Exam 3: The Corporate Takeover Market:

All materials in a proxy contest must be filed with the SEC before they are sent to shareholders.

Teva Acquires Cephalon in a Hostile Takeover 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 directors and to have the new board rescind Cephalon’s shareholder rights plan. Shareholders only had to sign and return a response card to Valeant giving the firm the right to vote their shares in support of the proposal to change the composition of the Cephalon board. Cephalon distributed their own candidates for the Cephalon board to the shareholders. Valeant had a reputation for aggressive cost cutting and improving earnings performance by paring back its own internal R&D activities and acquiring new drugs through the acquisition of other pharmaceutical companies. This was in marked contrast to the more traditional approach taken by many pharmaceutical companies, which involved heavy reinvestment in internal research and development to develop new drugs. Valeant’s approach has been to cut R&D costs ruthlessly, seek undervalued targets, set aggressive timeframes for integrating acquisitions, and to use cash rather than equity. This set Valeant apart from many other pharmaceutical firms, which have commonly used equity to make acquisitions, despite the research showing that equity-financed deals tend to underperform those in which the purchase price was mainly cash. 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 Pharmaceuticals Ltd of Australia for $175 million. The use of cash for these purposes substantially reduced the firm’s cash balances. Teva had significantly greater appeal to the Cephalon board, since it had expressed interest in the entire company. Teva also was willing to pay a substantially higher purchase price because of the greater perceived synergy between the two companies. To understand the source of this synergy it is important to recognize that Teva has historically been viewed by investors as primarily a manufacturer of low-margin pharmaceuticals. Profit margins on such drugs tend to be substantially less than those of branded drugs and were likely to continue to decline due to increased competition and government and insurance company pressure to reduce selling prices. Teva did have its own blockbuster branded drug, Copaxone, which accounted for 21% of the firm’s $16.1 billion in 2010. However, the drug was going to lose patent protection in 2014. 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 believed the deal would be accretive immediately, with $500 million in annual cost savings and synergies realized within three years. Although the deal did offer cost-cutting opportunities, the ability to broaden the firm’s product offering was a far greater attraction. With this in mind, Teva lost little time in exploiting Cephalon’s efforts to ward off Valeant’s March 29 unwanted takeover bid by moving aggressively to trump Valeant’s offer. Teva’s all-cash bid of $81.50 per share represented an approximate 12% premium to Valeant’s $73 per share offer and a 39% premium to Cephalon’s share price the day after Valeant’s announced its bid. The deal, including the conversion of its convertible debentures and stock options, is worth $6.8 billion to Cephalon’s shareholders. The purchase agreement included a breakup fee of $275 million, about 4% of the purchase price. Having publicly stated that they thought their offer fully valued the business, Valeant withdrew its offer after the joint Cephalon–Teva announcement on May 2, 2011. Valeant could not continue to pursue Cephalon unless it was willing to run the risk of being publicly perceived as overpaying for the target. Investors reacted favorably, with Cephalon’s stock and 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. The acquisition of Cephalon marks the third major deal for Teva in four years as it continues to implement its business strategy of broadening its product portfolio by diversifying between generic-drug offerings and higher-margin branded offerings through acquisitions. This strategy is designed to reduce the firm’s reliance on any single drug or handful of drugs. -What alternative strategies could Valeant and Teva have pursued?

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?

What are the management entrenchment and shareholder interests hypotheses? Which seems more realistic in your judgment?

