Question 1

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?

Accepted Answer

A)   Share repellent plan
B)   Golden parachute plan
C)   Pac Man defense
D)   Poison pill
E)   Greenmail provision D

Question 2

A no-shop agreement prohibits the takeover target from seeking other bids.

Accepted Answer

A) True 
 B)False  True

Question 3

All of the following are true of a proxy contest except for

Accepted Answer

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
E)   Are often costly A

Question 4

Poison pills are a commonly used takeover tactic to remove the management and board of the target firm.

Accepted Answer

A) True 
 B)False

Question 5

Case Study Short Essay Examination Questions
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.
Verizon Communications, created through the merger of Bell Atlantic and GTE in 2000, is the largest telecommunications provider in the United States. The company provides local exchange, long distance, Internet, and other services to residential, business, and government customers. In addition, the company provides wireless services to over 42 million customers in the United States through its 55 percent-owned joint venture with Vodafone Group PLC. Verizon stated that the merger would enable it to more efficiently provide a broader range of services, give the firm access to MCI's business customer base, accelerate new product development using MCI's fiber-optic network infrastructure, and create substantial cost savings.
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, following a one-time cash dividend to MCI shareholders from MCI's cash in excess of its required operating balances. In view of Verizon's interest, MCI's board of directors directed management to advise Richard Notebaert, the chairman and CEO of Qwest, that MCI was not prepared to move forward with a potential transaction. The stage was set for what would become Qwest's laboriously long and ultimately unsuccessful pursuit of MCI, in which the firm would improve its original offer four times, only to be rejected by MCI in each instance even though the Qwest bids exceeded Verizon's.
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).
The merger agreement also provided for the MCI board to declare a special dividend of $5.60 once the firm's shareholders approved the deal. MCI's board of directors also considered the additional value that its stockholders would realize, since the merger would be a tax-free reorganization in which MCI shareholders would be able to defer the payment of taxes until they sold their stock. Only the cash portion of the purchase price would be taxable immediately. MCI's board of directors also noted that a large number of MCI's most important business customers had indicated that they preferred a transaction between MCI and Verizon rather than a transaction between MCI and Qwest.
While it is clearly impossible to know for sure, the sequence of events reveals a great deal about Verizon's possible bidding strategy. Any bidding strategy must begin with a series of management assumptions about how to approach the target firm. It was certainly in Verizon's best interests to attempt a friendly rather than a hostile takeover of MCI, due to the challenges of integrating these two complex businesses. Verizon also employed an increasingly popular technique in which the merger agreement includes a special dividend payable by the target firm to its shareholders contingent upon their approval of the transaction. This special dividend is an inducement to gain shareholder approval.
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 substantial all-cash offer due to its current excessive debt burden, and its stock appeared to have little appreciation potential because of ongoing operating losses. Perhaps stunned by the persistence with which Qwest pursued MCI, Verizon believed that its combination of cash and stock would ultimately be more attractive to MCI investors than Qwest's primarily all-cash offer, due to the partial tax-free nature of the bid.
Throughout the bidding process, many hedge funds criticized MCI's board publicly for accepting the initial Verizon bid. Since its emergence from Chapter 11, hedge funds had acquired significant positions in MCI's stock, with the expectation that MCI constituted an attractive merger candidate. In particular, Carlos Slim Helu, the Mexican telecommunications magnate and largest MCI shareholder, complained publicly about the failure of MCI's board to get full value for the firm's shares. Pressure from hedge funds and other dissident MCI shareholders triggered a shareholder lawsuit to void the February 14, 2005, signed merger agreement with Verizon.
