View
23
Download
0
Category
Tags:
Preview:
DESCRIPTION
Taking over “Dana Petroleum” facing hostile takeover bids
Citation preview
TAKING OVER “DANA PETROLEUM”TAKING OVER “DANA PETROLEUM” FACING HOSTILE TAKEOVER BIDSFACING HOSTILE TAKEOVER BIDS
For Assignment or Dissertation Help, Please Contact:
Muhammad Sajid Saeed
+44 141 4161015
Email: tosajidsaeed@hotmail.com
Skype ID: tosajidsaeed
TABLE OF CONTENTS
1. TITLE1. TITLE ---------------------------------------------------------------------------------------------------------- 2
2. 2. KEYWORDSKEYWORDS ------------------------------------------------------------------------------------------------- 2
3. 3. AIMS OF RESEARCH AIMS OF RESEARCH -------------------------------------------------------------------------------------- 2
4. INTRODUCTION & 4. INTRODUCTION & BACKGROUNDBACKGROUND -------------------------------------------------------------------- 2
5. 5. RESEARCH PROBLEM RESEARCH PROBLEM ------------------------------------------------------------------------------------- 3
6. 6. LITERATURE REVIEWLITERATURE REVIEW ------------------------------------------------------------------------------------- 3
6.1 6.1 POTENTIAL CHALLENGES IN TAKEOVERPOTENTIAL CHALLENGES IN TAKEOVER ------------------------------------------------------ 5
7. RESEARCH 7. RESEARCH METHODOLOGYMETHODOLOGY & DESIGN -------------------------------------------------------------- 7
7.1 7.1 QUALITATIVE DATAQUALITATIVE DATA ----------------------------------------------------------------------------- 7
7.2 7.2 QUANTITATIVE DATAQUANTITATIVE DATA --------------------------------------------------------------------------- 8
8. TAKEOVER 8. TAKEOVER ETHICS ETHICS ---------------------------------------------------------------------------------------- 9
9. TAKEOVER 9. TAKEOVER LIMITATIONS LIMITATIONS -------------------------------------------------------------------------------- 10
REFERENCES REFERENCES --------------------------------------------------------------------------------------------------- 11
1 | P a g e
1. TITLE
Taking over “Dana Petroleum” facing hostile takeover bids
2. KEYWORDS
Hostile takeover, Dana Petroleum, White Knight, friendly takeover planning
3. OBJECTIVES OF THE RESEARCH
The objectives of the research are:
Friendly taking over Dana Petroleum which is facing hostile takeover bids
Identifying key challenges involved in takeover
Key elements involved in research planning in taking over the organization
4. INTRODUCTION & BACKGROUND
In the business language, takeover is a generic term which refers to a change in the
ownership and control of the any organization (Depamphilis, 2010, p. 251). In the UK,
takeover also refers to the acquisition of a public limited company that has their shares in
the stock exchange market. There are two common types of takeover: friendly takeover
and hostile takeover. Friendly takeover represents a situation where target company’s
board and management are interested in takeover with the support of shareholders
whereas hostile takeover is the term used when a company attempts to obtain the control
over the financial and business activities or assets of the target company against the
resistance of the board and management (Depamphilis, 2010). Hostile takeover bids are
often considered as serious issue between target company’s shareholders and
management. A “White Knight” company (with good intentions) is the third party
involved in offering a friendly takeover tender to a target company which is already facing
hostile takeover bids from the another organization so-called “Black Knight”
(Papadopoulos, 2011).
There are mainly two ways in which the management, directors, and key shareholders of
the target company may attempt to stop hostile takeover bids: using poison pill and
finding a white knight. According to Depamphilis (2010) the “poison pill” is the strategy
used to make takeover more expensive by issuing new securities as dividend that gives
right to shareholders to obtain/acquire extra shares on discount. On the other hand, finding
2 | P a g e
a white knight which refers to a potential acquirer (third party) is preferred by the
directors and management of the target company as bidder.
Dana Petroleum is an oil and gas explorer company based in Aberdeen. The company
faced £1.87 billion hostile takeover bid offer from Korea National Oil Corporation
(KNOC) (Kollewe, 2010). KNOC claimed that they have 48.62% (worth £18 billion)
shares of Dana Petroleum. The executives of Dana Petroleum immediately advised
shareholders and convertible bond holders not to take any action in response to that offer.
The dealing between the two companies was not successful and both were failed to agree
on terms and conditions (Kollewe, 2010).