Linkedin IPO Raises Governance Issues Various antitakeover defenses raise shareholder rights issues. Critics argue such measures entrench existing management. Firms employing such measures argue that they allow the founder to retain control, attract and retain key managers, and enable the firm to continue its business strategy. ______________________________________________________________________________ Investors often overlook governance structures when the prospect of future profits is high. This may have been the case when Internet social media company LinkedIn completed on May 9, 2011, the largest IPO since Google’s in 2004. With 2010 revenues of $243 million and net income of $15 million, the eight-year-old firm was valued at $8.9 billion, nearly 600 times earnings. Investors in the IPO received Class A shares, which have only one vote, while LinkedIn’s pre-IPO shareholders hold Class B shares, entitled to 10 votes each. The dual share structure guarantees that cofounder and CEO, Reid Hoffman, will own 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 family to preserve and protect their desired corporate culture, to preserve continuity of policies and practices, to attract and retain key managers, and to enable the current board and management to look beyond quarterly earnings pressures. The dual structure also allows founders to cash out without losing control of the companies they started. LinkedIn also adopted a staggered board, which effectively requires at least two years before a majority of the firm’s current board can be replaced. To make it more difficult to eliminate the staggered board defense, LinkedIn shareholders must vote to change the firm’s certificate of incorporation after the board recommends such a vote. Once the recommendation is made, all LinkedIn shares (Class A and Class B) have only one vote. However, the removal of the staggered board is still unlikely, because the firm’s certificate of incorporation requires that more than 80% of all shareholders approve changes in the staggered board structure. The firm also added bylaw notice provisions—to discourage shareholder activists—more onerous than would be required in SEC filings, when a shareholder has more than 5% ownership interest in a public firm. If it is later determined that the shareholder has misstated the facts in any manner, LinkedIn’s bylaws allow the board to disqualify the proposal or nomination. Finally, according to LinkedIn’s charter, any shareholder lawsuits must be litigated in the state of Delaware, where the laws are particularly favorable to corporations. 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. Mittal acquired Arcelor to accelerate steel industry consolidation to reduce industry overcapacity. The combined firms could have more leverage in setting prices and negotiating contracts with major customers such as auto and appliance manufacturers and suppliers such as iron ore and coal vendors, and eventually realize $1 billion annually in pretax cost savings. After having been rebuffed by Guy Dolle, Arcelor's president, in an effort to consummate a friendly merger, Mittal launched a tender offer in January 2006 consisting of mostly stock and cash for all of Arcelor's outstanding equity. The offer constituted a 27 percent premium over Arcelor's share price at that time. The reaction from Arcelor's management, European unions, and government officials was swift and furious. Guy Dolle stated flatly that the offer was "inadequate and strategically unsound." European politicians supported Mr. Dolle. Luxembourg's prime minister, Jean Claude Juncker, said a hostile bid "calls for a hostile response." Trade unions expressed concerns about potential job loss. 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 market price for Arcelor stock. These actions were taken to motivate Arcelor shareholders not to tender their shares to Mittal. Arcelor also backed a move to change the law so that Mittal would be required to pay in cash. However, the Luxembourg parliament rejected that effort. To counter these moves, Mittal Steel said in mid-February that if it received more than one-half of the Arcelor shares submitted in the initial tender offer, it would hold a second tender offer for the remaining shares at a slightly lower price. Mittal pointed out that it could acquire the remaining shares through a merger or corporate reorganization. Such rhetoric was designed to encourage Arcelor shareholders to tender their shares during the first offer. In late 2005, Arcelor outbid German steelmaker Metallgeschaft to buy Canadian steelmaker Dofasco for $5 billion. Mittal 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 an unusual vote that created very tough conditions for Arcelor shareholders to prevent the deal with Severstahl from being completed. Arcelor's board stated that the Severstahl deal could be blocked only if at least 50 percent of all Arcelor shareholders would vote against it. However, Arcelor knew that only about one-third of shareholders actually attend meetings. This is a tactic permissible under Luxembourg law, where Arcelor is incorporated. Investors holding more than 30 percent of Arcelor shares signed a petition to force the company to make the deal with Severstahl subject to a traditional 50.1 percent or more of actual votes cast. After major shareholders pressured the Arcelor board to at least talk to Mr. Mittal, Arcelor demanded an intricate business plan from Mittal as a condition that had to be met. Despite Mittal's submission of such a plan, Arcelor still refused to talk. In late May, Mittal raised its bid by 34 percent and said that if the bid succeeded, Mittal would eliminate his firm's two-tiered share structure, giving the Mittal family shares ten times the voting rights of other shareholders. A week after receiving the shareholder petition, the Arcelor board rejected Mittal's sweetened bid and repeated its support of the Severstahl deal. Shareholder anger continued, and many investors said they would reject the share buyback. Some investors opposed the buyback because it would increase Mr. Mordashov's ultimate stake in Arcelor to 38 percent by reducing the number of Arcelor shares outstanding. Under the laws of most European countries, any entity owning more than a third of a company is said to have effective control. Arcelor cancelled a scheduled June 21 shareholder vote on the buyback. Despite Mr. Mordashov's efforts to enhance his bid, the Arcelor board asked both Mordashov and Mittal to submit their final bids by June 25. Arcelor finally agreed to Mittal's final bid, which had been increased by 14 percent. The new offer consisted of $15.70 in cash and 1.0833 Mittal shares for each Arcelor share. The new bid is valued at $50.54 per Arcelor share, up from Mittal's initial bid in January 2006 of $35.26. The final offer represented an unprecedented 93 percent premium over Arcelor's share price of $26.25 immediately before Mittal's initial bid. Lakshmi Mittal will control 43.5 percent of the combined firm's stock. Mr. Mordashov would receive a $175 million breakup fee due to Arcelor's failure to complete its agreement with him. Finally, Mittal agreed not to make any layoffs beyond what Arcelor already has planned. -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)?

