Hostile Takeover free essay sample

Should there be a market for corporate control? What is the fiduciary duty of officers and directors in their response to take over bids? A hostile takeover typically involves an insurgent group, known as a ‘raider’, who makes a tender offer to buy a controlling block of stock in a target corporation from its present shareholders. The price is generally at a premium. If enough of the current shareholders take the offer, the insurgent group receives a controlling interest at which time the â€Å"raider† fires the current management and makes additional changes to the company. The insurgent group’s responsibility is then to add value to show the premium paid for the company’s stock was a smart investment. The proponents for hostile takeover activity argue that a corporation becomes a takeover target because current management is not increasing the share value. The ‘raider’ pays a premium for the stock because they believe under the new management; the company will increase in value well above the price paid for the stock. They would further argue that increasing shareholder value is better for society because it increases wealth among shareholders, and this wealth trickles down through society. In addition, they would argue that a constant threat of a hostile takeover is accountability to current management to give full shareholder value. A final argument is that all shareholders, regardless of holding period, have equal ownership rights. To restrict a new shareholder from imposing power would be to reduce the rights of the shareholders. The critics of hostile takeover activity argue that target companies of takeovers are often split up and sold piecemeal. This dislocates employees, creates job loss, and is harmful to the community. The takeover often saddles the company with debt that limits opportunities and creates additional risk in the event of an economic downturn. They would further argue that the wealth created from a hostile takeover might not trickle down to society at all. The benefits may come to shareholders from accounting techniques and tax law that do not create any additional wealth. Oftentimes, the bondholders are harmed because they go from holding investment grade bonds to junk-bonds in many cases. In addition, the evidence is lacking to show takeover companies perform any better than the average, over the long-term. They may experience a short-term increase in share price, but this is short-lived. A final argument is that the threat of takeovers causes managers to manage for the short-term by creating immediate results, and the threat of takeover may act as accountability on current management; however, the real winners are the lawyers and investment bankers. August Busch, IV was CEO of Anheuser-Busch in 2008 after taking the place of his father August Busch, III. August, III chose to spend lavishly on national marketing campaigns amongst other big-ticket budget items rather than expanding the Anheuser-Busch footprint internationally. August, IV noticed that American tastes were changing, and his company needed to change too. Anheuser-Busch stock had been stagnant for many years and in 2005 the company’s net income fell 17. 9 percent, to $1. 8 billion, the first drop in a decade. By 2006, beer sales had fallen to 50. 7 percent of the total market for alcohol in the U. S. , from 55. 5 percent in 2000. Then in 2007, Anheuser-Busch’s two main competitors, SABMiller and Molson Coors, merged, making the situation for Anheuser-Busch even more precarious. (Berfield) InBev’s tender offer for Anheuser-Busch stock shares came with a number of concessions not typically seen in hostile takeover activity. They were prepared to adopt the Anheuser-Busch name for the combined entity and establish its North American headquarters in St. Louis. InBev pledged not to close any U. S. breweries and said it would invite a number of Anheuser directors to join the board of the combined company as well as seek to retain key members of its management team. InBev was also willing to pay cash of up to $40 Billion on the deal, and InBev would maintain its investment-grade credit rating after the deal was complete. (Wall Street Journal) InBev saw, what they viewed as, extravagant spending by Anheuser-Busch and 50% of the United States market share for beer as a great opporutnity. InBev has a reputation for watching expenses closely, and they felt that trimming the lavish spending of Anheuser-Busch would increase profits rapidly. Anheuser-Busch looked at a number of alternatives to the hostile takeover, including buying the 50 percent of the Mexican brewer Grupo Modelo that it did not already own. This would raise Anheuser-Buschs price tag, potentially deterring InBev. (Sorkin and Merced) Grupo Modelo was not interested in the offer, and Anheuser-Busch Board of Directors were left to make the best decision for the shareholders. The Anheuser-Busch Board of Directors were left to decide the fate of an American icon. Kantian ethics, or duty based ethics, must have come into question during their meetings. Which action was most rational and dignified? The company was struggling, and they were looking at an offer, especially at $70/share, that was at a 35% premium to their current share price. The shareholders had not seen this type of growth from Anheuser-Busch, cumulatively, over many years of holding the stock. The utiliartian benefits must have also come into question, and they must have known that they would be judged by the amount of good produced by their decision. The stakeholder’s, namely the employees, community of St. Louis, stock holders, and consumers, rights all had to be weighed in making a decision. Though the Busch family had been in control for 5 generations, the Busch family owned only 4% of Anheuser-Busch stock in 2008. â€Å"A common and fair complaint about globalization is that it separates businesses from the places in which they do their business. If a business operates amidst, and is therefore dependent upon, a local community, it tends to treat that community with more care than if its an ocean away. It has more of an investment in the community financially, emotionally, politically and therefore usually makes more of an investment. † (Solomon) How would the city of St. Louis, MO fair with this takeover? What about national pride? What duty did the Board of Directors have toward the United States in protecting a native brand? On November 18, 2008, the acquisition was completed, and the parent corporation was renamed Anheuser-Busch InBev; Anheuser-Busch became a wholly owned subsidiary of the new corporation, controlled within the North America zone unit of Anheuser-Busch InBev. By early 2009, Anheuser-Busch InBev turned a family-led company that spared little expense into one that is focused intently on cost-cutting and profit margins, while rethinking the way it sells beer. (Wall Street Journal) Anheuser-Busch InBev focused on reducing costs in the Anheuser-Busch Companies subsidiary and implemented performance-related pay, along with several other changes. These included immediate layoffs of 1,400 employees and 415 contractors, the sale of Busch Entertainment Corporation and company-owned aircraft, lengthened accounts payable terms, and the introduction of zero-based budgeting. For employees, Anheuser-Busch InBev ended employee benefits such as executive assistants for senior management, company contributions to the salaried employee pension plan, and company-provided life insurance to retirees; it also reduced company-provided cell phones, tuition reimbursement, and severance packages. In addition to these internal changes, Anheuser-Busch InBev has made large cuts to its advertising budget. (Wall Street Journal) Anheuser-Busch InBev stock price has risen from $70 per share on November 18, 2008 to $88. 61 per share on December 3, 2012, an increase of 26. % as compared to the 64. 1% increase in the SP 500 during the same time period. Was the loss of an American beer company necessary for the short-term gains of a foreign competitor? This is a difficult question to answer; however, I do not believe Anheuser-Busch would have made the necessary changes to compete in a changing, global market. In my opinion, their history of overspending and native bias led to t heir takeover. In retrospect, I am unable to condemn InBev for their handling of this corporate takeover, and I do not believe Anheuser-Busch or InBev acted unethically in their decision-making.