Chapter 3: The Corporate Takeover Market:
3.1 What are the management entrenchment and shareholder interests hypotheses? Which seems more realistic in your
judgment?
3.2 What are the advantages and disadvantages of the friendly versus hostile approach to a corporate takeover?
3.3 What are the primary advantages and disadvantages of commonly used takeover defenses?
3.4 How may golden parachutes for senior management help a target firm’s shareholders? Are such
severance packages justified in your judgment?
3.5 How might recapitalization as a takeover defense help or hurt a target firm’s shareholders?
Answer: Recapitalization often takes the form of the target firm becoming highly leveraged. The objective may be
3.6 Anheuser-Busch (AB) rejected InBev’s all-cash offer price of $65 per share on June 30, 2008 saying it undervalued
the company, despite the offer representing a 35 percent premium to AB’s pre-announcement share price. InBev
refused to raise its offer repeating its strong preference for a friendly takeover. Speculate as to why InBev refused
to raise its initial offer. Why do you believe that InBev continued to prefer a friendly takeover? What would you
recommend InBev do to raise pressure on the AB board to accept the offer?
Answer: InBev was concerned about overpaying for AB since it would make it increasingly difficult to earn back the
substantial premium contained in its current offer. The firm preferred a friendly takeover since it would be the least
traumatic course of action. A protracted hostile takeover battle could result in a loss of key employees to
3.7 What do you believe are the primary factors a target firm’s board should consider when evaluating a bid from a
potential acquirer? Explain your answer.
Answer: The board should consider the adequacy of the bid. Does the offer exceed potential financial returns to the
target’s shareholders if the firm were to continue with its current strategy? Other factors include the nature and
3.8 If you were the CEO of a target firm, what strategy would you recommend to convince institutional shareholders
to support your position in a proxy battle with the bidding firm?
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3.9 Anheuser-Busch reduced its anti-takeover defenses in 2006 when it removed its staggered board structure. Two
years earlier, it did not renew its poison pill provision. Speculate as to why the board acquiesced in these
instances? Explain how these events affected the firm’s vulnerability to a takeover
3.10 In response to Microsoft’s efforts to acquire the firm, the Yahoo board adopted a “change–in–control” compensation
plan in May 2008. The plan states that if a Yahoo employee is terminated by Yahoo without cause (i.e., the
employee is performing their duties appropriately) of if an employee leaves of their own volition due to a change in
their position or responsibilities within two years after Microsoft acquires a controlling interest in Yahoo, the
employee will receive one year’s salary. Also, the plan provides for accelerated vesting of all stock options. Yahoo
notes that the adoption of severance plan is an effort to ensure that employees are treated fairly if Microsoft wins
control. Microsoft views the tactic as an effort to discourage a takeover. With whom do you agree and why?
Answer: The Yahoo plan covers all employees and the offer of a year’s salary is unusual. The end result of the plan
if allowed to stand would be to dramatically add to the cost of realizing synergy by combining MSN and Yahoo if
Solutions to End of Chapter Case Study Questions
New Technologies Drive Value Chain Consolidation
Discussion Questions and Answers:
1. Describe the takeover tactics employed by Merck? Why were they employed and were they effective?
Answer: Acquirers rebuffed in their efforts to make a deal on friendly terms can either walk away or turn
hostile. Most acquirers prefer friendly transactions and choose to walk away unless they feel the target firm is
too valuable of a prize. Merck chose to turn hostile and did so by ratcheting up pressure on the Versum board to
engage in negotiations.
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2. What takeover defenses were employed by Versum in this case? Why were they used and were they effective?
Answer: Takeover defenses may be employed to “entrench management” or to negotiate from a position of strength
3. Using the information in this case study, discuss the arguments for and against 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
negotiated settlement, the subsequent enmity inevitably raises the cost of integration and the ultimate cost of the
4. What is the true purchase price Merck agreed to pay for Versum?
Answer: Merck agreed to pay $5.8 billion for all the outstanding common shares held by Versum shareholders. It
5. Why do the shares of acquiring companies tend to perform better when cash is used to make the acquisition rather
than equity?
6. What does the reaction of investors to Merck’s takeover of Versum and Entegris deciding not to revise its bid tell
you about how they viewed the outcome?