In preparation for a possible proxy fight, Verizon entered into negotiations with Carlos Slim Helu to acquire his shares. Verizon acquired Mr. Slim's 13.7 percent stake in MCI in April 2005. Despite this purchase, Verizon's total stake in MCI remained below the 15 percent ownership level that would trigger the MCI rights plan.
About 70 percent (i.e., $1.4 billion) of the cash portion of Verizon's proposed purchase price consisted of a special MCI dividend payable by MCI when the firm's shareholders approved the merger agreement. Verizon's management argued that the deal would cost their shareholders only $7.05 billion (i.e., the $8.45 billion purchase price consisting of cash and stock, less the MCI special dividend). The $1.4 billion special dividend reduced MCI's cash in excess of what was required to meet its normal operating cash requirements.
Qwest consistently attempted to outmaneuver Verizon by establishing a significant premium between its bid and Verizon's, often as much as 25 percent. Qwest realized that its current level of indebtedness would preclude it from significantly increasing the cash portion of the bid. Consequently, it had to rely on the premium to attract enough investor interest, particularly among hedge funds, to pressure the MCI board to accept the higher bid. However, Qwest was unable to convince enough investors that its stock would not simply lose value once more shares were issued to consummate the stock and cash transaction.
Qwest could have initiated a tender or exchange offer directly to MCI shareholders, proposing to purchase or exchange their shares without going through the merger process. The tender process requires lengthy regulatory approval. However, if Qwest initiated a tender offer, it could trigger MCI's poison pill. Alternatively, a proxy contest might have been preferable because Qwest already had a bid on the table, and the contest would enable Qwest to lobby MCI shareholders to vote against the Verizon bid. This strategy would have avoided triggering the poison pill.
Ultimately, Qwest was forced to capitulate simply because it did not have the financial wherewithal to increase the $9.9 billion bid. It could not borrow anymore because of its excessive leverage. Additional stock would have contributed to earnings dilution and caused the firm's share price to fall.
It is unusual for a board to turn down a higher bid, especially when the competing bid was 17 percent higher. In accepting the Verizon bid, MCI stated that a number of its large business customers had expressed a preference for the company to be bought by Verizon rather than Qwest. MCI noted that these customer concerns posed a significant risk in being acquired by Qwest. The MCI board's acceptance of the lower Verizon bid could serve as a test case of how well MCI directors are conducting their fiduciary responsibilities. The central issue is how far boards can go in rejecting a higher offer in favor of one they believe offers more long-term stability for the firm's stakeholders.
Ron Perlman, the 1980s takeover mogul, saw his higher all-cash bid rejected by the board of directors of Revlon Corporation, which accepted a lower offer from another bidder. In a subsequent lawsuit, a court overruled the decision by the Revlon board in favor of the Perlman bid. Consequently, from a governance perspective, legal precedent compels boards to accept higher bids from bona fide bidders where the value of the bid is unambiguous, as in the case of an all-cash offer. However, for transactions in which the purchase price is composed largely of acquirer stock, the value is less certain. Consequently, the target's board may rule that the lower bidder's shares have higher appreciation potential or at least are less likely to decline than those shares of other bidders.
MCI's president and CEO Michael Capellas and other executives could collect $107 million in severance, payouts of restricted stock, and monies to compensate them for taxes owed on the payouts. In particular, Capellas stood to receive $39.2 million if his job is terminated "without cause" or if he leaves the company "for good reason."
Discussion Questions:
-In your opinion,did the MCI board act in the best interests of their shareholders? Of all their stakeholders? Be specific.