The company named “ABC” as white knight is now planning to friendly takeover Dana
Petroleum. In this report, the attempt has been made to highlight the potential challenges
that ABC organization may face in taking over Dana Petroleum. In addition, the key
elements in the research planning and a synopsis of proposed research design will also be
the part of the research report.
5. RESEARCH PROBLEM
The intention of this research is to highlight the potential challenges that ABC company
will face in taking over Dana Petroleum and also to identify key planning components
need to be considered.
6. LITERATURE REVIEW
In spite of all recent developments within the context of corporate governance legislation,
hostile and friendly takeovers are frequently taking place in all around the World (Kireev,
2007). Especially due to the recent financial and liquidity crisis, hostile takeovers are
becoming even more vital. UK has a transparent policy with a special code of conduct to
ensure the ethical and fair treatment of shareholders in both friendly and hostile
takeovers. One of the key established rules is “board neutrality” which aims to protect the
rights of the target stockholders and also provides them the opportunities to determine bid
by themselves (Goergen and Martynova, 2005).
The researcher’s community has different viewpoints about takeovers, mergers, and
acquisitions in increasing the wealth of the shareholders. According to Jensen (1984),
3 | P a g e
shareholders received large returns due to the restructuring process in the past resulted in
from the positive impact of takeovers, mergers, and acquisitions. In contrast, many
economists and financial analysts (e.g. Lowenstein, 1985; Law, 1986; Drucker, 1986)
have different opinions. According to them, the takeovers and acquisitions may be good
in increasing shareholder’s wealth but on other hand, they tend to exceed costs
substantially and caused a loss of productive energy that may be utilized in other
applications more efficiently. Shleifer and Summers (1988) identified that takeovers
create opportunities for shareholders on the basis of the expenses of other shareholders.
They explained that the redistributions may results in net losses so it is not the right
thinking to judge the impacts of takeovers in terms of shareholder’s returns.
In comparing friendly takeovers with hostile takeovers, the general perception about
hostile takeovers is negative (Volkov, 2004; Kireev, 2007; Demidova, 2007). There are
two key explanations in justifying the comment. Demidova (2007) mentioned that in
several types of raiders, some may use illegal methods during hostile takeover process.
Kireev (2007) uses straight words in mentioning that in particular group of raiders, some
individuals may have criminal background and use immoral strategies during hostile
takeover. Volkov (2004) opines about other factors concerned with negativity of
perception against hostile takeovers. According to him, the hostile takeover may contain
few incentives (e.g. arbitrage opportunity) behind takeover actions. However, the
incentives behind the hostile takeover actions are based on the background of the
company employing different types of raiders (Kireev, 2007). The figure1 is showing the
comparison between hostile and friendly takeovers over the years.
Figure 1 – Target characteristics, Hostile versus friendly takeovers
4 | P a g e
Source: Damodaran (2012, p. 710)
On the basis of above discussion, it can be said that friendly takeovers are better than the
hostile takeovers in terms of producing better investment performance for stakeholders.
Therefore, it is decided to offer a friendly takeover proposal to Dana Petroleum but before
this it is the best practice to explore the potential challenges that ABC company will face
in taking over Data Petroleum.
6.1 POTENTIAL CHALLENGES
Angwin (2007) argue that the acquiring firm should search and identify target firm that is
suitable for the overall growth strategy of the organization. He further opines that it is the
best practice to choose organization within the relevant industry. Sirower (2007) cited
Lubatkin (1983) in suggesting that taking over a wrong company at wrong price can have
disastrous effects.
Hitt et al. (2010) mentioned many difficulties in taking over any organization. Integration
difficulties are tend to be more important in takeovers where ABC company will face the
reactions arise inside the organization at interpersonal level during the process of
integration. According to Hitt et al (2010), the integration of two big organizations is a
complicated task that includes combining two organization’s cultures, re-establishing an
efficient working relationship, connecting different monitoring and control systems, and
modifying problem solving mechanisms. These complicated tasks may create conflicts
between the employees and managements of both organizations. The integration
difficulty is a real challenge for the both organizations that cannot be underestimated
because without it the takeover success is not possible in producing positive outcomes.
Jaques (2011) and Tuch (2006) reported that in embarking takeover, the white knight firm
may bear extensive costs in planning and execution depending on the size and complexity
of the operations. The ABC firm may need to appoint many advisors and expert as the
part of the process. These specialists may include legal advisors, accounting experts,
financial advisors, tax advisors, law and regulator firms, security registry firms, and
public relation officers.