Answer: The sharp decline in Merck stock implied investor discontent with the deal, perhaps reflecting a feeling the
firm had overpaid. Versum share price increase as expected to very close to the offer price less transaction costs and
Examination Questions and Answers
True/False Questions: Answer true or false to each of the following.
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1. Friendly takeovers are negotiated settlements that are often characterized by bargaining, which remains undisclosed
until the agreement has been signed. True or False
2. Concern about their fiduciary responsibility to shareholders and shareholder lawsuits often puts pressure on a target
firm’s board of directors to accept an offer if it includes a significant premium to the target’s current share price.
True or False
3. An astute bidder should always analyze the target firm’s possible defenses such as golden parachutes for key
employees and poison pills before making a bid. True or False
4. The accumulation of a target firm’s stock by arbitrageurs makes purchases of blocks of stock by the bidder easier.
True or False
5. A successful proxy fight may represent a far less expensive means of gaining control over a target than a
tender offer. True or False
6. Public announcements of a proposed takeover are often designed to put pressure on the board of the target firm.
True or False
7. A tender offer is a proposal made directly to the target firm’s board as the first step leading to a friendly takeover.
True or False
8. A bear hug involves mailing a letter containing an acquisition proposal to the target’s board without warning and
demanding an immediate response. True or False
9. Dissident shareholders always undertake a tender offer to change the composition of a firm’s board of
directors. True or False
10. A proxy contest is one in which a group of dissident shareholders attempts to obtain representation on a
firm’s board by soliciting other shareholders for the right to vote their shares. True or False
11. A hostile tender offer is a takeover tactic in which the acquirer bypasses the target’s board and management and
goes directly to the target’s shareholders with an offer to purchase their shares. True or False
12. According to the management entrenchment hypothesis, takeover defenses are designed to protect the
target firm’s management from a hostile takeover. True or False
13. The shareholder interests theory suggests that shareholders gain when management resists takeover
attempts. True or False
14. A standstill agreement is one in which the target firm agrees not to solicit bids from other potential
buyers while it is negotiating with the first bidder. True or False
15. Most takeover attempts may be characterized as hostile bids. True or False
16. Litigation is a tactic that is used only by acquiring firms. True or False
17. The takeover premium is the dollar or percentage amount the purchase price proposed for a target firm
exceeds the acquiring firm’s share price. True or False
18. Concern about their fiduciary responsibility and about stockholder lawsuits puts pressure on the target’s
board to accept the offer. True or False
19. The final outcome of a hostile takeover is rarely affected by the composition of the target’s stock
ownership and how stockholders feel about management’s performance. True or False
20. Despite the pressure of an attractive purchase price premium, the composition of the target’s board
greatly influences what the board does and the timing of its decisions. True or False
21. The target firm’s bylaws may provide significant hurdles for an acquiring firm. True or False
22. Bylaws may provide for a staggered board, the inability to remove directors without cause, and
supermajority voting requirements for approval of mergers. True or False
23. An acquiring firm may attempt to limit the options of the target’s senior management by making a formal
acquisition proposal, usually involving a public announcement, to the board of the directors of the target. True or