Accepted Answer

The answer of Case Study Short Essay Examination Questions
Verizon Acquires...

Question 6

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.

Accepted Answer

A) True 
 B)False

Question 7

Case Study Short Essay Examination Questions
Alcoa Easily Overwhelms Reynolds' Takeover Defenses
Alcoa reacted quickly to a three-way intercontinental combination of aluminum companies aimed at challenging its dominance of the Western World aluminum market by disclosing an unsolicited takeover bid for Reynolds Metals in early August 1999. The offer consisted of $4.3 billion, or $66.44 a share, plus the assumption of $1.5 billion in Reynolds' outstanding debt. Reynolds, a perennial marginally profitable competitor in the aluminum industry, appeared to be particularly vulnerable, since other logical suitors or potential white knights such as Canada's Alcan Aluminum, France's Pechiney SA, and Switzerland's Alusuisse Lonza Group AG were already involved in a three-way merger.
Alcoa's letter from its chief executive indicated that it wanted to pursue a friendly deal but suggested that it may pursue a full-blown hostile bid if the two sides could not begin discussions within a week. Reynolds appeared to be highly vulnerable because of its poor financial performance amid falling aluminum prices worldwide and because of its weak takeover defenses. It appeared that a hostile bidder could initiate a mail-in solicitation for shareholder consent at any time. Moreover, major Reynolds' shareholders began to pressure the board. Its largest single shareholder, Highfields Capital Management, a holder of more than four million shares, demanded that the Board create a special committee of independent directors with its own counsel and instruct Merrill Lynch to open an auction for Reynolds.
Despite pressure, the Reynolds' board rejected Alcoa's bid as inadequate. Alcoa's response was to say that it would initiate an all cash tender offer for all of Reynolds' stock and simultaneously solicit shareholder support through a proxy contest for replacing the Reynolds' board and dismantling Reynolds' takeover defenses. Notwithstanding the public posturing by both sides, Reynolds capitulated on August 19, slightly more than two weeks from receipt of the initial solicitation, and agreed to be acquired by Alcoa. The agreement contained a thirty-day window during which Reynolds could entertain other bids. However, if Reynolds should choose to go with another offer, it would have to pay Alcoa a $100 million break-up fee.
Under the agreement, which was approved by both boards, each share of Reynolds was exchanged for 1.06 shares of Alcoa stock. When announced, the transaction was worth $4.46 billion and valued each Reynolds share at $70.88, based on an Alcoa closing price of $66.875 on August 19, 1999. The $70.88 price per share of Reynolds suggested a puny 3.9 percent premium to Reynolds' closing price of $68.25 as of the close of August 19. The combined annual revenues of the two companies totaled $20.5 billion and accounted for about 21.5 percent of the Western World market for aluminum. To receive antitrust approval, the combined companies were required divest selected operations.
:
-Why do you believe Reynolds' management rejected Alcoa's initial bid as inadequate?

