Mergers and Acquisitions Assignment 1
Due FRIDAY 2/26/21 by 2:30 pm BEFORE CLASS
By completing and submitting the Mergers and Acquisitions Assignment 1 you are stating that you are doing your OWN work. Provide examples and incorporate current events where applicable. Try to use topics and material discussed within those chapters relating to the problems with your responses. All assignments should be written in your own words. I will be looking for your opinions and examples beyond textbook definition/solution(s). Do not provide solutions without showing and discussing your work or you will be penalized. Please adhere to the school policy on plagiarism and academic integrity and do your own work. Plagiarism software will be used to check work even amongst each other so do your own work please. Please label your uploaded assignment file with the course and your name on the file to the Blackboard assignment link. Note: The selection of real example securities should not be the same, there are plenty of examples for each student to select. Label your problems includes parts within the problems or questions. Once again, you’re using your own thoughts and words to discuss these.
Mergers and Acquisitions Assignment 1
Mergers and Acquisitions Assignment 1 CASE 1: Verizon And MCI
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.”
Mergers and Acquisitions Assignment 1 Questions: Remember to include topics covered in class to include within your discussions. Use real examples and your own opinions and thoughts. As a guide the length of each responses should be at least 350 words give or take but remember it’s the quality that counts more.
Mergers and Acquisitions Assignment 1
Mergers and Acquisitions Assignment 1 CASE 2: Remember to include topics covered in class to include within your discussions. Use real examples and your own opinions and thoughts. As a guide the length of each responses should be at least 350 words give or take but remember it’s the quality that counts more.
Google and Hardware
As one of the most successful firms on the planet measured by most any metric, Google represents a firm at a crossroads. How does it grow beyond the extraordinary success it has achieved in its legacy search business? How does it find the “next big thing” that will drive its revenue and profits? Its actions in recent years provide an important glimpse into the challenges associated with a firm trying to find its future beyond its legacy as the premier search engine on the globe.
Google’s website describes its mission/vision as organizing the world’s information and making it universally accessible and useful. Central to the firm’s culture is the quality of the people they hire, “favoring ability over experience.” The firm strives to maintain an open culture in which “everyone is a hands-on contributor and feels comfortable sharing ideas and opinions.” Among its core beliefs are a focus on the user and the ability to do one thing “really, really well.” Google notes its core capability is to provide users the ability to search from any location at any time vast amounts of information and to retrieve only that which is relevant.
Google states unequivocally that it is a business that makes money by offering search technology to companies and from the sale of advertising displayed on its website and other websites across the web. It pledges to conduct its business in a legal and socially responsible manner to maintain the highest possible trust among its users that the information it collects will not be used to their detriment.
At Google “great just isn’t good enough.” Through innovation, the firm aims to “take things that work well and improve upon them in unexpected ways.” The customers for its products and services are consumers, businesses, and the Web (i.e., community of web designers and developers). For consumers, the company strives to make it as easy as possible to find the information they need and to get the things the need done. For business, Google provides tools to help businesses engage in all aspects of e-commerce from advertising to fulfillment. For the Web, Google engages in a variety of projects to make it easier for developers and designers to contribute the improvement of the Web.
Founded in 1998, Google continues to grow at a torrid pace, largely driven by the shift of advertising and commerce from traditional media and brick and mortar retail outlets to the Internet. This is likely to continue well into the foreseeable future. Furthermore, the firm’s profitability continues to rank well above most other technology firms. However, reflecting the effects of increasing infrastructure costs and efforts to diversify its core business, the firm’s operating margins have declined for 5 consecutive years. Despite accelerated efforts in recent years to diversify its revenue base, about 95% of the firm’s total 2013 revenue of more than $56 billion came from advertising on its website and those of its network members in 2013.
In recent years, Google has accelerated the pace of diversification by moving from a largely software business into one offering both software and hardware. The diversification effort into hardware businesses began in earnest in 2011 with Google’s $12.5 billion acquisition of wireless handset manufacturer Motorola Mobility. In 2013, Google acquired four robotics companies with products ranging from robot arms and heads to walking androids. In mid-2014, it purchased Titan Aerospace, a maker of high altitude solar powered drones, in an effort to bring internet access more cost effectively than satellites to millions of people in largely inaccessible places. Such drones are capable of staying aloft for several years. That same year, Facebook acquired Ascenta, a British based maker of similar types of drones.
What all these transactions have in common is that they involve the gathering and analysis of data. But is that enough to create real and sustainable synergy? What the firm was trying to achieve with this seemingly disparate and random acquisitions was puzzling to many observers.