False
24. A target firm is unlikely to reject a bid without getting a “fairness” opinion from an investment banker
stating that the offer is inadequate. True or False
25. By replacing the target’s board members, proxy fights may be an effective means of gaining control
without owning 51% of the target’s voting stock. True or False
26. Proxy contests and tender offers are often viewed by acquirers as inexpensive ways to takeover another
firm. True or False
27. All materials in a proxy contest must be filed with the SEC before they are sent to shareholders.
True or False
28. Federal and state laws make it extremely difficult for a bidder to acquire a controlling interest in a target
without such actions becoming public knowledge. True or False
29. Tender offers always consist of an offer to exchange acquirer shares for shares in the target firm.
True or False
30. The size of the target firm is the best predictor of the likelihood of being taken over by another firm.
True or False
31. Poison pills are a commonly used takeover tactic to remove the management and board of the target firm.
True or False
32. Poison pills represent a new class of securities issued by a company to its shareholders, which have no
value unless an investor acquires a specific percentage of the firm’s voting stock. True or False
33. In elections involving staggered or classified boards, only one group of board members is up for
reelection each year. True or False
34. Golden parachutes are employee severance arrangements, which are triggered whenever a change in
control takes place. They are generally held by a large number of employees at all levels of management throughout
the firm. True or False
35. Tender offers apply only for share for share exchanges. True or False
36. Corporate governance refers to the way firms elect CEOs. True or False
37. The threat of hostile takeovers is a factor in encouraging a firm to implement good governance practices.
True or False
38. Corporate governance refers to a system of controls both internal and external to the firm that protects
stakeholders’ interests. True or False
39. Stakeholders in a firm refer to shareholders only. True or False
40. Corporate anti-takeover defenses are necessarily a sign of bad corporate governance. True or False
41. The threat of corporate takeover has little impact on how responsibly a corporate board and management manage a
firm. True or False
42. Institutional activism has assumed a larger role in ensuring good corporate governance practices in recent years.
True or False
43. Executive stock option plans have little impact on the way management runs the firm. True or False
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44. A standstill agreement prevents an investor who has signed the agreement from ever again buying stock in the target
firm. True or False
45. The primary forms of proxy contests are those for seats on the board of directors, those concerning management
proposals, and those seeking to force management to take a particular action. True or False
46. Purchasing target stock in the open market is a rarely used takeover tactic. True or False
47. In a one-tier offer, the acquirer announces the same offer to all target shareholders. True or False.
48. In a two-tiered offer, target shareholders typically received two offers, which potentially have different values.
True or False
49. A no-shop agreement prohibits the takeover target from seeking other bids. True or False
50. Poison pills represent a new class of stock issued by a company to its shareholders, usually as a dividend. True or
False
Multiple Choice: Circle only one alternative.
1. All of the following are commonly used takeover tactics, except for
a. Poison pills
b. Bear hug
c. Tender offer
d. Proxy contest
e. Litigation
2. According to the management entrenchment theory,
a. Management resistance to takeover attempts is an attempt to increase the proposed purchase price premium
b. Management resistance to takeover attempts is an attempt to extend their longevity with the target firm
c. Shareholders tend to benefit when management resists takeover attempts
d. Management attempts to maximize shareholder value
e. Describes the primary reason takeover targets resist takeover bids
3. Which of the following factors often affects hostile takeover bids?
a. The takeover premium
b. The composition of the board of the target firm
c. The composition of the ownership of the target’s stock
d. The target’s bylaws
e. All of the above
4. All of the following are true of a proxy contest except for
a. Are usually successful
b. Are sometimes designed to replace members of the board
c. Are sometimes designed to have certain takeover defenses removed
d. May enable effective control of a firm without owning 51% of the voting stock
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e. Are often costly
5. Purchasing the target firm’s stock in the open market is a commonly used tactic to achieve all of
the following except for
a. Acquiring a controlling interest in the target firm without making such actions public knowledge.
b. Lowering the average cost of acquiring the target firm’s shares
c. Recovering the cost of an unsuccessful takeover attempt
d. Obtaining additional voting rights in the target firm
e. Strengthening the effectiveness of proxy contests
6. All of the following are true of tender offers except for
a. Tender offers consist only of offers of cash for target stock
b. Are generally considered an expensive takeover tactic
c. Are extended for a specific period of time
d. Are sometimes over subscribed
e. Must be filed with the SEC
7. Which of the following are common takeover tactics?
a. Bear hugs
b. Open market purchases
c. Tender offers
d. Litigation
e. All of the above
8. All of the following are common takeover defenses except for
a. Poison pills
b. Litigation
c. Tender offers
d. Staggered boards
e. Golden parachutes
9. All of the following are true of poison pills except for
a. They are a new class of security
b. Generally prevent takeover attempts from being successful
c. Enable target shareholders to buy additional shares in the new company if an unwanted shareholder’s
ownership exceeds a specific percentage of the target’s stock
d. Delays the completion of a takeover attempt
e. May be removed by the target’s board if an attractive bid is received from a so-called “white knight.”