The takeover premium is the dollar or percentage amount the purchase price proposed for a target firm exceeds the acquiring firm's share price.

Most takeover attempts may be characterized as hostile bids.

Litigation is a tactic that is used only by acquiring firms.

Kraft Sweetens the Offer to Overcome Cadbury’s Resistance Despite speculation that offers from U.S.-based candy company Hershey and the Italian confectioner Ferreiro would be forthcoming, Kraft’s bid on January 19, 2010, was accepted unanimously by Cadbury’s board of directors. Kraft, the world’s second (after Nestle) largest food manufacturer, raised its offer over its initial September 7, 2009, bid to $19.5 billion to win over the board of the world’s second largest candy and chocolate maker. Kraft also assumed responsibility for $9.5 billion of Cadbury’s debt. Kraft’s initial bid evoked a raucous response from Cadbury’s chairman Roger Carr, who derided the offer that valued Cadbury at $16.7 billion as showing contempt for his firm’s well-known brand and dismissed the hostile bidder as a low-growth conglomerate. Immediately following the Kraft announcement, Cadbury’s share price rose by 45 percent (7 percentage points more than the 38 percent premium implicit in the Kraft offer). The share prices of other food manufacturers also rose due to speculation that they could become takeover targets. The ensuing four-month struggle between the two firms was reminiscent of the highly publicized takeover of U.S. icon Anheuser-Busch in 2008 by Belgian brewer InBev. The Kraft-Cadbury transaction stimulated substantial opposition from senior government ministers and trade unions over the move by a huge U.S. firm to take over a British company deemed to be a national treasure. However, like InBev’s takeover of Anheuser-Busch, what started as a donnybrook ended on friendly terms, with the two sides reaching final agreement in a single weekend. Determined to become a global food and candy giant, Kraft decided to bid for Cadbury after the U.K.-based firm spun off its Schweppes beverages business in the United States in 2008. The separation of Cadbury’s beverage and confectionery units resulted in Cadbury becoming the world’s largest pure confectionery firm following the spinoff. Confectionery companies tend to trade at a higher value, so adding the Cadbury’s chocolate and gum business could enhance Kraft’s attractiveness to competitors. However, this status was soon eclipsed by Mars’s acquisition of Wrigley in 2008. 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. The differences in the composition of the initial and final Kraft bids reflected a series of crosscurrents. Irene Rosenfeld, the Kraft CEO, not only had to contend with vituperative comments from Cadbury’s board and senior management, but she also was soundly criticized by major shareholders who feared Kraft would pay too much for Cadbury. Specifically, the firm’s largest shareholder, Warren Buffett’s Berkshire Hathaway with a 9.4 percent stake, expressed concern that the amount of new stock that would have to be issued to acquire Cadbury would dilute the ownership position of existing Kraft shareholders. In an effort to placate dissident Kraft shareholders while acceding to Cadbury’s demand for an increase in the offer price, Ms. Rosenfeld increased the offer by 7 percent by increasing the cash portion of the purchase price. The new bid consisted of $8.17 of cash and 0.1874 new Kraft shares, compared to Kraft’s original offer of $4.89 of cash and 0.2589 new Kraft shares for each Cadbury share outstanding. The change in the composition of the offer price meant that Kraft would issue 265 million new shares compared with its original plan to issue 370 million. The change in the terms of the deal meant that Kraft would no longer have to get shareholder approval for the new share issue, since it was able to avoid the NYSE requirement that firms issuing shares totaling more than 20 percent of the number of shares currently outstanding must receive shareholder approval to do so. -Why did the price of other food manufacturers also increase following the announcement of the attempted takeover?

The threat of corporate takeover has little impact on how responsibly a corporate board and management manage a firm.

Tender offers apply only for share for share exchanges.

In elections involving staggered or classified boards, only one group of board members is up for reelection each year.