In 2013, Google’s CEO, Larry Page, known for his emphasis on making audacious investment and a pragmatic management style mused at a Google developer conference in mid-2013 about how “technology should do the hard work so people can do the things that make them the happiest in life.” He noted that “today we are still scratching the surface of what is possible.” Google’s role in this future seems to be to use its core skills as a technology innovator to make what seems impossible today possible tomorrow.
Implicit in what Page is saying is that he sees a future world in which all things are connected via the Internet and that Google can benefit by getting more people to use the Internet. In turn, Google’s stakeholders from shareholders to employees to communities benefit as the firm’s revenues grow with increased Internet traffic. Shareholders gain by increasing profits, employees by increased opportunities and challenges and communities from more jobs and tax revenue. Therefore, Google’s business strategy is implicitly to seek ways to get more people to use the Internet more frequently and in more diverse ways. But does this strategy facilitate the realization of the firm’s stated mission: organizing the world’s information and making it universally accessible and useful?
Since so much of what Internet users do online generates revenue for the firm, consistent with its mission, Google wants to pursue ways to make the Internet easier to use, more accessible, and faster. From its original search product, the firm has tried to improve the quality of search results by returning only those most relevant to the search request. The objective of the Google Chrome product was to build speed and ease of use. Through its fiber program the firm rolled out in 2013 in Kansas City, customers can get free internet access at generally acceptable rates of speeds and for additional fees can access increasing rates of speed reaching speeds purported to be 100 times faster than broadband. With respect to wireless devices, Google purchased Motorola Mobility to drive the spread of its Android operating system through smartphones and tablets displaying the Google logo. While promoting increased safety and fuel economy, Google’s self-driving cars allow for constant internet usage during daily commutes as the vehicle’s sensors communicate with the network.
Larry Page wants the firm’s new products and services to be those that get more people to use them multiple times daily. An important criterion for selecting new products and services has been dubbed the “toothbrush test” (analogous to toothbrushes used at least twice daily). The firm’s search capability and Android operating system for wireless devices satisfy this criterion. Having penetrated the software market in a big way, the firm is now pushing into the hardware market with software embedded in such products as cars and glasses to robots and thermostats.
With its sight on enlarging its exposure in the hardware business, Google announced on January 13, 2014, that it would pay a whopping (almost 12 times annual revenue) $3.2 billion for Nest Labs, a manufacturer of thermostats and smoke detectors. The Nest deal takes Google into the home heating, air conditioning, and appliance business as a parts and services supplier. Nest is in the business of energy management, with reported annual revenues of $275 million. Utilities pay Nest $30 to $50 monthly to manage the energy usage of Nest customers who had opted into their utility’s demand-response programs. As part of the programs, Nest temporarily takes control of a home’s heating and cooling for a set period. Customers are notified that their home’s temperature is about to be changed in advance. When this is done over large neighborhoods, utility energy costs are lowered by as much as 50% by re-routing peak energy being used in empty homes. Consistent with past practices, Nest will be operated as a wholly owned independent subsidiary of Google.
Tony Fadell, Nest’s CEO, describes Google’s acquisition of his firm as its further penetration of the “Internet of Things.” This is a metaphor for a world in which many different types of devices connected wirelessly use a combination of software ad sensors to communicate with one another and their owners. Perhaps somewhat whimsically, given its largely amorphous definition, the “Internet of Things” has been described as having a potential size of $19 trillion, larger than the size of the US annual gross domestic product. The movement toward the “Internet of Things” is expected to accelerate in the relatively near future. Increasingly sophisticated interconnected devices ranging from smartphones and tablets to thermostats and smoke alarms that Nest makes to smartwatches and other wearable technologies increasingly penetrate every aspect of our lives.
Google is not alone in pursuing this vision of the future. Samsung announced a new smart-home computing platform that will let people control washing machines, televisions, and other devices it makes from a single app. Microsoft, the world’s biggest maker of software, is working to transform itself into a devices, software, and services firm. The acquisition of Nokia brings it an array of new devises that utilize a common wireless operating system.
Some argue that Google’s entry into hardware is at some level simply an imitation of Apple’s fabulously successful strategy. That is, create your own devices to sell software and services. Apple has demonstrated that properly designed devices win brand recognition followed by exploding sales and profit. Further, they establish an ongoing relationship between the firm and its customers within a so-called ecosystem of interconnected software and hardware products. Once established, the firm can sell additional products and content through these devices to its customers. The ecosystem currently includes a variety of mobile wireless devices that run apps, TV shows, movies, music and other content today and most likely the car, home appliances, and health services in the future.