10. The following takeover defenses are generally put in place by a firm before a takeover attempt is
initiated.
a. Standstill agreements
b. Poison pills
c. Recapitalization
d. Corporate restructuring
e. Greenmail
11. The following takeover defenses are generally put in place by a firm after a takeover attempt is
underway.
a. Staggered board
b. Standstill agreement
c. Supermajority provision
d. Fair price provision
e. Reincorporation
12. Which of the following is true about so-called shark repellants?
a. They are put in place to strengthen the board
b. They include poison pills
c. Often consist of the right to issue greenmail
d. Involve White Knights
e. Involve corporate restructuring
13. Which of the following is true? A hostile takeover attempt
a. Is generally found to be illegal
b. Is one that is resisted by the target’s management
c. Results in lower returns to the target firm’s shareholders than a friendly attempt
d. Usually successful
e. Supported by the target firm’s board and its management
14. Which is true of the following? A white knight
a. Is a group of dissident shareholders which side with the bidding firm
b. Is a group of the target firm’s current shareholders which side with management
c. Is a third party that is willing to acquire the target firm at the same price as the bidder but usually removes
the target’s management
d. Is a firm which is viewed by management as a more appropriate suitor than the bidder
e. Is a firm that is willing to acquire only a large block of stock in the target firm
15. Which of the following is true about supervoting stock?
a. Is a commonly used takeover tactic.
b. Is generally encouraged by the SEC
c. May have 10 to 100 times of the voting rights of other classes of stock
d. Is issued to acquiring firms if they agree not to purchase a controlling interest in the target firm
e. Is a widely used takeover defense
16. Which of the following factors influences corporate governance practices?
a. Securities legislation
b. Government regulatory agencies
c. The threat of a hostile takeover
d. Institutional activism
e. All of the above
17. Which of the following are commonly considered alternative models of corporate governance?
a. Market model
b. Control model
c. Takeover model
d. A & B only
e. A & C only
18. The market governance model is applicable when which of the following conditions are true?
a. Capital markets are liquid
b. Equity ownership is widely dispersed
c. Ownership and control are separate
d. Board members are largely independent
e. All of the above
19. The control market is applicable when which of the following conditions are true?
20. The control model of corporate governance is applicable under all of the following conditions except for
a. Capital markets are illiquid
b. Board members are largely insiders
c. Ownership and control overlap
d. Equity ownership is widely dispersed
e. A, B, & D only
21. Which of the following are the basic principles on which the market model is based?
a. Management incentives should be aligned with those of shareholders and other major stakeholders
b. Transparency of financial statements
c. Equity ownership should be widely dispersed
d. A & B only
e. A, B, and C only
22. Which of the following statements best describes the business judgment rule?
a. Board members are expected to conduct themselves in a manner that could reasonably be seen as being in
the best interests of the shareholders.
b. Board members are always expected to make good decisions.
c. The courts are expected to “second guess’ decisions made by corporate boards.
d. Directors and managers are always expected to make good decisions.
e. Board decisions should be subject to constant scrutiny by the courts.
23. Over the years, the U.S. Congress has transferred some of the enforcement of securities laws to organizations other
than the SEC such as
a. Public stock exchanges
b. Financial Accounting Standards Board
c. Public Accounting Oversight Board
d. State regulatory agencies
e. All of the above
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24. Which of the following government agencies can discipline firms with inappropriate governance practices?
a. Securities and Exchange Commission
b. Federal Trade Commission
c. The Department of Justice
d. A & C only
e. A, B, & C
25. Studies show that which of the following combinations of corporate defenses can be most effective in discouraging
hostile takeovers?
a. Poison pills and staggered boards
b. Poison pills and golden parachutes
c. Golden parachutes and staggered boards
d. Standstill agreements and White Knights
e. Poison Pills and tender offers
26. Some of Acme Inc.’s shareholders are very dissatisfied with the performance of the firm’s current management team
and want to gain control of the board. To do so, these shareholders offer their own slate of candidates for open
spaces on the firm’s board of directors. Lacking the necessary votes to elect these candidates, they are contacting
other shareholders and asking them to vote for their slate of candidates. The firm’s existing management and board
is asking shareholders to vote for the candidates they have proposed to fill vacant seats on the board. Which of the
following terms best describes this scenario?
a. Leveraged buyout
b Proxy contest
c. Merger
d. Divestiture
e. None of the above
27. Xon Enterprises is attempting to take over Rayon Group. Rayon’s shareholders have the right to buy additional
shares at below market price if Xon (considered by Rayon’s board to be a hostile bidder) buys more than 15 percent
of Rayon’s outstanding shares. What term applies to this antitakeover measure?
a. Share repellent plan
b. Golden parachute plan
c. Pac Man defense
d. Poison pill
e. Greenmail provision
Case Study Short Essay Examination Questions
AUCTION EUPHORIA CAN RESULT IN BUYER’S REMORSE
KEY POINTS
• Buyers usually prefer friendly acquisitions but when the target firm is sufficiently attractive they sometimes turn
hostile.
