Pharmaceuticals International Ltd. (Valeant). The Valeant offer was valued at
$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
Cephalon to prosper on its own. Cephalon responded that the Valeant offer had undervalued the company. Valeant coupled
its hostile offer with the mailing of a proposal to Cephalon shareholders to replace Cephalon’s board with its own chosen
29
Given its reputation, attempts to get an agreement between Valeant and Cephalon were in trouble from the outset. Valeant
was not interested in Cephalon’s oncology products and even proposed buying only the firm’s non–oncology drugs.
Cephalon’s board and management showed little interest in dismembering the firm and proceeded to acquire U.S.-based
Gemin X Pharmaceuticals Inc. for $225 million on March 21, 2011, and to buy up the outstanding shares of ChemGenex
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
firms’ revenue. Together, the combined firms would have 30 pharmaceuticals at least at the mid-development stage. Teva
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
Teva’s rising 4.2% and 3.5%, respectively, on the announcement. Expressing their disappointment, investors drove Valeant’s
share price down by 6.5%. Valeant would still profit from the 1 million Cephalon shares it had acquired prior to Teva’s and
Cephalon’s public announcement of their agreement. These shares had been acquired at prices below Teva’s winning bid of
$81.50 per share.
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
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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
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
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
shareholders and that the firm could become embroiled in a nasty and protracted proxy fight. In addition, the firm
5. What does the reaction of investors tell you about how they valued the combination of either Valeant or Teva with
Cephalon? Be specific.
Answer: Investors apparently believed that significant shareholder value would be created if either Valeant or Teva
6. Why do the shares of acquiring companies tend to perform better when cash is used to make the acquisition rather
than equity?
Answer: Acquirers tend to use overvalued equity to buy targets and in doing so often overpay. Such stock tends to
underperform subsequent to closing as it declines to its long-term average price level.
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The court’s decision illustrates how a poison pill can work in concert with a classified or staggered board, in which
directors are elected one-third at a time. Bidders must therefore wait two years to elect a majority of the total board and force
the poison pill to be rescinded. This combination has proven to be a highly potent antitakeover defense. Air Products’ bid for
Airgas highlights the challenges of attempting to take control of another firm’s board. Even if Air Products had been
successful in electing a majority of board members, there was no assurance the new board would have supported the $70 Air
Products bid. The Airgas rejection of their bid came after three new directors nominated by Air Products had been elected to
the Airgas board in 2009. Instead of campaigning for a sale, the three new directors joined the rest of the Airgas board in
demanding a higher price from Air Products.
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
operation of the firm). Such decisions can have major impacts on the value of the shareholder investments.
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
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
terms of legal, investment banking, and consulting fees as well as expenses related to proxy tender offer materials
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.
______________________________________________________________________________
33
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
about 20% of LinkedIn and, in concert with three venture capital firms, will have a controlling interest. In contrast, public
shareholders will have less than 1% of the voting power of the firm. Different classes of voting stock allow the founder’s
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.
Hostile takeovers are now increasingly common in Europe. The battle is widely viewed as a test case as to how far a firm can
go in attempting to prevent an unwanted takeover.
Arcelor was created in 2001 by melding steel companies in Spain, France, and Luxembourg. Most of its 90 plants are in
Europe. In contrast, most of Mittal’s plants are outside of Europe in areas with lower labor costs. Lakshmi Mittal, Mittal’s
CEO and a member of an important industrial family in India, started the firm and built it into a powerhouse through two
decades of acquisitions in emerging nations. The company is headquartered in the Netherlands for tax reasons. Prior to the
Arcelor acquisition, Mr. Mittal owned 88 percent of the firm’s stock.
34
Dolle engaged in one of the most aggressive takeover defenses in recent corporate history. In early February, Arcelor
doubled its dividend and announced plans to buy back about $8.75 billion in stock at a price well above the then current
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
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.
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
35
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
Answer: Hostile takeovers may be appropriate whenever target management is not working in the best interests of
its shareholders (i.e., so-called agency problems). However, while such transactions often are concluded in a
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.
36
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,
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).
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