Accepted Answer

The answer of Case Study Short Essay Examination Questions
Alcoa Easily...

Question 8

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.

Accepted Answer

A) True 
 B)False

Question 9

Case Study Short Essay Examination Questions
Pfizer Acquires Warner-Lambert in a Hostile Takeover
In 1996 Pfizer and Warner Lambert (Warner) agreed to co-market worldwide the cholesterol-lowering drug Lipitor, which had been developed by Warner. The combined marketing effort was extremely successful with combined 1999 sales reaching $3.5 billion, a 60% increase over 1998. Before entering into the marketing agreement, Pfizer had entered into a confidentiality agreement with Warner that contained a standstill clause that, among other things, prohibited Pfizer from making a merger proposal unless invited to do so by Warner or until a third party made such a proposal.
In late 1998, Pfizer became aware of numerous rumors of a possible merger between Warner and some unknown entity. William C. Steere, chair and CEO of Pfizer, sent a letter on October 15, 1999, to Lodeijk de Vink, chair and CEO of Warner, inquiring about the potential for Pfizer to broaden its current strategic relationship to include a merger. More than 2 weeks passed before Steere received a written response in which de Vink expressed concern that Steere's letter violated the spirit of the standstill agreement by indicating interest in a merger. Speculation about an impending merger between Warner and American Home Products (AHP) came to a head on November 19, 1999, when an article appeared in the Wall Street Journal announcing an impending merger of equals between Warner and AHP valued at $58.3 billion.
The public announcement of the agreement to merge between Warner and AHP released Pfizer from the standstill agreement. Tinged with frustration and impatience at what Pfizer saw as stalling tactics, Steere outlined in the letter the primary reasons why the proposed combination of the two companies made sense to Warner's shareholders. In addition to a substantial premium over Warner's current share price, Pfizer argued that combining the companies would result in a veritable global powerhouse in the pharmaceutical industry. Furthermore, the firm's product lines are highly complementary, including Warner's over-the-counter drug presence and substantial pipeline of new drugs and Pfizer's powerful global marketing and sales infrastructure. Steere also argued that the combined companies could generate annual cost savings of at least $1.2 billion annually within 1 year following the completion of the merger. These savings would come from centralizing computer systems and research and development (R&D) activities, consolidating more than 100 manufacturing facilities, and combining two headquarters and multiple sales and administrative offices in 30 countries. Pfizer also believed that the two companies' cultures were highly complementary.
In addition to the letter from Steere to de Vink, on November 4, 1999, Pfizer announced that it had commenced a legal action in the Delaware Court of Chancery against Warner, Warner's directors, and AHP. The action sought to enjoin the approximately $2 billion termination fee and the stock option granted by Warner-Lambert to AHP to acquire 14.9% of Warner's common stock valued at $83.81 per share as part of their merger agreement. The lawsuit charged that the termination fee and stock options were excessively onerous and were not in the best interests of the Warner shareholders because they would discourage potential takeover attempts.
On November 5, 1999, Warner explicitly rejected Pfizer's proposal in a press release and reaffirmed its commitment to its announced business combination with AHP. On November 9, 1999, de Vink sent a letter to the Pfizer board in which he expressed Warner's disappointment at what he perceived to be Pfizer's efforts to take over Warner as well as Pfizer's lawsuit against the firm. In the letter, he stated Warner-Lambert's belief that the litigation was not in the best interest of either company's stockholders, especially in light of their co-promotion of Lipitor, and it was causing uncertainty in the financial markets. Not only did Warner reject the Pfizer bid, but it also threatened to cancel the companies' partnership to market Lipitor.
Pfizer responded by exploiting a weakness in the Warner Lambert takeover defenses by utilizing a consent solicitation process that allows shareholders to change the board without waiting months for a shareholders' meeting. Pfizer also challenged in court two provisions in the contract with AHP on the grounds that they were not in the best interests of the Warner Lambert shareholders because they would discourage other bidders. Pfizer's offers for Warner Lambert were contingent on the removal of these provisions. On November 12, 1999, Steere sent a letter to de Vink and the Warner board indicating his deep disappointment as a result of their refusal to consider what Pfizer believes is a superior offer to Warner. He also reiterated his firm's resolve in completing a merger with Warner. Not hearing anything from Warner management, Pfizer decided to go straight to the Warner shareholders on November 15, 1999, in an attempt to change the composition of the board and to get the board to remove the poison pill and break-up fee.
In the mid-November proxy statement sent to Warner shareholders, Pfizer argued that the current Warner Lambert board has approved a merger agreement with American Home, which provides 30% less current value to the Warner-Lambert stockholders than the Pfizer merger proposal. Moreover, Warner shareholders would benefit more in the long run in a merger with Pfizer, because the resulting firm would be operationally and financially stronger than a merger created with AHP. Pfizer also argued that its international marketing strength is superior in the view of most industry analysts to that of American Home and will greatly enhance Warner-Lambert's foreign sales efforts. Pfizer stated that Warner Lambert was not acting in the best interests of its shareholders by refusing to even grant Pfizer permission to make a proposal. Pfizer also alleged that Warner Lambert is violating its fiduciary responsibilities by approving the merger agreement with American Home in which AHP is entitled to a termination fee of approximately $2 billion.
Pressure intensified from all quarters including such major shareholders as the California Public Employees Retirement System and the New York City Retirement Fund. After 3 stormy months, Warner Lambert agreed on February 8, 2000, to be acquired by Pfizer for $92.5 billion, forming the world's second largest pharmaceutical firm. Although they were able to have the Warner poison pill overturned in court as being an unreasonable defense, Pfizer was unsuccessful in eliminating the break-up fee and had to pay AHP the largest such fee in history. The announced acquisition of Warner Lambert by Pfizer ended one of the most contentious corporate takeover battles in recent memory.
:
-What factors may have contributed to Warner Lambert's rejection of the Pfizer proposal?