5 | P a g e
Jaques (2011) also mentioned that in planning a takeover, the white knight organization
require to carefully consider structuring considerations with the assistance from the
advisors. The structuring considerations indicate many things such as timing of takeover,
financing considerations, strategic stake, flexibility, tax, and outcome. The timing of
takeover is very important especially when the target firm is facing hostile bids because it
shows that black knight firm has already acquired maximum shares of the company. If the
management team is facing high pressure of meeting deadlines, they might employ crisis
management experts. Similarly, the white knight firm should have more flexibility in
structuring takeover of strategic stakes under the planning scheme (Jaques, 2011).
Financing consideration involves the decision of offering cash and relative merits to
target firms. Angwin (2007) points out that takeover should be structured in a way which
optimises tax effectiveness for both parties.
Hitt et al (2010) emphasized on the existence of synergy after takeover or acquisition.
Synergy is basically a Greek word which means “working together”. In case of takeover,
synergy means that underlying assets are more valuable when used in conjunction with
each other as compared to used individually. Synergy can be helpful for ABC in
generating shareholder’s wealth but it is also a real challenge to allocate resources to a
combined firm (Lee and Lee, 2006). Sirower (2007) mentioned that the unsuccessful
allocation of resources can bring negative effects for the acquirer.
Many takeovers formed a big organization that results in increasing its economy of scale.
To some extent, the extra costs incurred in managing big organization may exceed the
benefit of economies of scale. Thus, the difficulty produced by the larger firms may lead
management to apply additional bureaucratic controls in order to organize the operations
of the integrated firm (Hitt et al., 2010).
The takeover process requires too much diversification and also based on hundred of
complex operations. The inadequate evaluation of target company especially without an
effective ‘Due Diligence’ process may create inconsistencies for the white knight
organizations (Tuch, 2006). The Intelligent Investor magazine (2003) reveals that top
managers are usually not involved in obtaining information needed for the takeovers.
6 | P a g e
However, these managers are engaged in making decisions on the basis of that
information that may not come from reliable sources.
According to Kraakman et al. (2009), past experiences show that managers may
participate in and overseeing activities needed for takeover that can divert the attentions
toward personal matters such as taking advantage of other opportunities by involving
either external shareholders or management of target company and here comes the agency
problem where managers thinks about personal matters rather than corporate objectives.
Boadwin (1997) identified the potential issue of goodwill because it is always paid in
excess for the takeover. He mentioned that acquirer should calculate and if possible
minimise the goodwill before takeover.
7. RESEARCH METHODOLOGY AND DESIGN
The quality research is always based on the reliability of true and ethical data/information
especially from authentic sources in early phases of the research (Marlow, 2010).
According to Sekaran and Bougie (2009), the clarification of research methodology is
essential in order to conduct research in progressive style. This means that clarification of
the results will be based on both qualitative and quantitative measures. This research is
specifically based on taking over a company named ‘Dana Petroleum’ which is facing
hostile takeover bids from a South Korean company. During this research, an attempt will
be made to respect the chief criteria of the research to avoid biased information.
According to the proposed plan, the data collection methods will consists of the mixture
of both qualitative and quantitative data, so-called triangulation in order to find out the
worth of taking over Dana Petroleum.
7.1 QUALITATIVE DATA
Creswell (2009) specifies that qualitative data is based on conceptual framework and
theoretical methodologies. The collection of qualitative data is primarily consists of
newspapers, books, magazines, case studies, and journal articles. In this research, to
evaluate the valuation of taking over Dana Petroleum, the attempt will be made to apply
‘Due Diligence’ process. The effective due diligence process consists of the examination
of numerous actions and tasks in diverse areas (Howson, 2003). For example, examining
differences between cultures of both organizations, impact on economy of scale, tax
7 | P a g e
consequences of the takeover procedure, and actions needed to successfully merge two
managements and workforces. In order to apply due diligence process, the companies
normally take the expert opinions and services of advisors and professionals such as
investment bankers, lawyers, accountants, and management consultants. Howson (2003)
argue that applying due diligence is very important in terms of right decisions on right
time but before applying this technique, following rules must be considered:
The brief discussion about takeover must be given to advisors
The buyer/white knight organization can control the process, not the advisors
Advisors only can provide advice, they are not there to make decisions
The buyer should not be unrealistic about demands
7.2 QUANTITATIVE DATA
As compare to qualitative data, the quantitative data consists of numerical data in the
form of raw facts and figures so that it can be tested through numerous statistical and
mathematical applications (Creswell, 2009). The ABC company wish to takeover Dana
Petroleum must determine whether the takeover will be successful or not. In order to do
that, ABC company needs to find out how much Dana Petroleum being acquired is really
worth. There are many ways to determine the worth of the company. One of the most
widely used methods is to compare Dana Petroleum with other companies within the
petroleum industry. The quantitative data will be obtained in this study to compare Dana
Petroleum with other organization based on three techniques recommended by various
experts (e.g. Scharf et al., 1991; Hooke, 1998; Coyle, 2000; Machiraju, 2007; Hunt, 2009;
Eckbo, 2010)
1. Comparative ratios
a. Liquidity ratios
b. Price and Earning ratio
c. Enterprise Value to Sales ratio
2. Discounted Cash Flow
3. Replacement cost (if applicable)
It is so common to test the worth of target company using comparative ratio analysis.
