Gods at War: Shotgun Takeovers, Government by Deal, and the Private Equity Implosion

by Steven M. Davidoff

  Excerpted From Dale A. Oesterle, The Law of Mergers & Acquisitions (3rd ed., 2005). Reprinted with permission of Thomson Reuters.

  Microsoft’s bear hug letter and offer were made in accordance with these time limitations. Yahoo’s last annual meeting had been on June 12, 2007. In this case, it meant that the notice period for Yahoo director nominees began on February 13, 2008, and ended on March 14, 2008.12 Microsoft thus had a window from mid-February to mid-March to make such nominations. Microsoft was acting strategically in the timing of its announcement. The bear would be able to appear in time to launch a proxy contest if Yahoo’s board refused to negotiate or make a deal with Microsoft. Microsoft could then seek to replace the entirety of Yahoo’s board.

  Yahoo was particularly vulnerable. It did not have a staggered board, so all of its directors were up for nomination that year. In a contested election, Yahoo’s bylaws also provided that directors were elected by a plurality of votes cast.13 This was a low threshold, which would aid Microsoft in electing its own slate. Microsoft, though, would be acting in a novel manner if it actually launched a hostile proxy contest. Since 2001, there have been only 26 proxy contests in connection with a hostile bid by a strategic buyer.14 The low figure reflected the historically low rate of hostile offers, but it also showed how bear hug letters typically ended the matter and forced a transaction with the bidder or a white knight. A white knight is a third-party buyer who comes along to save the target from the hostile bid by acquiring the target itself. In Microsoft’s case, the logical white knight for Yahoo was Google. Google, though, was likely to be forestalled by antitrust laws from acquiring all of Yahoo.

  Many thought Yahoo would quickly fall, given its weak defenses and the full price Microsoft was offering. Things unfolded differently. Yahoo publicly adopted a just say no defense. On February 11, 2008,Yahoo’s board rejected the Microsoft offer, asserting that the bid “massively undervalued” Yahoo. Privately, though, Yahoo took the position that a price in the high 30s would be acceptable, one that most analysts thought unreasonably high. Many instead attributed Yahoo’s implacability to the hatred often expressed toward Microsoft in Silicon Valley. In particular, Jerry Yang was said to be adamantly against any acquisition by Microsoft, taking every private occasion to heap scorn on Microsoft.15

  In response to Yahoo’s rejection, Stephen Ballmer and Microsoft appeared to be following the tactic used by Larry Ellison, ex-CEO of Oracle, in Oracle’s hostile bid for PeopleSoft. Oracle had made an initial offer, then threatened to pull the offer, and eventually lowered its offer to force PeopleSoft into a deal. Microsoft’s Ballmer repeatedly stated in interviews that Microsoft would not overpay. He also equivocated on whether Microsoft would acquire Yahoo if Yahoo demanded a higher price than Microsoft initially offered.

  Yahoo bought time by announcing on March 4 amendments to its by-laws that effectively postponed its annual shareholder meeting to a date that eventually turned out to be August 1, 2008.16 The effect of this maneuver was twofold. First, it bought time for Yahoo to bake another transaction. Second, it pushed back Yahoo’s director nomination deadline, thereby keeping Microsoft at bay from actually nominating directors and going fully hostile.17

  Yahoo’s delaying strategy worked to a point. Microsoft did indeed refuse to ratchet up the pressure on Yahoo by formally launching a proxy contest. Over the weekend of May 3 and three months into the contest, Microsoft increased its bid to $33 a share, approximately $47.5 billion. Yahoo countered that it would take only $37 a share, a price many viewed as laughably high.There was also a rumor that the parties could not agree on who would bear the risks of an antitrust challenge. Microsoft then walked away, a move that Yang applauded by exchanging high fives on the Saturday afternoon he learned of Microsoft’s withdrawal.18

  The deal then devolved into farce. Initially, it was thought that Microsoft was simply being a tough negotiator. Ballmer, the driving force behind Microsoft’s bid, had wanted to show that he was a dealmaker who could walk away from the table.19 Carl Icahn sent a letter to Yahoo’s Chairman Roy Bostock, stating that Yahoo “completely botched” the Microsoft talks and announced that he was going to run a slate of directors for the Yahoo board. Icahn’s specific goal was to force Yahoo to take Microsoft’s bid.20 This raised a number of issues. What would be the board’s negotiating power? The new board would need to familiarize themselves with Yahoo and then bargain and even decide whether to sell to Microsoft. Their bargaining position, though, would be from weakness, as they would be locked into an acquisition strategy.