Accepted Answer

The answer of Case Study Short Essay Examination Questions
Pfizer Acquires...

Question 10

Friendly takeovers are negotiated settlements that are often characterized by bargaining,which remains undisclosed until the agreement has been signed.

Accepted Answer

A) True 
 B)False

Question 11

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.

Accepted Answer

A) True 
 B)False

Question 12

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.

Accepted Answer

A) True 
 B)False

Question 13

The market governance model is applicable when which of the following conditions are true?

Accepted Answer

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

Question 14

Case Study Short Essay Examination Questions
Pfizer Acquires Warner-Lambert in a Hostile Takeover
In 1996 Pfizer and Warner Lambert (Warner) agreed to co-market worldwide the cholesterol-lowering drug Lipitor, which had been developed by Warner. The combined marketing effort was extremely successful with combined 1999 sales reaching $3.5 billion, a 60% increase over 1998. Before entering into the marketing agreement, Pfizer had entered into a confidentiality agreement with Warner that contained a standstill clause that, among other things, prohibited Pfizer from making a merger proposal unless invited to do so by Warner or until a third party made such a proposal.
In late 1998, Pfizer became aware of numerous rumors of a possible merger between Warner and some unknown entity. William C. Steere, chair and CEO of Pfizer, sent a letter on October 15, 1999, to Lodeijk de Vink, chair and CEO of Warner, inquiring about the potential for Pfizer to broaden its current strategic relationship to include a merger. More than 2 weeks passed before Steere received a written response in which de Vink expressed concern that Steere's letter violated the spirit of the standstill agreement by indicating interest in a merger. Speculation about an impending merger between Warner and American Home Products (AHP) came to a head on November 19, 1999, when an article appeared in the Wall Street Journal announcing an impending merger of equals between Warner and AHP valued at $58.3 billion.
The public announcement of the agreement to merge between Warner and AHP released Pfizer from the standstill agreement. Tinged with frustration and impatience at what Pfizer saw as stalling tactics, Steere outlined in the letter the primary reasons why the proposed combination of the two companies made sense to Warner's shareholders. In addition to a substantial premium over Warner's current share price, Pfizer argued that combining the companies would result in a veritable global powerhouse in the pharmaceutical industry. Furthermore, the firm's product lines are highly complementary, including Warner's over-the-counter drug presence and substantial pipeline of new drugs and Pfizer's powerful global marketing and sales infrastructure. Steere also argued that the combined companies could generate annual cost savings of at least $1.2 billion annually within 1 year following the completion of the merger. These savings would come from centralizing computer systems and research and development (R&D) activities, consolidating more than 100 manufacturing facilities, and combining two headquarters and multiple sales and administrative offices in 30 countries. Pfizer also believed that the two companies' cultures were highly complementary.
In addition to the letter from Steere to de Vink, on November 4, 1999, Pfizer announced that it had commenced a legal action in the Delaware Court of Chancery against Warner, Warner's directors, and AHP. The action sought to enjoin the approximately $2 billion termination fee and the stock option granted by Warner-Lambert to AHP to acquire 14.9% of Warner's common stock valued at $83.81 per share as part of their merger agreement. The lawsuit charged that the termination fee and stock options were excessively onerous and were not in the best interests of the Warner shareholders because they would discourage potential takeover attempts.
On November 5, 1999, Warner explicitly rejected Pfizer's proposal in a press release and reaffirmed its commitment to its announced business combination with AHP. On November 9, 1999, de Vink sent a letter to the Pfizer board in which he expressed Warner's disappointment at what he perceived to be Pfizer's efforts to take over Warner as well as Pfizer's lawsuit against the firm. In the letter, he stated Warner-Lambert's belief that the litigation was not in the best interest of either company's stockholders, especially in light of their co-promotion of Lipitor, and it was causing uncertainty in the financial markets. Not only did Warner reject the Pfizer bid, but it also threatened to cancel the companies' partnership to market Lipitor.
Pfizer responded by exploiting a weakness in the Warner Lambert takeover defenses by utilizing a consent solicitation process that allows shareholders to change the board without waiting months for a shareholders' meeting. Pfizer also challenged in court two provisions in the contract with AHP on the grounds that they were not in the best interests of the Warner Lambert shareholders because they would discourage other bidders. Pfizer's offers for Warner Lambert were contingent on the removal of these provisions. On November 12, 1999, Steere sent a letter to de Vink and the Warner board indicating his deep disappointment as a result of their refusal to consider what Pfizer believes is a superior offer to Warner. He also reiterated his firm's resolve in completing a merger with Warner. Not hearing anything from Warner management, Pfizer decided to go straight to the Warner shareholders on November 15, 1999, in an attempt to change the composition of the board and to get the board to remove the poison pill and break-up fee.
In the mid-November proxy statement sent to Warner shareholders, Pfizer argued that the current Warner Lambert board has approved a merger agreement with American Home, which provides 30% less current value to the Warner-Lambert stockholders than the Pfizer merger proposal. Moreover, Warner shareholders would benefit more in the long run in a merger with Pfizer, because the resulting firm would be operationally and financially stronger than a merger created with AHP. Pfizer also argued that its international marketing strength is superior in the view of most industry analysts to that of American Home and will greatly enhance Warner-Lambert's foreign sales efforts. Pfizer stated that Warner Lambert was not acting in the best interests of its shareholders by refusing to even grant Pfizer permission to make a proposal. Pfizer also alleged that Warner Lambert is violating its fiduciary responsibilities by approving the merger agreement with American Home in which AHP is entitled to a termination fee of approximately $2 billion.
Pressure intensified from all quarters including such major shareholders as the California Public Employees Retirement System and the New York City Retirement Fund. After 3 stormy months, Warner Lambert agreed on February 8, 2000, to be acquired by Pfizer for $92.5 billion, forming the world's second largest pharmaceutical firm. Although they were able to have the Warner poison pill overturned in court as being an unreasonable defense, Pfizer was unsuccessful in eliminating the break-up fee and had to pay AHP the largest such fee in history. The announced acquisition of Warner Lambert by Pfizer ended one of the most contentious corporate takeover battles in recent memory.
:
-What takeover defenses did Warner employ to ward off the Pfizer merger proposal? What tactics
did Pfizer employ to overcome these defenses? Comment on the effectiveness of these defenses.