Coyle (2000) mentioned that comparative ratios help the acquirer to compare target
8 | P a g e
company on the basis of many factors such as size of margins, growth rates, quality of
earnings, and strength of cash flows. The liquidity ratio will consists of short term ratios
(i.e. quick ratio and current ratio) and long term ratios (i.e. debt to equity ratio, leverage
ratio, and interest cover ratio). With price and earnings ratio, the ABC company can make
an offer on the basis of multiple of the earnings of the target company whereas Enterprise
value to sales ratio will help ABC company to make an offer on the basis of multiple of
the revenues by comparing it with other companies within the industry.
Machiraju (2007) and Hunt (2009) confirmed that Discounted Cash Flow (DCF)
approach is the best valuation method to determine the present value according to future
cash flows. In discount cash flow method, free cash flows (i.e. operating profit,
amortization of goodwill, depreciation, expenses, taxes, and working capital) are
discounted on the basis of company’s Weighted Average Cost of Capital. In rare cases,
takeovers can be based on replacement cost of target company’s entire value of
equipment and staff costs (Eckbo, 2010).
8. TAKEOVER ETHICS
Boatright (2010) reported that hostile takeover faced many criticisms especially when it is
not permitted by the target company but friendly takeovers and acquisitions may also
raise many ethical and social concerns that may cause disappointing results. Various
studies indicated that takeovers and mergers may create many problems such as stress,
uncertainties, fears, and tensions for the employees and stakeholders (Buono, 1997; Stahl
and Mendenhall, 2005). Boatright (1997) emphasized on three fundamental ethical issues
concerned with takeovers:
To ensure that takeover (hostile/friendly) is permitted by the target company
To ensure that the tactics or methods being used by the acquirers to takeover target
firm are legal, appropriate, and ethical
To ensure the ethical treatment of directors and key shareholders of the target
company especially when offering them takeover bids
In addition, as a white knight, ABC company should make sure the following rules and
ethical principles for the fair transaction:
9 | P a g e
To keep target company’s qualitative and quantitative data safer
To ensure that the data should be acquired from authentic sources
To ensure not to adopt any wrong way/method to collect data
To ensure the ethical use of collected data, especially not to use the data for illegal
or threatening purposes
Ensuring to stay positive if the deal is not finalised due to any issue or concern
9. TAKEOVER LIMITATIONS
In the author’s opinion, time will be a limiting factor in offering a competitive offer to
Dana Petroleum because the company is already facing hostile takeover bids from
another company since August 2010. It is supposed that underlying challenges and
existing literature review can help ABC company to decide whether taking over Dana
Petroleum is worthy or not. Moreover, the acquiring company should also keep in mind
the two things in planning a takeover: cost factor and overall growth strategy of the
organization after taking over Dana Petroleum especially when ABC is deciding to
diversify because diversification in terms of takeover carries hundred of complex
operations and procedures.