The challenges for Google in making these hardware acquisitions are fourfold: logistical, public relations, cultural, and competitive. The logistics associated with promotion of cooperation between the new units and existing Google operations and the cross-fertilization of ideas could be daunting. Without these activities, it is unlikely that the firm can fully leverage its highly impressive technology infrastructure without being stifled by a burgeoning bureaucracy that has grown to 46,000 employees. Since the new businesses are operated largely as independent entities within Google, the usual methods for promoting the desired behaviors such as colocation and sharing of facilities are difficult making contact among current employees and those with the new units problematic.
Entry into the “Internet of Things” also poses serious privacy concerns among regulators and activists, potentially creating a public relations nightmare for Google. The increasing intrusion into personal lives and the accumulation of data on personal habits and lifestyles could trigger an explosive backlash against companies attempting to enlarge their positions in the “Internet of Things.” The backlash could take the form of customer boycotts of the firm’s products or calls for increased government regulation.
Google’s entry into hardware is a radical departure from past practices. Google has relied on partners, including Samsung, to promote its Android mobile operating system software and its apps ecosystem as a rival to Apple’s IPhone, iPad, and to its IOS software. This changed in 2011 with Google’s acquisition of Motorola Mobility. Motorola gives Google its own branded smartphone for promoting its Android system and for attracting customers to Google Play Store, a competitor to Apple’s iTunes and App Store. Google’s new acquisitions now put them squarely in competition with its traditional partners.
Finally, the addition of hardware businesses creates a cultural conflict in a firm whose employees were accustomed historically to developing and selling software services. The production and the sale of hardware will require a fundamental change in the mindset of those employees required to work with the new hardware business if hardware is to become an important platform for delivering software and content developed by other units within Google. For example, selling services is significantly different from selling hardware. Services can be more readily customized to satisfy a customer’s needs and once sold require less marketing and selling effort to maintain an ongoing relationship with the customer. In contrast, hardware products often become commodities with few if any meaningful distinguishing features often require an ongoing aggressive marketing and selling campaign to sustain and grow sales.
With Nest, Google puts its logo on another device. For the immediate future, Google will use Nest as a hub of products targeted at the residential home “Internet of Things.” Because Google makes most of its money selling advertising and collecting information about users and how they use the Internet, the penetration of the market for in-home energy products enables the firm to collect additional information about how people use products in their personal residences. The sensors and software in these in-home devices enable Google to tap into that data.
In early 2014, under pressure from investors and analysts, Google decided to cut its losses on its Motorola Mobility acquisition by announcing it had reached an agreement to sell the unit to Chinese PC maker, Lenovo, for $2.91 billion. Google retained the rights to the intellectual property that it had acquired in buying Motorola Mobility, while granting a license to Lenovo to use certain patents to produce its handsets. Despite three rounds of layoffs, Motorola Mobility lost more than $1 billion in operating income in 2013. While Motorola’s most recent offering Moto X in late 2013 has been well received, its sales have not been sufficient to stem hemorrhaging cash flow. It had become increasingly clear that continued investment in the unit was not likely to turnaround the business. Moreover, exiting the handset business would assuage concerns among major handset makers that were using Android to power their phones. They had expressed concern since Google acquired Motorola Mobility in 2011 that Google could become a competitor.
While history rarely repeats itself exactly in the same way, certain parallels may be drawn between Microsoft’s experience with diversification and what Google is currently doing. Microsoft once having achieved dominance in the global PC operating system market and for integrated apps such as Microsoft Office lost its way in trying to diversify into a plethora of largely unrelated businesses. Also, it was late to the mobile device revolution and has been playing catch up for years, most recently illustrated by its acquisition in 2014 of Nokia’s phone handset manufacturing business.
Google, which continues to dominate the global Internet search market, may be on the verge of diffusing its resources on only loosely related investments in its seemingly haphazard search for the “next big thing.” As has been the case with Microsoft, Google’s healthy cash flows will allow it to sustain its effort to diversity for a long period of time. Both Google and Microsoft are likely to continue no doubt to dominate their respective markets for many years to come, with Microsoft’s cash flows sustained by its huge installed base of users and Google’s cash flow by the continued shift of retail trade to the Internet. However, their sustained success will ultimately depend on their ability to foresee and implement the next great disruptive technology. As both firms continue to get ever larger and more bureaucratic, history shows that all too often such firms lack the nimbleness to maneuver effectively in a rapidly changing technology environment.
Mergers and Acquisitions Assignment 1 Questions
Mergers and Acquisitions Assignment 1