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 takeover would be valued at $9.4 billion. After an initial jump to $23.72 a share, PeopleSoft shares had eased to $22.70 a share, well below Oracle’s sweetened offer. The rejection prolonged a highly contentious and public eight-month takeover battle that has pitted the two firms against each other. PeopleSoft was quick to rebuke publicly Oracle’s original written offer made behind the scenes to PeopleSoft’s management that included a requirement that PeopleSoft respond immediately. At about the same time, Oracle filed its intentions with respect to PeopleSoft with the SEC when its ownership of PeopleSoft stock rose above 5%. Since then, Oracle proposed replacing five of PeopleSoft’s board members with its own nominees at the PeopleSoft annual meeting to be 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 shares in order to be able to vote at the meeting, where the two companies will present rival slates for the PeopleSoft board. Oracle seeks to gain a majority on the PeopleSoft board in order to lift the company’s unique “customer assurance” anti-takeover defense. PeopleSoft advised its shareholders to vote no on the slate of potential board members proposed by Oracle. PeopleSoft also announced that it would buyback another $200 million of its shares, following the $350 million buyback program completed last year. Oracle has said that it will take $9.8 billion (including transaction fees) to complete the deal. The cost of acquiring PeopleSoft could escalate under PeopleSoft’s unusual customer assurance program in which its customers have been offered money-back guarantees if an acquirer reduces its support of PeopleSoft products. Oracle repeated its intention to continue support for PeopleSoft customers and products. The potential liability under the program increased to $1.55 billion. In addition, Oracle will have to pay PeopleSoft’s CEO Craig Conway a substantial multiple of his current annual salary if he loses his job after a takeover. This could cost Oracle an additional $25 to $30 million. Meanwhile, the Federal Trade Commission is reviewing the proposed acquisition of PeopleSoft by Oracle and has expressed concern that it will leave to reduced competition in the software industry -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.