  Microsoft inexplicably stayed away, and Yahoo settled with Icahn, placing Icahn and two other directors selected by Icahn on Yahoo’s board.21 Yahoo instead turned to Google and negotiated an ad-sharing revenue pact. Yahoo was criticized for reaching that deal instead of negotiating in good faith with Microsoft, and when antitrust regulators objected to the arrangement, Google abruptly terminated the pact.The day after Google’s termination of its agreement with Yahoo, Jerry Yang repented, stating: “To this day, I believe the best thing for Microsoft to do is buy Yahoo,” and that Yahoo remains “open to everything.”22 Yahoo, in rushing into the arms of Google, had forgotten a cardinal rule of dealmaking: “Marry in haste, repent at leisure.”

  Meanwhile, Microsoft’s Ballmer acted more like a scorned lover than a businessman, publicly speculating about a deal, but Microsoft taking few steps to do so. Jerry Yang subsequently resigned on November 18, 2008, with his company’s stock price trading at approximately $12 a share.23 His replacement may have been an attempt by Yahoo to clear the air and appease a Microsoft that appeared no longer willing to deal with Yahoo in part due to Yang’s conduct. To date, though, Microsoft has yet to act again with respect to Yahoo

  InBev-Anheuser-Busch

  The InBev hostile bid unfolded in a very different manner than Microsoft’s bid for Yahoo On June 11, 2008, InBev, the Brazilian-Belgian brewer, publicly leaked its bear hug letter. The bear hug letter from InBev CEO Carlos Brito personally made a proposal to Anheuser-Busch CEO Augustus A. Busch IV to acquire Anheuser-Busch for $65 a share. The bid was valued at approximately $46 billion. This was a good price. It was 18 percent over Anheuser-Busch’s all-time high reached almost six years before. InBev’s letter also very much stressed its friendliness. In his letter, Brito stated: “We have the highest respect for Anheuser-Busch, its employees and its leadership, who have built the leading brewer in the U.S. and grown the iconic Budweiser brand… .”24 Brito even made a video to accompany the letter. Despite the big hug in the letter, it still remained clear from its text that the InBev team would be persistent and that a bear lurked.

  Anheuser-Busch had reason to be concerned. Anheuser-Busch’s defenses were weak, but in a manner different from Yahoo’s. Anheuser-Busch’s annual meeting had already taken place in April. Normally, this would mean that InBev would have to wait until next year for a proxy contest to unseat Anheuser-Busch’s directors. But Anheuser-Busch appeared to have a hole in its armor. Anheuser-Busch was in the minority of companies where the shareholders could act by written consent. These shareholders could act at any time to remove all of Anheuser-Busch’s directors and replace them.25

  Anheuser-Busch had also let its poison pill naturally expire in 2004 and begun a process to declassify its staggered board in 2006. The lack of a poison pill could be rectified; a board can adopt a poison pill at any time. This is something that is publicly misunderstood. Whether a company has in place a poison pill upon receipt of a hostile bid makes very little difference because the board can simply and rapidly adopt a poison pill in response. In fact, most companies have a shadow poison pill, a poison pill that is already drafted and ready to be adopted at a moment’s notice.26 The lack of a staggered board was more serious. Because of this, the Anheuser-Busch board could apparently be removed and replaced entirely and at any time by its shareholders.

  On June 26, Busch rejected InBev’s offer. In a letter to the InBev CEO Brito, Busch asserted that the bid “substa
ntially undervalued” Anheuser-Busch.27 The rejection was not surprising. Anheuser-Busch had been a family-led operation for 148 years, since its founding in 1860. The family was led now by Busch, who publicly opposed any acquisition. His opposition to the InBev overture was probably ego-driven. The Fourth, as he was known, did not want to be seen as losing the family heritage.