Accepted Answer

The answer of Case Study Short Essay Examination Questions
Pfizer Acquires...

Question 15

The following takeover defenses are generally put in place by a firm after a takeover attempt is underway.

Accepted Answer

A)   Staggered board
B)   Standstill agreement
C)   Supermajority provision
D)   Fair price provision
E)   Reincorporation

Question 16

Which of the following is true about so-called shark repellants?

Accepted Answer

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

Question 17

The size of the target firm is the best predictor of the likelihood of being taken over by another firm.

Accepted Answer

A) True 
 B)False

Question 18

All of the following are common takeover defenses except for

Accepted Answer

A)   Poison pills
B)   Litigation
C)   Tender offers
D)   Staggered boards
E)   Golden parachutes

Question 19

Case Study Short Essay Examination Questions
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.
Verizon Communications, created through the merger of Bell Atlantic and GTE in 2000, is the largest telecommunications provider in the United States. The company provides local exchange, long distance, Internet, and other services to residential, business, and government customers. In addition, the company provides wireless services to over 42 million customers in the United States through its 55 percent-owned joint venture with Vodafone Group PLC. Verizon stated that the merger would enable it to more efficiently provide a broader range of services, give the firm access to MCI's business customer base, accelerate new product development using MCI's fiber-optic network infrastructure, and create substantial cost savings.
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, following a one-time cash dividend to MCI shareholders from MCI's cash in excess of its required operating balances. In view of Verizon's interest, MCI's board of directors directed management to advise Richard Notebaert, the chairman and CEO of Qwest, that MCI was not prepared to move forward with a potential transaction. The stage was set for what would become Qwest's laboriously long and ultimately unsuccessful pursuit of MCI, in which the firm would improve its original offer four times, only to be rejected by MCI in each instance even though the Qwest bids exceeded Verizon's.
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).
The merger agreement also provided for the MCI board to declare a special dividend of $5.60 once the firm's shareholders approved the deal. MCI's board of directors also considered the additional value that its stockholders would realize, since the merger would be a tax-free reorganization in which MCI shareholders would be able to defer the payment of taxes until they sold their stock. Only the cash portion of the purchase price would be taxable immediately. MCI's board of directors also noted that a large number of MCI's most important business customers had indicated that they preferred a transaction between MCI and Verizon rather than a transaction between MCI and Qwest.
While it is clearly impossible to know for sure, the sequence of events reveals a great deal about Verizon's possible bidding strategy. Any bidding strategy must begin with a series of management assumptions about how to approach the target firm. It was certainly in Verizon's best interests to attempt a friendly rather than a hostile takeover of MCI, due to the challenges of integrating these two complex businesses. Verizon also employed an increasingly popular technique in which the merger agreement includes a special dividend payable by the target firm to its shareholders contingent upon their approval of the transaction. This special dividend is an inducement to gain shareholder approval.
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 substantial all-cash offer due to its current excessive debt burden, and its stock appeared to have little appreciation potential because of ongoing operating losses. Perhaps stunned by the persistence with which Qwest pursued MCI, Verizon believed that its combination of cash and stock would ultimately be more attractive to MCI investors than Qwest's primarily all-cash offer, due to the partial tax-free nature of the bid.
Throughout the bidding process, many hedge funds criticized MCI's board publicly for accepting the initial Verizon bid. Since its emergence from Chapter 11, hedge funds had acquired significant positions in MCI's stock, with the expectation that MCI constituted an attractive merger candidate. In particular, Carlos Slim Helu, the Mexican telecommunications magnate and largest MCI shareholder, complained publicly about the failure of MCI's board to get full value for the firm's shares. Pressure from hedge funds and other dissident MCI shareholders triggered a shareholder lawsuit to void the February 14, 2005, signed merger agreement with Verizon.
In preparation for a possible proxy fight, Verizon entered into negotiations with Carlos Slim Helu to acquire his shares. Verizon acquired Mr. Slim's 13.7 percent stake in MCI in April 2005. Despite this purchase, Verizon's total stake in MCI remained below the 15 percent ownership level that would trigger the MCI rights plan.