• Such circumstances can attract multiple bidders.
• Disciplined bidders will walk away when the target’s demands appear excessive.
• The winning bidder by paying too much finds it difficult to recover the purchase price premium and earn financial
returns required by their shareholders.
__________________________________________________________________________________
At the outset, French multinational pharmaceutical company Sanofi appeared to hold all the cards in its attempted takeover of
Medivation, an American biopharmaceutical firm known for developing therapies for difficult to treat illnesses. Why? Even
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though the nomination deadline for its annual meeting had past, Medivation allowed shareholders to act by written consent
(also called consent solicitation) at any time. Under Delaware state law, where Medivation is incorporated, directors on a
board in which every director is up for election at the same time can be removed at any time with or without cause.
END OF CHAPTER CASE STUDY: STRATEGY MATTERS—SEMPRA ENERGY ACQUIRES
ONCOR ELECTRIC
_____________________________________________________________________
Case Study Objectives: To illustrate how
• Being the first bidder does not ensure success
• Learning from the mistakes of previous bidders can be a winning strategy
• Highly regulated industries may limit realizing potential synergy
__________________________________________________________________________________
Investment firms Kohlberg, Kravis & Roberts Co., Texas Pacific Group Capital, and Goldman Sachs Group Inc.’s private-
equity arm directed the $45 billion (including debt) takeover of Texas Utilities (TXU) in 2007. This was the largest
leveraged buyout in history. The investors believed that natural gas prices would rise; but instead, they collapsed amid a
boom in U.S. shale natural gas production. Unable to service their debt, the firm sought protection of the bankruptcy court
from its creditors in early 2014. Energy Future Holdings Inc. (Energy Future), TXU’s holding company, spent more than
three years in one of the largest-ever bankruptcy proceedings.
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Public Utility Commission of Texas, U.S. Bankruptcy Court of Delaware, Federal Energy Regulatory Commission, and the
U.S. Department of Justice.
Despite Energy Future’s problems, Oncor is considered a good investment by many, having posted an operating profit of
$431 million in 2016. The Hunt family of Texas wanted to buy Oncor and put its assets into a real-estate investment trust,
but this was not acceptable to regulators leery of the loss of tax revenue and the family’s limited utility industry expertise. The
Hunt family also would not agree to share some of the take savings with Oncor’s customers. Then NextEra Energy Inc., a
Fortune 200 largely East Coast electric utility, tried to buy Oncor based on their expertise in managing utilities, but they
would not commit to the “ring-fencing”1 of Oncor required by state regulators feeling uneasy after TXU’s collapse.
Oncor, which as part of Energy Future has been embroiled in Chapter 11 bankruptcy, should see its credit rating improve
due to the financial strength of the new parent. Sempra will maintain the existing independence of the Oncor board of
directors which has served to protect the interests of Oncor and its customers during the ongoing Energy Future bankruptcy
proceedings. This decision heightened the likelihood that the deal would receive regulatory approval. Sempra has committed
to support Oncor’s plan to invest $7.5 billion over five years to expand and improve its transmission and distribution network.
.
The takeover left Sempra with a debt to equity ratio well above the industry average possibly limiting its ability to
Discussion Questions and Answers:
1. What decisions made by Sempra Energy could affect its control over Oncor?
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Answer: Key Sempra decisions included the retention of the independent Oncor board, its use of a third party
investor diluting its ownership stake, and its assumption of more than $9 billion of Oncor debt. The Oncor board
2. Describe the takeover tactics employed by each previous suitor and why they failed? What enabled Sempra to win
approval?
