Takeovers, Mergers and Corporate Restructuring - Assignment Example

341907 Takeovers, Mergers and Corporate Restructuring Introduction The terms ‘takeover’ and ‘merger’ mean somewhat different things. It is called ‘take-over’ or acquisition when one company ‘acquires’ another and becomes its new owner. The ‘acquired’ company ceases to exist, the buyer ‘incorporates’ the business into its own and the buyer's stock continues to be traded. It is a merger when two firms agree to carry on as a single new company rather than remain separately owned and operated. Both companies' stocks cease to exist separately and new company stock is issued in their place. The Tata takeover of Corus may be characterised as an ‘acquisition’, while the Chicago Mercantile Exchange’s purchase of the Chicago Board of Trade, may be termed a ‘merger’. Generally, a company which buys another may allow the acquired firm to announce that the action is a merger of equals, even if it is technically an acquisition. A purchase deal will also be called a merger when the management of both the firms agree that joining together is in the best interest of both of their companies as in the case of the Chicago institutions. Whether a purchase is considered a merger or an acquisition depends on whether the purchase is friendly or hostile and how it is communicated to and received by the target company's board of directors, employees and shareholders. Synergy is the magic word used for improved cost efficiencies of the new business and takes the form of operating and/or financial synergies as reflected in revenue enhancement and cost savings. All mergers and acquisitions have the common goal of creating synergy that makes the value of the combined companies greater than the sum of the two parts. The success of a merger or acquisition depends on whether this synergy is achieved. We discuss in this paper some aspects of the coming together, through merger or acquisition, of the Chicago Mercantile Exchange and the Chicago Board of Trade on 17th October, 2006 and of the Tata Steel and the Anglo-Dutch steelmaker Corus on 31st January 2007. The October 2006 Merger in Chicago On October 17, 2006, the Chicago Mercantile Exchange announced the purchase of the Chicago Board of Trade for $8 billion in stock, and merged the two financial institutions as CME Group, Inc. to create the extensive and diverse $25 billion premier global derivatives exchange. The Chicago Mercantile Exchange (CME or "The Merc") was founded in 1898 as a ‘not-for-profit’ organization, but became ‘a for-profit’, shareholder-owned corporation in November 2000, and went public in December 2002. CME is a large and diverse financial exchange in the world and brings together buyers and sellers on its CME Globex electronic trading platform and its Open Outcry trading floors, and offers futures and options on futures primarily in interest rates, equities, foreign exchange, commodities, energy and alternative investment products nearly 24 hours a day. The Chicago Board of Trade (CBOT) was founded in 1848 and is one of the leading global derivatives exchanges. CBOT provides an assorted mix of financial, equity and commodity futures and options-on-futures products. Using both electronic and open-auction trading platforms, CBOT has provided satisfactory customer service to risk managers and investors worldwide. The combined company will bring together two leading institutions in global derivatives trading in all major asset classes, and is expected to provide a liquid marketplace, with average daily trading volume of nine million contracts and a market value of $25 billion. This is higher than the nearly $20 billion market cap of the proposed NYSE-Euro next deal, or the $16 billion market cap of Deutsche Borse, according to the CME-CBOT presentation slides. The combined company’s products consist of global access to a wide array of exchange-traded derivatives based on U.S.interest rate yield curve, equity indexes, foreign exchange, agricultural and industrial commodities, energy and alternative investment products such as weather and real estate. Reasons for merger The reasons for their merger are many. CME and CBOT have been for long fierce competitors, and their competitiveness, as of others, has been ‘under pressure from regulatory changes’. Once exchanges were converted to ‘for-profit’ entities, they were under pressure to cut costs, and merging with a competitor was a tried-and-true method for achieving that. In 2004, ‘CBOT rejected an approach from the CME in favour of its own listing’. “This”, say Cameron and Cohen, has “proved crucial in providing an agreed price for the smaller exchange”, viz. CBOT1. In the early 2000s the exchange began to move toward a totally electronic system. Such a move, according