About 70 percent (i.e., $1.4 billion) of the cash portion of Verizon's proposed purchase price consisted of a special MCI dividend payable by MCI when the firm's shareholders approved the merger agreement. Verizon's management argued that the deal would cost their shareholders only $7.05 billion (i.e., the $8.45 billion purchase price consisting of cash and stock, less the MCI special dividend). The $1.4 billion special dividend reduced MCI's cash in excess of what was required to meet its normal operating cash requirements.
Qwest consistently attempted to outmaneuver Verizon by establishing a significant premium between its bid and Verizon's, often as much as 25 percent. Qwest realized that its current level of indebtedness would preclude it from significantly increasing the cash portion of the bid. Consequently, it had to rely on the premium to attract enough investor interest, particularly among hedge funds, to pressure the MCI board to accept the higher bid. However, Qwest was unable to convince enough investors that its stock would not simply lose value once more shares were issued to consummate the stock and cash transaction.
Qwest could have initiated a tender or exchange offer directly to MCI shareholders, proposing to purchase or exchange their shares without going through the merger process. The tender process requires lengthy regulatory approval. However, if Qwest initiated a tender offer, it could trigger MCI's poison pill. Alternatively, a proxy contest might have been preferable because Qwest already had a bid on the table, and the contest would enable Qwest to lobby MCI shareholders to vote against the Verizon bid. This strategy would have avoided triggering the poison pill.
Ultimately, Qwest was forced to capitulate simply because it did not have the financial wherewithal to increase the $9.9 billion bid. It could not borrow anymore because of its excessive leverage. Additional stock would have contributed to earnings dilution and caused the firm's share price to fall.
It is unusual for a board to turn down a higher bid, especially when the competing bid was 17 percent higher. In accepting the Verizon bid, MCI stated that a number of its large business customers had expressed a preference for the company to be bought by Verizon rather than Qwest. MCI noted that these customer concerns posed a significant risk in being acquired by Qwest. The MCI board's acceptance of the lower Verizon bid could serve as a test case of how well MCI directors are conducting their fiduciary responsibilities. The central issue is how far boards can go in rejecting a higher offer in favor of one they believe offers more long-term stability for the firm's stakeholders.
Ron Perlman, the 1980s takeover mogul, saw his higher all-cash bid rejected by the board of directors of Revlon Corporation, which accepted a lower offer from another bidder. In a subsequent lawsuit, a court overruled the decision by the Revlon board in favor of the Perlman bid. Consequently, from a governance perspective, legal precedent compels boards to accept higher bids from bona fide bidders where the value of the bid is unambiguous, as in the case of an all-cash offer. However, for transactions in which the purchase price is composed largely of acquirer stock, the value is less certain. Consequently, the target's board may rule that the lower bidder's shares have higher appreciation potential or at least are less likely to decline than those shares of other bidders.
MCI's president and CEO Michael Capellas and other executives could collect $107 million in severance, payouts of restricted stock, and monies to compensate them for taxes owed on the payouts. In particular, Capellas stood to receive $39.2 million if his job is terminated "without cause" or if he leaves the company "for good reason."
Discussion Questions:
-What alternative strategies could Verizon,Qwest,and MCI have pursued? Was the decision to acquire MCI the best alternative for Verizon? Explain your answer.

Accepted Answer

The answer of Case Study Short Essay Examination Questions
Verizon Acquires...

Question 20

Which of the following factors often affects hostile takeover bids?

Accepted Answer

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

Exam 3: The Corporate Takeover Market: Common Takeover Tactics, anti-Takeover Defenses, and Corporate Governance

A no-shop agreement prohibits the takeover target from seeking other bids.

All of the following are true of a proxy contest except for

Poison pills are a commonly used takeover tactic to remove the management and board of the target firm.

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.

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.

Friendly takeovers are negotiated settlements that are often characterized by bargaining,which remains undisclosed until the agreement has been signed.

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.

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.

The market governance model is applicable when which of the following conditions are true?

The following takeover defenses are generally put in place by a firm after a takeover attempt is underway.

Which of the following is true about so-called shark repellants?

The size of the target firm is the best predictor of the likelihood of being taken over by another firm.

All of the following are common takeover defenses except for

Which of the following factors often affects hostile takeover bids?