10 | P a g e
REFERENCES
Angwin, (2007). Mergers and acquisitions, Oxford: John Wiley and Sons Ltd
Boadwin, D. A., (1997). Negotiating and documenting business acquisitions, ALI-ABA
Boatright, J. R., (1999). Ethics in finance, Wiley-Blackwell
Boatright, J. R., (2010). Finance Ethics: Critical Issues in Theory and Practice, John Wiley and Sons
Buono, A. F., (1997). Technology transfer through acquisition, Management Decision, 35(3), pp. 194 – 204
Coffee, J. C., Lowenstein, L. and Ackerman, S. R., (1988). Knights, raiders, and targets: the impact of the hostile takeover, Oxford: Oxford University Press
Coyle, B., (2000). Mergers and acquisitions, Global Professional Publishing
Damodaran, A., (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset, 3rd edition, John Wiley and Sons
Demidova, E., (2007). Hostile takeovers and defence against them in Russia. Problems of Economic Transition, 5, pp. 44-60
Depamphilis, D., (2010). Mergers and Acquisitions Basics: All You Need to Know, Academic Press
Drucker, F., (1986). Corporate Takeovers - What is to be done? The Public Interest, 82, pp. 3–24
Eckbo, B. E., (2010). Valuation Estimates and Takeover Activity: Modern Empirical Developments, Academic Press
Goergen, M. and Martynova, M., (2005). Corporate Governance Convergence: Evidence From Takeover Regulation Reforms in Europe, Oxford Review of Economic Policy, 21(2), pp. 1 – 34
11 | P a g e
Hitt, M. A., Ireland, D. and Hoskisson, R. E., (2010). Strategic Management: Competitiveness & Globalization, Concepts, 9th edition, Cengage Learning
Hooke, J. C., (1998). Security analysis on Wall Street: a comprehensive guide to today's valuation methods, John Wiley and Sons
Howson, P., (2003). Due diligence: the critical stage in mergers and acquisitions, Gower Publishing Ltd
Hunt, P. A., (2009). Structuring Mergers & Acquisitions: A Guide to Creating Shareholder Value, 4th edition, Aspen Publishers Online
Jaques, M. S., (2011). A guide to takeovers in Australia, Financial review dealbook
Jensen, M. (1984). Takeovers: Folklore and Science, Harvard Business Review, pp. 109–121
Kireev, A., (2007). Raiding and the Market for Corporate Control: The Evolution of Strong-Arm Entrepreneurship. Problems of Economic Transition, 8, pp. 29-45
Kollewe, J., (2010). Dana Petroleum faces hostile takeover bid from South Korea, The Guardian, Friday 20 August 2010, [online], available from: http://www.guardian.co.uk/business/2010/aug/20/dana-petroleum-takeover-bid-knoc [Accessed: 23 March 2012]
Kraakman, R., Armour, J. and Davies, P., (2009). The Anatomy of Corporate Law, 2nd edition, Oxford: Oxford University Press
Law, W., (1986). A Corporation is more than its Stock, Harvard Business Review, pp. 80–83
Lee, C. F. and Lee, A. C., (2006). Encyclopaedia of finance, Springer
Lowenstein, L., (1985). Management Buyouts, Columbia Law Review, 85, pp. 730–784
Machiraju, H. R., (2007). Mergers, Acquisitions and Takeovers, New Age International
Marlow, C. R., (2010). Research methods for generalist social work, 5th edition, Cengage Learning
12 | P a g e
Papadopoulos, P., (2011). Hostile Takeovers - The Use of Attack and Defence Strategies: A Literature Review of Possible Theoretical Approaches, GRIN Verlag
Scharf, C. A., Shea, E. E. and Beck, G. C., (1991). Acquisitions, mergers, sales, buyouts, and takeovers: a handbook with forms, 4th edition, Prentice Hall
Sekaran, U. and Bougie, R., (2009). Research methods for business: a skill building approach, 5th edition, John Wiley and Sons
Shleifer, A. and Vishny, R. W., (1988). Value maximisation and the acquisition process, Journal of Economic Perspectives, 2(1), pp. 7 – 20
Shleifer, A., Summers, L., (1988). Hostile Takeovers as Breaches of Trust in: A. J. Auerbach, ed., Corporate Takeovers: Causes and Consequences, Chicago: University of Chicago Press
Sirower, M. L., (2007). The synergy trap, Simon and Schuster publishing
Stahl, G. K. and Mendenhall, M. E., (2005). Mergers and acquisitions: managing culture and human resources, Stanford, CA: Stanford University Press
The Intelligent Investor, (2003). Problems with acquisitions, [online], Available from: http://www.intelligentinvestor.com.au/PDFissues/pII_Issue126_ZQFJBQWPJTIOOFCW.pdf [Accessed: 17 March 2012]
Tuch, A., (2006). Contemporary Challenges in Takeovers: Avoiding Conflicts, Preserving Confidences and Taming the Commercial Imperative, Journal of Company and Security Law, 24, pp. 107 – 136
Tuch, C. and O’Sullivan, N., (2007). The impact of acquisitions on firm performance: a review of the evidence, International Journal of Management Reviews, 9(2), pp. 141 – 170
Volkov, V., (2004). Hostile Enterprise Takeovers: Russia’s Economy in 1998-2002, Review of Central and East European Law, 4, pp. 527-548
13 | P a g e
Recommended