to Institutional Investor, “would make for cheaper, more efficient trading for the exchange's 6,000 customers, speed new product development and allow the CME to market more aggressively across borders for new customers, leading to volume gains and bigger profits."2. The Merc was also in the market to grow in other ways. In the words of Crain's Chicago Business in 2004, "Flush with cash, Chicago Mercantile Exchange Holdings Inc. will consider acquisitions, joint ventures and other partnerships in a consolidating futures industry." Given its history of a willingness to adapt to changing times and an eagerness to seize opportunities when they presented themselves, there was every reason to expect the Merc to find a way to prosper for many years to come.3. Wharton finance professor Marshall E. Blume says that with the "blurring of distinctions between different types of investments" exchanges that have specialized in derivatives want to also trade stocks, while stock markets want to trade derivatives… If you consolidate two big [Chicago exchanges], the transmission of information and the maintenance of order priority is much easier to do."4 Transaction Structure The ‘exchange ratio’ in the purchase deal was such that the CBOT shareholders had the right to receive 0.3006 shares of CME Class A common stock per share of CBOT Class A common stock or to opt for an amount in cash per share equal to the value of the exchange ratio based on a ten day average of closing prices of CME equity shares at the time of the merger. The cash portion of the consideration was subject to a $3 billion aggregate limit and to prorating if cash otherwise payable would exceed that limitation. If no shareholder opted to receive cash, shareholders of CME and CBOT would own approximately 69 percent and 31 percent of the combined company, respectively, and CME would issue approximately 15.9 million shares. Based on the closing stock prices of CME and CBOT on October 16, 2006, the last trading day prior to the announcement of the merger, the combined company has been valued at $25 billion (CME equity $18 billion; CBOT equity $7 billion). The cash portion was to be financed through cash on hand and debt financing, if necessary. The company expects pre-tax cost savings of more than $125 million beginning in the second full year following the merger.5 The Combined Company A press release by CME at the time of the merger stated that the combined company will be an extensive and diverse derivatives exchange in the world and will offer the: highest derivatives volume, with a daily average of about 9 million contracts and a notional value of about $4.2 trillion per day based on recent results. It will be the premier marketplace for interest rate trading for the U.S. dollar-denominated yield curve, the leading market for equity index derivatives trading, including futures and options on futures on major U.S. equity indexes; and for foreign exchange derivatives trading. It will also be the leading agricultural trading complex for grains and livestock futures contracts; and will provide global access to all major asset classes around the clock, around the world on the CME Globex platform.6 The same press release also specified that the company’s customers will have access to distinct products and services as well as new product offerings on an integrated platform; integrated market data services; and seamless continuation of current clearing arrangement, which secures existing margin benefits for customers.7 CBOT-CME merger await the results of an antitrust review by the US Department of Justice. The merger must also be approved by the Commodity Futures Trading Commission and the Securities and Exchange Commission. Despite this the two exchanges said that they were on track to complete the merger transaction by mid-2007. The parties have already filed a registration statement on form S-4, with the Securities and Exchange Commission on December 21, 2006 and decided on a high level organisational structure and senior leadership team for the combined company with the Chairman of CME, to become Chairman of the combined organization and the Chairman of CBOT, the Vice-Chairman of the combined organization. The Board of Directors of the new company initially will be comprised of 29 directors, 20 directors designated by CME and 9 by CBOT. Shareholders will vote on the deal April 4, 2007. Meanwhile, Howard Chen, an analyst of CreditSuisse, upgraded the stocks of both exchanges to “Outperform'' from "Neutral'' on March 5, 2007. Chen said that CBOT has improved its earning power since the deal was announced, but that the improvement has not been priced in. He raised his price target for CBOT shares to $190 from $169, and for CME shares to $650 per share from $580. CME