TYCO Rescues AMP from Allied Signal In late November 1998, Tyco International Ltd., a diversified manufacturing and service company, agreed to acquire AMP Inc., an electrical components supplier, for $11.3 billion. In doing so, AMP successfully fended off a protracted takeover attempt by AlliedSignal Inc. As part of the merger agreement with Tyco, AMP rescinded its $165 million share buyback offer and its plan to issue an additional 25 million shares to fund its defense efforts. Tyco, the world’s largest electronics connector company, saw the combination with AMP as a means of becoming the lowest cost producer in the industry. Lawrence Bossidy, CEO of AlliedSignal, telephoned an AMP director in mid-1998 to inquire about AMP’s interest in a possible combination of their two companies. The inquiry was referred to the finance committee of the AMP board, which expressed no interest in merging with AlliedSignal. By early August, AlliedSignal announced its intention to initiate an unsolicited tender offer to acquire all of the outstanding shares of AMP common stock for $44.50 per share to be paid in cash. The following week AlliedSignal initiated such an offer and sent a letter to William J. Hudson, then CEO of AMP, requesting a meeting to discuss a possible business combination. Bossidy also advised AMP of AlliedSignal’s intention to file materials shortly with the SEC as required by federal law to solicit consents from AMP’s shareholders. The consent solicitation materials included proposals to increase the size of AMP’s board from 11 to 28 members and to add 17 AlliedSignal nominees, all of whom were directors or executive officers of AlliedSignal. Within a few days, the AMP board announced its intentions to continue to aggressively pursue its current strategic initiatives, because the AlliedSignal offer did not fully reflect the values inherent in AMP businesses. In addition, the AMP board also replaced Hudson with Robert Ripp as chair and CEO of AMP. The AMP board also authorized an amendment to the AMP rights agreement dated October 25, 1989. The amendment provided that the rights could not be redeemed if there were a change in the composition of the AMP board following the announcement of an unsolicited acquisition proposal such that the current directors no longer comprised a majority of the board. A transaction not approved by AMP’s board and involving the acquisition by a person or entity of 20% or more of AMP’s common stock was defined as an unsolicited acquisition proposal. By early September, AlliedSignal amended its tender offer to reduce the number of shares of AMP common stock it was seeking to purchase to 40 million shares. AlliedSignal also stated that it would undertake another offer to acquire the remaining shares of AMP common stock at a price of $44.50 in cash following consummation of its offer to purchase up to 40 million shares. In concert with its tender offer, AlliedSignal also announced its intention to solicit consents for a proposal to amend AMP’s bylaws. The proposed amendment would strip the AMP board of all authority over the AMP rights agreement and any similar agreements and to vest such authority in three individuals selected by AlliedSignal. In response, the AMP board unanimously determined that the amended offer from AlliedSignal was not in the best interests of AMP shareholders. The AMP board also approved another amendment to the AMP rights agreement, lowering the threshold that would make the rights redeemable from 20% to 10% of AMP’s shares outstanding. AlliedSignal immediately modified its tender offer by reducing the number of shares it wanted to purchase from 40 million to 20 million shares at $44.50 per share. 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 . Credit Suisse, AMP’s investment banker, approached a number of firms, including Tyco, concerning their possible interest in acquiring AMP. In early November, Tyco stepped forward as a possible white knight. Based on limited information, L. Dennis Kozlowski, Tyco’s CEO, set the preliminary valuation of AMP at $50.00 per share. This value assumed a transaction in which AMP shares would be exchanged for Tyco shares and was subject to the completion of appropriate due diligence. In mid-November, Ripp and Bossidy met at Bossidy’s request. Bossidy indicated that AlliedSignal would be prepared to increase its proposed acquisition price for AMP by a modest amount and to include stock for a limited portion of the total purchase price. The revised offer also would include a minimum share exchange ratio for the equity portion of the purchase price along with an opportunity for AMP shareholders to participate in any increase in AlliedSignal’s stock before the closing. The purpose of including equity as a portion of the purchase price was to address the needs of certain AMP shareholders, who had a low tax basis in the stock and who wanted a tax-free exchange. Ripp indicated that the AMP board expected a valuation of more than $50.00 per share. 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. In late August, AMP filed a complaint in the United States District court against AlliedSignal, seeking an injunction to prevent AlliedSignal from attempting to pack the AMP board of directors with AlliedSignal executive officers and directors. The complaint also alleged that the Schedule 14D-1 SEC filing by Allied-Signal was false and misleading. The complaint alleged that the filing failed to disclose that some of AlliedSignal’s proposed directors had conflicts of interest and that the packing of the board would prevent current board members from executing their fiduciary responsibilities to AMP shareholders. In early October, the court agreed with AMP and enjoined AlliedSignal’s board-packing consent proposals until it stated unequivocally that its director nominees have a fiduciary duty solely to AMP under Pennsylvania law. The court also denied AlliedSignal’s request to deactivate anti-takeover provisions in the AMP rights agreement. The court further held that shareholders might not sue the board for rejecting the AlliedSignal proposal. AlliedSignal immediately filed in the United States Court of Appeals for the Third Circuit. The court ordered that although AlliedSignal could proceed with the consent solicitation, its representatives could not assume positions on the AMP board until the court of appeals completed its deliberations. The district court ruled that the shares of AMP common stock acquired by AlliedSignal are “control shares” under Pennsylvania law. As a result, the court enjoined AlliedSignal from voting its AMP shares unless AlliedSignal’s voting rights are restored under Pennsylvania law. AlliedSignal was able to overturn the lower court ruling on appeal. -What other takeover defenses did AMP employ in its attempt to thwart AlliedSignal?

Poison pills represent a new class of stock issued by a company to its shareholders, usually as a dividend.

Which of the following statements best describes the business judgment rule?

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

The following takeover defenses are generally put in place by a firm before a takeover attempt is initiated.