Answer: The Hunt family proposed acquiring Oncor and putting it in a real estate investment trust in order to
eliminate double taxation of dividends. Regulators were loath to lose the tax revenue and were uncomfortable with
the family’s experience in managing a utility. Nextra Energy was in same business as Oncor and had a track
4. What constituencies won and which lost with Sempra’s takeover of Oncor?
Answer: The regulators got what they had demanded. Oncor’s customers were assured of uninterrupted service at
5. 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
6. Compare and contrast the Sempra and Berkshire Hathaway bids for Oncor?
Answer: Both bids were all-cash and both companies were willing to assume Oncor’s outstanding debt. Sempra’s bid
7. Describe the unique challenges of buying an electric utility out of bankruptcy? Illustrate how these challenges were
overcome by Sempra Energy? Be Specific.
Answer: Any sale was subject to a daunting array of regulatory and judicial hurdles. The deal is subject to approval
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8. The case study states the following: Sempra learned from the failures of past bidders to gain regulatory approval.
But these concessions came with a price. What is that price? Be specific.
Answer: The true cost is best viewed as an opportunity cost. What is Sempre giving up in order to buy Oncor?
Sempra sacrificed considerable control over Oncor by agreeing to allow it to be run by an independent board. The
STRATEGY MATTERS IN TAKEOVER BATTLES
KEY POINTS
• Successful takeovers include a strategy for bringing the target’s board to the negotiating table and the discipline to
walk away when the target’s demands are viewed as excessive,
• Friendly takeovers often are preferred to hostile attempts but sometimes result in overpaying for the target, and
• Paying too much severely limits the acquirer’s ability to earn its cost of capital.
Good takeover strategies don’t always ensure success, especially when things turn hostile. But a bad strategy dramatically
increases the risk of calamity. This was aptly demonstrated in the years following Conagra Food’s (Conagra) acquisition of
Ralcorp Holdings (Ralcorp) in early 2013. By mid-2015, Conagra, under considerable pressure to divest or spin-off Ralcorp
from activist investors, announced it would be seeking ways to do so.
The Ralcorp takeover made Conagra one of the largest packaged food companies in North America. The transaction also
positioned ConAgra as the largest private label packaged food business in North America.2 What Conagra had hoped is that
diversifying from its own consumer brands to faster growing private label brands would provide a well-balanced business
portfolio allowing the firm to better weather cyclical downturns in the economy. What actually happened is that investors
saw Conagra as a hybrid company consisting of second and third tier branded products such as Hunt’s ketchup and Orville
Redenbacher’s popcorn and private label foods sold under supermarket names. Other food companies selling either branded
products or private-label items were easier to value.
manufacturer.
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MYLAN THWARTED IN HOSTILE TAKEOVER OF PERRIGO
________________________________________________________
Case Study Objectives: To illustrate how
• Institutional investors can impact corporate decisions
• Current strategies can limit future options
• Good governance trumps bad management and
• Hubris can derail good decision making
__________________________________________________________________________________
Things looked good for Mylan NV, a leading generic pharmaceutical drug maker, midday on November 13, 2015 as the early
results of the firm’s campaign to acquire Perrigo appeared promising. The votes of more and more index-fund shares
supported Mylan’s proposed takeover of Perrigo Co., a maker of store-branded generic drugs. This date marked the last day
Perrigo shareholders could tender their shares, a process that had begun with Mylan’s initiation of a tender offer for a simple
But the heady feeling among Mylan’s board of directors and senior management was soon to turn grim. By evening,
Mylan’s position appeared to weaken when a tally of votes by the national stock clearinghouse, Deposit Trust Corporation,
showed that Mylan was short by about 18 million shares of the number of needed to gain a controlling interest in Perrigo.
Had they won control of the firm, Mylan reasoned they could implement a backend merger at a later date to “squeeze out” the
shareholders who had been unwilling to tender their shares.
Nearly all the major mutual funds supported Perrigo, with only Vanguard Group supporting Mylan. Other major mutual
fund groups did not even vote, including Blackrock, State Street Global Advisers, and Fidelity Investments. Despite an
aggressive marketing campaign to garner investor support, Mylan failed to convince enough investors that they would be
better off owning shares in a combined Mylan/Perrigo company. In the end, Mylan was able to garner only 40% of Perrigo’s
outstanding common shares.
