Dr. P.V. Viswanath
Introduction to Mergers and Acquisitions
© P.V. Viswanath, 2006
In 1986, GE acquired Kidder Peabody. This is an example of a conglomerate deal; one that was not successful. Below is a paragraph from the 1994 G.E. Annual Report (http://www.scripophily.net/kidpeabcotra.html):
Sheridan Square Entertainment and Hirsch International Corporation
Have Dealmakers Wised up? (Businessweek article, February 21, 2005)
Why large takeover premiums? (Prof. Stephen Bainbridge, UCLA, http://www.professorbainbridge.com/2005/09/mannes_primer_o.html)
In standard economic theory, a control premium is not inconsistent with the efficient capital markets hypothesis. The pre bid market price represented the consensus of all market participants as to the present discounted value of the future dividend stream to be generated by the target—in light of all currently available public information. Put another way, the market price represents the market consensus as to the present value of the stream of future cash flows anticipated to be generated by present assets as used in the company's present business plans. A takeover bid represents new information. It may be information about the stream of future earnings due to changes in business plans or reallocation of assets. In any event, that pre bid market price will not have impounded the value of that information. To the extent the bidder has private information, moreover, the market will be unable to fully adjust the target's stock price.
Campeau's two-tier bid
Example 1.9 (Hostile Takeovers). During the 1980s there was a huge wave
of mergers and acqui-sitions
Such was the case in 1988 when Robert Campeau made a tender offer for Federated Department Stores. Let us consider a simplified version of the actual story. Suppose that the pre-takeover price of a Federated share is $100. Campeau offers to pay $105 per share for the first 50% of the shares, and $90 for the remainder. All shares, however, are bought at the average price of the total shares tendered. If the takeover succeeds, the shares that were not rendered are worth $90 each.
For example, if 75% of the shares are tendered, Campeau pays $105 to
the first 50% and pays $90 to the remaining 25%. The average price that
Campeau pays is then equal to p = 105×(50/75 +90×(25/75) =
The actual unfolding of events were quite unfortunate for Campeau. Macy’s joined the bidding and this increased the premium quite significantly. Campeau finally won out (not by a two-tiered tender offer, however) but paid $8.17 billion for the stock of a company with a pre-acquisition market value of $2.93 billion. Campeau financed 97 percent of the purchase price with debt. Less than two years later, Federated filed for bankruptcy and Campeau lost his job.