Question

In August 1998, AMP launched a hostile $3.3 Billion takeover bid for the GIO Insurance Group. The takeover took 17 months, and was finally concluded in December 1999 when AMP acquired a 100% controlling interest in GIO. Shareholders in GIO were initially offered $5.35 per share, or one AMP share for every four GIO shares. The cash offer represented (approximately) a 30% premium on the market value of GIO shares. The share exchange, based on AMP’s share price at the time (around $20) was valued at just over $5.05. Mid December 1998, an independent report by Grant Samuel and Associates commissioned by GIO, valued GIO shares at between $5.66 and $6.71. On 20 December 1998, stock brokers Ord Minnett advised GIO shareholders to accept the $5.35 offer. KPMG also stated the offer was generous (as GIO’s shares were only valued between $4.28- $4.49 without the takeover offer).

Required:

(i) List three factors that can motivate hostile takeover activity in practice.

(ii) Identify the key risks associated with hostile takeover bids for the acquirer in practice.

(iii) What actions can a target firm take to defend itself against potential hostile takeover activity?

(iv) What is the purpose of independent valuation reports in takeover activity? What are the limitations (if any) of these reports?

(v) Explain AMP’s post takeover performance in relation to GIO. What were the factors that contributed to this performance?

Answer 1

A hostile takeover is the acquisition of one company by the other that is accomplished by going directly to the compay's shareholders or fighting to replace management to get the acquistion approved.

1. Three fcors that motivates hostile takeover are as follows:

a. Accounting - The avilablity of pooling accounting for mergers has been significant factor in 1990s merger activity. Pooling avoids dilution of earnings brought about by the recognition and mandatory amortization of goodwill when a merger is accounted for as a purchase.

b. Antitrust - Government policy can promote, retard or prohibit mergers and is a major factor affecting mergers. The antitrust regulators in the U.S. and the EU have been reasonably receptive to mergers.

c. Arbitrage - rbitrageurs, together with hedge funds and activist institutional investors, are a major factor in merger activity. They sometimes band together to encourage a company to seek a merger and sometimes to encourage a company to make an unsolicited bid for a company with which they are dissatisfied.

2. Key risks associtaed -

a. The target company's board of directors might reject the offer.

b. Another method of hostile bidding is acquiring a majority interest in the stock of the company on the open market. If that is impossible or just too expensive, a bidder may initiate a proxy fight, which means that the bidder persuades enough shareholders to replace the management of the company with one that will approve the acquisition.

3. Actions taken by a firm to defend itself:

a. poison pill

b. golden parachute

c. supermajority - this requires of majority of shareholders to approve of acquisition

d. Dual-class stock allows company owners to hold onto voting stock, while the company issues stock with little or no voting rights to the public. That way investors can purchase stocks, but they can't purchase control of the company

4. In case of a merger valuation, the emphasis is on arriving at the relative values of the shares of the merging companies to facilitate determination of the swap ratio – Hence, the purpose is not to arrive at absolute values of the shares of the companies • The key issue to be addressed is that of fairness to all shareholders – This is particularly important where the shareholding pattern and shareholders vary between the two companies • There are established legal precedence for merger valuation methodologies – Valuer’s role is to incorporate case specific factors and use appropriate methodologies so as to determine a fair ratio – Usually, best to give weight ages to valuation by all methods – Market price method and Earnings methods dominate. Swap Ratio Valuation