shares rose by $14.15, or 2.6%, to close at $554.40 and CBOT shares gained $3.76, or 2.3%, to close at $164.26. Both exchanges trade on the New York Stock Exchange.8 Tata’s acquisition of Corus The London-based Corus Group is one of the world's largest producers of steel and aluminium. Corus was formed in 1999 by the merger of Dutch group Koninklijke Hoogovens N.V. with the UK's British Steel Plc on October 6, 1999. It is listed on the London Stock Exchange, Euronext Amsterdam and the New York Stock Exchange. Corus has four operational divisions and an annual turnover of $18 billion. After the Arcelor-Mittal Steel merger, the buzz was that Corus was the next to be acquired, and likely partners could include, among others, Tata Steel. Tata Steel is India's largest integrated private sector steel company. It was established in 1907, at Jamshedpur and produces four million tonnes of hot and cold rolled flat and long products. The company is backward integrated with its own iron ore mines and collieries. Tata Steel is among the lowest cost steel producers in the world. Tata Steel produced more than five million tonnes in the year ending March 2006 and aims to reach 7.5 million tones by 2008. It has $3.8 billion in annual turnover On October 20, 2006, Tata Steel made an offer of 455 pence a share to Corus shareholders, which was approved by the Corus board and to be placed before shareholders at an extraordinary general meeting on December 4 to acquire 100 per of the Anglo-Dutch group.9 This offer gave rise to both a sense of disbelief and dismay among the ‘print media’ in UK and a sense of glee among the investors. The Economist wrote in its 2006 October 26th issue10: “In the early 1900s, when Britain ruled India, the chairman of the colony's Railway Board, Sir Frederick Upcott, was so sceptical about Tata, then a young steel company, that he declared he would eat every pound of steel rail that it could produce to Britain's exacting specifications. His subsequent indigestion is not recorded, even though Tata was producing hundreds of tonnes a year by 1916. Similar scepticism would have been justified if anyone had suggested two or three years ago that Corus, the Anglo-Dutch steelmaker which includes the once-mighty British Steel, would receive a takeover bid from Tata Steel, a much smaller Indian firm”. In a similar vein the Financial Times wrote editorially on October 21, 2006 that the “Empire strikes back as Tata bids for Corus”, that there was a “collective silence in Britain” over the bid, and consoled itself by saying that it might be because “the current wave of globalisation, in contrast to that of the 19th century, is led by the developing as much as the developed world”. But the investors loved it. The announcement sent Corus shares up by 12.52 per cent, to 458.5 pence, in London. Subsequent to Corus accepting the $8.1 billion takeover bid from Tata Steel a veritable dramatic saga unfolded, the account of which given below is a briefly paraphrased one from the detailed day-to-day account found11 at The Tata-Corus Saga: Complete Coverage at www.inhome.rediff.com/money/2007/feb/06corus1.htm . The Tata-Corus takeover saga After the October 20, 2006 Tata offer for Corus, on November 18, 2006, Brazil's fourth-largest steelmaker, Companhia Siderurgica Nacional (CSN), said it had made a formal bid for Corus at 475 pence for a share, 20 pence a share higher than the Tata offer. While Tata Steel's bid amounted to $8.1 billion, the CSN offer had valued Corus at $8.4 billion. Financial groups, including Goldman Sachs, Barclays Capital, and BNP Paribas had offered CSN $7.58 billion loans for the purpose, and acquired over 11 per cent stake in Corus. The Tata Steel Board decided to "match" CSN as and when the latter made a formal bid for Corus after due diligence. The combined equity holding of CSN and bankers and brokers allied to it had risen to 19.5 per cent after CSN had approached Corus with its 475-pence-a-share offer, according to information given by Corus to the London Stock Exchange. The shareholding of these entities, which were associates of CSN, was significant as the resolution pertaining to the Tata bid would have to get support from 50 per cent of shareholders and 75 per cent of shares at the EGM. Corus has had around 158,000 registered shareholders. Institutional investors accounted for around 90 per cent of the total shareholders. On December 11, 2006, the Tatas raised their offer price per share to 500 pence from the earlier 455 pence and the total to $9.2 billion from the original $8.1 billion, to acquire Corus. The Corus Board recommended the higher bid to its shareholders. CSN then announced a counter offer of 515 pence a share and $9.5 billion for the company, within hours of Tata’s offer of 500 pence