  Busch, though, was viewed as a particularly weak leader of Anheuser-Busch. During his 19 months as company CEO, Anheuser-Busch’s stock had stagnated. His past was even less stellar. When he was a college student at the University of Arizona, he had been driving his sports car from a night out at a bar when it flipped over, killing the woman passenger with him. Police found him at home eight hours later with blood still on him. After evidence was lost or damaged, police decided not to charge Busch with manslaughter. Then, two years later, he got into a car chase with police in St. Louis and allegedly attempted to run over at least one of the officers with his Mercedes. Busch was acquitted of assault charges brought in connection with the chase.28

  Eleven days after Anheuser-Busch’s rejection, InBev filed its consent solicitation with the SEC.29 This was the document necessary to solicit written consents from Anheuser-Busch’s shareholders to remove and replace the Anheuser-Busch directors. After the first consent was delivered to Anheuser-Busch, InBev would have 60 days under Delaware law to obtain sufficient consents to remove the Anheuser-Busch directors.30 Unlike Microsoft, InBev was acting in a textbook manner to take over a target, sending a bear hug and then ratcheting up the pressure to the extent the target resisted.

  On May 23, 2008, before the bid was announced, the Financial Times web site had contained a story stating that InBev was considering an offer to acquire Anheuser-Busch for $65 a share. Anheuser-Busch had taken this story seriously and so was already prepared when InBev’s bear hug letter arrived a few weeks later. By that time, Busch had activated the deal machine, hiring an army of lawyers and bankers to fight any InBev bid and advise Anheuser-Busch in its defense.31 Nonetheless, given the full price and its weak defenses, this left Anheuser-Busch with few options to counter the InBev bid and consent solicitation. Still, against InBev’s determined offense, Anheuser-Busch quickly cobbled together a solid defense.

  First, Anheuser-Busch took the offense on public relations. Anheuser-Busch was an American icon and a St. Louis stalwart. On the day of InBev’s announcement, Missouri Governor Matthew R. Blunt asserted his opposition to the bid:“Today’s offer to purchase the company is deeply troubling to me… . ”32 Anheuser-Busch played up to this sentiment and in subsequent press releases highlighted InBev’s foreign origins. Anheuser-Busch also enlisted a host of Missouri politicians to proclaim the importance of Anheuser-Busch to the American economy and Missouri.

  In a counterattack to InBev’s actions, Anheuser-Busch also filed a federal lawsuit against InBev in St. Louis. The lawsuit accused InBev of violating the federal securities laws by failing to disclose the conditional nature of InBev’s debt commitment letters for its financing. In addition, Anheuser-Busch asserted that InBev was misleading Anheuser-Busch shareholders by asserting that the acquired Anheuser-Busch would be the North American headquarters of the combined companies. This was allegedly misleading under the federal securities laws because InBev had operations in Cuba. Anheuser-Busch therefore could not legally have this operation under its domain under the U.S. laws boycotting Cuba. Hence, Anheuser-Busch would not be the North American headquarters.33

  Both claims were a public relations maneuver more than anything else. The Cuban claim in particular was designed to highlight InBev’s foreign nature. Anheuser-Busch’s first claim concerning InBev’s failure to disclose its debt commitment letters had a wider point, though. Buyers typically refused to reveal the terms of their commitment letters. The validity of this practice was dubious under the federal securities laws and, in any event, deprived target shareholders of the benefit of knowing the terms of the bidder’s financing. InBev would attempt to meet this second complaint by subsequently lining up more committed financing when Anheuser-Busch eventually agreed to be acquired.

  Second, like Yahoo, Anheuser-Busch took steps to control the process. On June 26, Anheuser-Busch amended its bylaws to allow the Anheuser-Busch board to set the record date for InBev’s consent solicitation.34 The record date determines who can provide consent to remove the board. All Anheuser-Busch shareholders on that date would be eligible. Without this maneuver, the record date would have been set under the Delaware default rule, which is the date on which the first consent is delivered.35 Instead, Anheuser-Busch’s board now had 10 days from the date of any shareholder request to set a record date. The Anheuser-Busch board could set the record date within 10 days of its date selection. Through this small maneuver, Anheuser-Busch bought an additional 20 days to fight off the InBev bid and the ability to set the record date with a mind to obtain the most favorable shareholder base for this consent solicitation.

  Third, Anheuser-Busch took steps to defend its board. Anheuser-Busch publicly argued that its entire 13-director board was still a staggered one. Under Delaware law, directors of a staggered board can be removed outside the annual meeting only for cause. Here, there was not sufficient cause alleged by InBev. Anheuser-Busch’s case was a technical one that essentially boiled down to an argument that Anheuser-Busch was in the process of destaggering its board, so until all of Anheuser-Busch’s directors were elected at once, the entire board was still deemed to be staggered. This barred the removal of these directors except for cause. Anheuser-Busch was trying to deliver a death blow to InBev’s bid. If the board was deemed unstaggered, then the directors could be removed at any time for any reason. If Anheuser-Busch’s directors were staggered, though, they would be removable only for cause, and InBev would have to wait until next year’s shareholder meeting to attempt to replace the Anheuser-Busch directors. InBev sought to counter Anheuser-Busch’s arguments by filing suit for a judicial resolution of the issue in Delaware Chancery Court.36