All of the following are commonly used takeover tactics, except for

TYCO Rescues AMP from Allied Signal In late November 1998, Tyco International Ltd., a diversified manufacturing and service company, agreed to acquire AMP Inc., an electrical components supplier, for $11.3 billion. In doing so, AMP successfully fended off a protracted takeover attempt by AlliedSignal Inc. As part of the merger agreement with Tyco, AMP rescinded its $165 million share buyback offer and its plan to issue an additional 25 million shares to fund its defense efforts. Tyco, the world’s largest electronics connector company, saw the combination with AMP as a means of becoming the lowest cost producer in the industry. Lawrence Bossidy, CEO of AlliedSignal, telephoned an AMP director in mid-1998 to inquire about AMP’s interest in a possible combination of their two companies. The inquiry was referred to the finance committee of the AMP board, which expressed no interest in merging with AlliedSignal. By early August, AlliedSignal announced its intention to initiate an unsolicited tender offer to acquire all of the outstanding shares of AMP common stock for $44.50 per share to be paid in cash. The following week AlliedSignal initiated such an offer and sent a letter to William J. Hudson, then CEO of AMP, requesting a meeting to discuss a possible business combination. Bossidy also advised AMP of AlliedSignal’s intention to file materials shortly with the SEC as required by federal law to solicit consents from AMP’s shareholders. The consent solicitation materials included proposals to increase the size of AMP’s board from 11 to 28 members and to add 17 AlliedSignal nominees, all of whom were directors or executive officers of AlliedSignal. Within a few days, the AMP board announced its intentions to continue to aggressively pursue its current strategic initiatives, because the AlliedSignal offer did not fully reflect the values inherent in AMP businesses. In addition, the AMP board also replaced Hudson with Robert Ripp as chair and CEO of AMP. The AMP board also authorized an amendment to the AMP rights agreement dated October 25, 1989. The amendment provided that the rights could not be redeemed if there were a change in the composition of the AMP board following the announcement of an unsolicited acquisition proposal such that the current directors no longer comprised a majority of the board. A transaction not approved by AMP’s board and involving the acquisition by a person or entity of 20% or more of AMP’s common stock was defined as an unsolicited acquisition proposal. By early September, AlliedSignal amended its tender offer to reduce the number of shares of AMP common stock it was seeking to purchase to 40 million shares. AlliedSignal also stated that it would undertake another offer to acquire the remaining shares of AMP common stock at a price of $44.50 in cash following consummation of its offer to purchase up to 40 million shares. In concert with its tender offer, AlliedSignal also announced its intention to solicit consents for a proposal to amend AMP’s bylaws. The proposed amendment would strip the AMP board of all authority over the AMP rights agreement and any similar agreements and to vest such authority in three individuals selected by AlliedSignal. In response, the AMP board unanimously determined that the amended offer from AlliedSignal was not in the best interests of AMP shareholders. The AMP board also approved another amendment to the AMP rights agreement, lowering the threshold that would make the rights redeemable from 20% to 10% of AMP’s shares outstanding. AlliedSignal immediately modified its tender offer by reducing the number of shares it wanted to purchase from 40 million to 20 million shares at $44.50 per share. 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 . Credit Suisse, AMP’s investment banker, approached a number of firms, including Tyco, concerning their possible interest in acquiring AMP. In early November, Tyco stepped forward as a possible white knight. Based on limited information, L. Dennis Kozlowski, Tyco’s CEO, set the preliminary valuation of AMP at $50.00 per share. This value assumed a transaction in which AMP shares would be exchanged for Tyco shares and was subject to the completion of appropriate due diligence. In mid-November, Ripp and Bossidy met at Bossidy’s request. Bossidy indicated that AlliedSignal would be prepared to increase its proposed acquisition price for AMP by a modest amount and to include stock for a limited portion of the total purchase price. The revised offer also would include a minimum share exchange ratio for the equity portion of the purchase price along with an opportunity for AMP shareholders to participate in any increase in AlliedSignal’s stock before the closing. The purpose of including equity as a portion of the purchase price was to address the needs of certain AMP shareholders, who had a low tax basis in the stock and who wanted a tax-free exchange. Ripp indicated that the AMP board expected a valuation of more than $50.00 per share. 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. In late August, AMP filed a complaint in the United States District court against AlliedSignal, seeking an injunction to prevent AlliedSignal from attempting to pack the AMP board of directors with AlliedSignal executive officers and directors. The complaint also alleged that the Schedule 14D-1 SEC filing by Allied-Signal was false and misleading. The complaint alleged that the filing failed to disclose that some of AlliedSignal’s proposed directors had conflicts of interest and that the packing of the board would prevent current board members from executing their fiduciary responsibilities to AMP shareholders. In early October, the court agreed with AMP and enjoined AlliedSignal’s board-packing consent proposals until it stated unequivocally that its director nominees have a fiduciary duty solely to AMP under Pennsylvania law. The court also denied AlliedSignal’s request to deactivate anti-takeover provisions in the AMP rights agreement. The court further held that shareholders might not sue the board for rejecting the AlliedSignal proposal. AlliedSignal immediately filed in the United States Court of Appeals for the Third Circuit. The court ordered that although AlliedSignal could proceed with the consent solicitation, its representatives could not assume positions on the AMP board until the court of appeals completed its deliberations. The district court ruled that the shares of AMP common stock acquired by AlliedSignal are “control shares” under Pennsylvania law. As a result, the court enjoined AlliedSignal from voting its AMP shares unless AlliedSignal’s voting rights are restored under Pennsylvania law. AlliedSignal was able to overturn the lower court ruling on appeal. -How did the AMP Board use the AMP Rights Agreement to encourage AMP shareholders to vote against AlliedSignal's proposals?