Ethics – 568
Chapter 5 – Boatright
December 4, 2012
Hostile Takeovers – A Case Study of InBev and Anheuser-Busch Co.
In early June 2008, Belgian-based InBev NV launched an unsolicited $46.4 billion bid to acquire Anheuser-Busch Co. On June 26, 2008, Anheuser’s board formally rejected InBev’s original proposal of $65 a share, saying it substantially undervalued the company. In mid-July, InBev raised its offer to $70 a share, and the Anheuser board voted to accept the deal, recognizing that a better offer was unlikely. (Sorkin and Merced) The $70 price, which was accepted on November 18, 2008, represented a substantial premium for Anheuser shareholders. This case provides an opportunity to review the economic and ethical impacts of hostile takeovers on American companies.
Before delving into the facts and analysis of this case, I believe it would be helpful to discuss common takeover tactics and briefly review a number of existing arguments for and against corporate takeovers as we endeavor to answer three main questions: Are corporate takeovers good or bad for the American economy? 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 “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...