per share and $9.2 billion for the company. The Corus board forwarded the counter offer of 515 pence a share from CSN also to its shareholders. The Tatas informed the London Stock Exchange that they “will make further announcement in due course." Analysts said CSN’s offer of 515 pence a share pegged the enterprise value of Corus at $11.6 billion, 7.6 times its 2006 earnings before interest, tax, depreciation and amortisation. Mittal Steel had paid about six times the operating profit to acquire Arcelor. The rising heat in the race between Tata Steel and CSN to acquire Corus was said to have raised the spectre of the ‘Winner's Curse’, the financial theory that the winning participant in a frenzied auction will typically pay an overvalued price. Tata Steel shares had lost about 20 per cent ever since its plan to acquire Corus, as it was felt that the costly takeover would have an adverse impact in the company's balance sheet. By December 15, 2006, with the market speculating that the company might withdraw its bid to acquire Corus, Tata Steel staged a partial recovery with a gain of over 5 per cent after a battering of two-and-a-half months. But Tatas did not withdraw. And by December 18, 2006, to abate the intensity of the battle for Corus, the UK takeover panel announced, on London Stock Exchange, a rare intervention by arranging an auction between the two bidders for Corus, to be held on January 30, 2007. There were to be nine rounds of auction. Of the nine rounds, eight rounds would be for the suitors to table a fixed price bid in cash. But in the event of the competitive situation continuing, a final round would be held to give chance to the offerors to outbid the other within a ceiling that has already been informed to the Panel. There had to be a difference of at least five pence for each round of the bid between the two suitors. It meant that the Corus shareholders could get around 600 pence a share if the fight between the two suitors was to last till the ninth round. Both the bidders had previously termed their respective offers – 500 pence a share by Tata and 515 pence bid by CSN – as fair valuation for Corus, while promising no job cuts after the deal. The takeover panel was to recommend the winner to the Corus board, to be placed before its shareholders with the proposed terms and conditions of the acquisition. When the nine rounds of the auction had concluded, Tata Steel emerged as the ‘victorious’ party, with a bid of 608 pence a share against CSN's offer of 603 pence a share, valuing the Corus Group Plc at $11.3 billion. The takeover marks the largest acquisition by an Indian company and would propel the combined entity led by Tata Steel to the fifth rank in steel output in the world. Tata-Corus would have a combined production of more than 23 million tonnes. Within a day of its victory in the auction to acquire Corus Group Plc, Tatas had acquired 21.1 per cent stake in the Anglo-Dutch steelmaker for about $2.4 billion at 608 pence a share. The shares were purchased on January 31, by its wholly-owned subsidiary Tata Steel UK Ltd., which was the acquisition vehicle for the Corus deal. On March 7, 2007, Tata Steel “received a thumping vote of confidence for its $12 billion take over bid for Corus, with shareholders having 96% equity in the Anglo-Dutch company voting in support of the deal that will create the world’s fifth biggest steelmaker”.(Times of India, 8th March, 2007). The deal will become effective on April 2, 2007 and Corus shares would stop trading in exchanges on March 29, 2007; and Corus would become a subsidiary of Tata Steel. References Cameron, Douglas and Norman Cohen: 2006, “Chicago Exchanges in $ 8 bn deal”, Financial Times. Companies Financial Services (FT.com) October 17, 2006 CME and CBOT Merger, 2006: at www.cme.com/about/press/cn/06-148CMEandCBOTMerger20222.html CBOT Holdings, 2007- Financial Services - Business - News: March 05, 2007 www.wikio.com/business/financial_services/cbot_holdings CME and CBOT to Merge, 2006 at www.cme.com/about/press/cn/06-148CMEandCBOTMerger20222.html The Economist, London. at http://www.economist.com/business/display strategy.cfm?story_id=8081780/ Lewis, Janet, "Up from the Pits," 2004, Institutional Investor, December 2004, p. 78 Strahler, Steven R., 2004 "Cash to Spare, Merc Intends to Spend," Crain's Chicago Business, April 26, 2004, p. 26 The Tata-Corus Saga: Complete Coverage at www.inhome.rediff.com/money/2007/feb/06corus1.htm Times of India, New Delhi, March 8, 2007, “Shareholders of Corus approve Tata Steel Offer” p.25. Wharton, 2006: What's in Your Future(s)? The Merger of the Chicago Exchanges November 01, 2006 in Knowledge@Wharton at www.knowledge.wharton.upenn.edu/article.cfm?articleid=1599 www.rediff.com/money/2006/oct/20tata.htm Read More