Even though Mylan had promised to make certain changes to its questionable governance practices immediately following
its acquisition of Perrigo, the declining value of its shares made the Mylan shares less attractive. Teva Pharmaceuticals bid to
acquire Mylan earlier in 2015 had inflated the value of Mylan’s shares to reflect most of the anticipated premium. Mylan was
using the inflated value of its shares to make a bid for Perrigo. When Teva later withdrew its offer, Mylan shares plummeted,
reducing the premium to Perrigo’s share price from 34% when the offer was first made to less than 3%. Ultimately, concerns
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Perrigo’s board after repeatedly rejecting Mylan’s offer encouraged its shareholders to reject the Mylan tender offer by
noting that it “substantially undervalues our Company and did not adequately compensate shareholders for our exceptional
standalone growth prospects.” The Perrigo board also pointed out that shareholders had realized a 970% total return since
2007, which dwarfed the total return to Mylan shareholders during the same time period. They argued that continuing the
firm’s current business strategy would be more lucrative than selling to Mylan.
Perhaps Perrigo’s most effective argument against the Mylan offer was its assertion that the poor governance practices of
Mylan would undermine the long-term value of shares that would be received by those tendering their Perrigo shares. Adding
support to Perrigo’s claims was the fact that Mylan had consistently received the worst possible governance score from ISS, a
leading independent proxy advisory firm. In response to Perrigo’s allegations, Mylan threatened to delist Perrigo shares if it
gained majority control making any such shares outstanding highly illiquid. Perrigo countered that these were just scare
tactics and represented another illustration of Mylan’s disregard for shareholder rights.
Decisions made years earlier had left Perrigo vulnerable to takeover. Perrigo surrendered highly effective defences
when it moved its legal domicile to Ireland. Prior to its corporate inversion, Perrigo had been incorporated in Michigan.
Michigan is generally considered to have strong antitakeover laws, including a business combination law limiting parties
that have acquired 10% or more of the shares of a firm from acquiring the remaining shares for five years. Because it
would take so many years to gain a controlling interest, most acquirers would be encouraged to look for t argets not
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Discussion Questions
1. What was Perrigo’s main line of defence against Mylan? Why was so much reliance given to this tactic?
Speculate as to why shareholders accepted Perrigo’s board and management’s arguments.
Answer: By inverting its legal domicile to Ireland, Perrigo lost the opportunity to utilize many of the traditional
antitakeover defences, because they are not acceptable under Ireland’s takeover laws. Consequently, its main
2. How did corporate inversions undertaken by each firm impact the outcome of the hostile takeover attempt?
Answer: Corporate inversions are generally undertaken to reduce a firm’s tax liability, but they do come with
3. Identify the takeover tactics and defences employed by Mylan and Perrigo , respectively. Explain why each may
have been used.
Answer: Mylan used a variety of takeover tactics including offering (at least initially) a sizeable premium for
the stock held by Perrigo shareholders, a tender offer designed to circumvent Perrigo’s recalcitrant board, and a
threat that shareholders not tendering their shares would run the risk of not receiving the same cash and
exchange offer that those tendering their shares during the first round would receive. Mylan also intended to use
a backend merger once it received at least a simple majority of Perrigo votes to eliminate any remaining Perrigo
4. What does the reaction of investors to the breakup of the deal tell you about what they were thinking?
Answer: Mylan’s shares rose substantially reflecting investor relief that the firm would not have to issue a large
number of new shares. The issuance of new shares often triggers a sell off of the acquirer’s shares for fear that
5. Under what circumstances do the combination of a poison pill and a staggered board make sense for the target firm’s
shareholders? Be specific.
6. Using the information in this case study, discuss the arguments for and against encouraging hostile corporate
takeovers. Why might a hostile takeover of Mylan be justified?
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
7. Explain why a friendly approach often is preferred to a hostile takeover?
Answer: A friendly takeover is often preferred to a hostile effort for several reasons. First, it may encourage
8. Explain what caused the share prices of both firms to fluctuate wildly when the results of the tender offer solicitation
were made public? Be specific.
Answer: Speculators often bid up the price of the target firm to just below the offer price in an effort to profit from
9. Explain how a backend merger works and what it means to “squeeze out” the remaining Perrigo investors.