  Finally, there were also rumors that Anheuser-Busch was looking for an alternative strategic transaction, such as buying all of Grupo Modelo S.A.V. de C.V., its business partner for the Corona brand, or undertaking a leveraged recapitalization.37 This is a standard 1980s-type tactic that the Delaware courts have sanctioned since the 1989 case of Shamrock Holdings v. Polaroid Corp.38 To fight off a hostile bid, the target can agree to an alternative transaction or arrange a leveraged recapitalization. In either case, the target is no longer as appealing to a buyer because it has lost crown jewel assets or has acquired new assets or debt that places a large amount of leverage on the company. If Anheuser-Busch could reach a deal to acquire all of Grupo Modelo, it would make itself too expensive for InBev to acquire.

  From a weak hand, Anheuser-Busch had managed to put together an able defense. However, InBev appeared to have a good argument in Delaware that the Anheuser-Busch board was not staggered and could be replaced at any time. Anheuser-Busch’s St. Louis case, in contrast, appeared to be a publicity stunt. On the strategic side of Anheuser-Busch’s defense, an alternative transaction would be hard for Anheuser-Busch to justify to its shareholders, given the underperformance of Anheuser-Busch’s management over prior years. Weighing InBev’s rich offer, and Busch’s continued nonperformance, shareholders were likely to go to Belgium. Nonetheless, the Fourth’s opposition to the bid was considered InBev’s main impediment.

  Having fleshed out Anheuser-Busch’s response, InBev moved in to finish the task. On July 9, InBev agreed to raise its price by $5 a share. In the face of limited options and continued shareholder pressure, Busch quickly capitulated, making the Missouri politicians who had run to his defense appear a bit foolish.39 InBev had acquired Anheuser-Busch through a textbook application of hostile strategy. It had launched its bid and taken legal and strategic steps to steadily increase the pressure on Anheuser-Busch until a final face-saving raise resulted in Anheuser-Busch’s capitulation.

  The Elements of a Successfu
l Hostile Takeover

  The two deals and their markedly different outcomes illustrate the uniqueness of each hostile transaction. Hostiles are snowflakes, and each is different, depending on the target’s defenses and strategic situation, as well as the subsequent actions of the target and bidder. The Microsoft and InBev hostiles ably show this but also highlight the common elements to a successful hostile transaction in today’s modern age.

  Publicity

  A coordinated, preplanned publicity strategy is a necessity. From the beginning, InBev worked to counter claims that it was a foreigner buying a beloved domestic company. InBev promised to keep its North American headquarters in St. Louis and accompanied that promise with assurances on job retention in Missouri. InBev’s initial and subsequent statements to this effect allowed InBev to fight off Anheuser-Busch’s attempts to spur xenophobic opposition to InBev’s acquisition. In contrast, Microsoft’s public relations strategy appeared to lack a message and flittered about as Microsoft appeared to be unwilling to commit to a transaction. Microsoft came off as acting to massage its ego and failed to implement a sustained publicity strategy to corner Yahoo This may have been Microsoft’s strategy, to appear to be fickle in order to bring Yahoo to the table, but the varying messages Microsoft put forth appeared incoherent to the public.

  Personality

  The personalities of Stephen Ballmer and Jerry Yang clearly mattered in the outcome of Microsoft’s bid. Microsoft’s fickleness appeared to come from Ballmer’s need to appear strong and in control and for the market to perceive him as having reached a good deal. Meanwhile, Yang was visceral in his initial reaction against a Microsoft deal.Yang appeared to be out to defeat the Microsoft bid at all costs, solely because it was Microsoft. This, no doubt, added fuel to the fire and made Ballmer all the more focused on achieving a public win that made him appear strong and humiliated Yahoo Lost in all of this were the economics of a deal. In contrast, Anheuser-Busch first resisted InBev, but InBev worked to accommodate Anheuser-Busch’s CEO, Augustus Busch IV, by providing him a face-saving exit. As part of this strategy, InBev offered Busch a postacquisition compensation package that included a continuing consulting assignment to InBev. Busch would be paid a lump sum of $10.35 million and $120,000 a month through December 31, 2013.40