Finally the threat posed by a backend merger was

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having no success in getting the Perrigo board to accept its offer. Finally, the threat posed by a backend merger was designed to encourage more Perrigo shareholders to tender their shares during the initial tender offer period. Perrigo had few options other than to cite what it deemed as examples of poor governance by Mylan and to trumpet its own performance in recent years. The lack of good governance is a potential threat to shareholders who trust that a firm’s board and management will act in their best interests. This defensive tactic worked because it put sufficient doubt into the minds of Perrigo shareholders that many either refused to tender their shares or to even vote. In addition, Perrigo shareholders enjoyed a 970% increase in total financial return since 2007, dwarfing Mylan’s financial performance during the same period. 4. What does the reaction of investors to the breakup of the deal tell you about what they were thinking? Answer: Mylan’s shares rose substantially reflecting investor relief that the firm would not have to issue a large number of new shares. The issuance of new shares often triggers a sell off of the acquirer’s shares for fear that the combined firms’ earnings per share will be diluted. In addition, investors were concerned that the purchase price was overvaluing Perrigo creating a huge challenge for Mylan to earn the firm’s cost of capital on the acquisition of Perrigo. 5. Under what circumstances do the combination of a poison pill and a staggered board make sense for the target firm’s shareholders? Be specific. Answer: This combination of antitakeover defenses has been demonstrated to be almost impregnable. This combination may be justified in that it gives the board of the target firm the wherewithal to negotiate a higher bid for the firm. Absent such defenses, target firm shareholder value may not be maximized. 4
6. Using the information in this case study, discuss the arguments for and against encouraging hostile corporate takeovers. Why might a hostile takeover of Mylan be justified? Answer: Hostile takeovers may be appropriate whenever target management is not working in the best interests of its shareholders (i.e., so-called agency problems). However, while such transactions often are concluded in a negotiated settlement, the subsequent enmity inevitably raises the cost of integration and the ultimate cost of the takeover due to the probable boost in the offer price required to close the deal. While this is good for the target shareholders, it works to the detriment of the acquirer’s shareholders. Hostile takeovers also can result in the loss of key employees as well as target firm customer and supplier attrition. 7. Explain why a friendly approach often is preferred to a hostile takeover? Answer: A friendly takeover is often preferred to a hostile effort for several reasons. First, it may encourage cooperation between the two firms during postclosing integration. Second, it may minimize customer and supplier attrition if the target firm’s management and board supports the takeover publicly and assists in explaining the logic behind the takeover to the various stakeholder groups.

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