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Phillips Petroleum, Mesa, and Icahn (1984-1985) ___________________________ 141
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In a transaction such as this, management's percentage of ownership increases if: Their stock options are rewritten for the same or a larger number of shares The ESOP has shares that are not exchanged for cash but are exchanged for new shares of common stock Management has shares that are not exchanged for cash, but are exchanged for new shares of common stock
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QUESTIONS AND PROBLEMS _______________
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1 Which of the facts given in the case are relevant in determining your preference of offers How is value created 2 Assuming an initial $40 stock price, what was the value of the stock equity before the restructuring 3 Estimate the stock price per share after the second offer is accepted, and after the buyout of Mesa and after the three-for-one split 4 The answers to (2) and (3) implicitly make what assumptions 5 How much value per share does a shareholder receive from the second offer 6 Carl Icahn demanded: More preferred stock Larger common stock dividend A three for one stock split Of what economic significance are these changes 7 If the first offer was worth $5183 per share and the second offer was worth $5239, what is the total value difference in the two offers 8 Icahn and Pickens each received $25,000,000 to cover expenses Is this ethical Strategically sound 9 Who won Who lost
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Owens-Corning Fiberglas Corporation (1986)
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summer of 1986 Bill Boeschenstein other top execuIn the of OCF could finally heave a sigh of and theOCF's net income tives relief for 1985 was $1312 million on stock equity of $9447 million The ROE of 14 percent was the best the firm had done since 1979 The years 1980 to 1983 had been difficult years and only since 1984 had the company made a return to acceptable profit performance Best yet, the forecast was that 1986's operating results would be better than those of 1985 Finally, the firm's top management could plan on spending to diversify out of the building-construction industry and to modernize the production facilities For 1987 the capital budget could be as high as $300 million The long-term debt was a modest 36 percent of the total capital On August 12, 1986 the entire set of long range plans was placed in jeopardy Wickes Acquisition I Inc made a tender offer of $74 per share for any and all of OCF's common stock The firm was a wholly owned subsidiary of Wickes Companies, Inc The offer was to expire on September 9, 1986 The deal manager for the offer was Drexel Burnham Lambert Drexel had the ability to raise debt capital (high yield, better known as junk bonds) The financial history of Wickes is interesting and relevant On January 25, 1984 Wickes had $13 billion of liabilities subject to reorganization proceedings and a stockholder deficit of $208 million After reorganization Wickes eliminated the $13 billion of liabilities and had $992 of stockholders' equity as of April 24, 1986 For the fiscal year ending January 26, 1985 Wickes had a net
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144 _____________________________________________ PRIVATE EQUITY
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income of $297 million Of this amount $281 million was the result of settlement of liabilities under the plan of reorganization and $16 million was the result of utilization of operating loss tax carryforwards Wickes did make $28 million of income from continuing operations in the fiscal year ending January 25, 1986 In 1986 Wickes issued (with the help of Drexel) $14 billion of 117/8 percent senior subordinated debentures The balance of funds needed to acquire OCF were to be obtained from private placements of debt and equity (again, Drexel) or from commercial banks The company's statement was:
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In connection with the Offer, Wickes currently expects to privately place Senior Promissory Notes ("Senior Notes"), Increasing Rate Senior Notes ("Increasing Rate Notes"), Senior Convertible Debentures ("Convertible Debentures") and Cumulative Convertible Exchangeable Preferred Stock ("Exchangeable Preferred Stock") through Drexel Burnham Drexel Burnham has informed Wickes that, based on current conditions, it is highly confident that it can obtain commitments for the private placement of up to $11 billion of such debt and equity securities of Wickes in connection with the Offer
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Wickes would obtain the capital based on OCF's debt capacity In his letter to OCF's shareholders Boeschenstein had stated (March 7, 1986):
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Looking ahead, we will continue to pursue our strategies for growth and enhanced profitability Our plans and programs are designed to assure Owens-Coming's ability to compete successfully in all of its major markets, under varying economic conditions We have made investments in physical assets, technology and, most importantly, in people to take advantage of our unique strengths and lay the foundation for future opportunities We believe this is the best course for capitalizing on Owens-Coming's potential
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During the first half of 1986 the price of the OCF common stock ranged from $36 to $57 The projected incremental federal tax rate was 34
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Owens-Corning Fiberglas Corporation (1986)
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OCF's management was shocked that a firm that had just come out of bankruptcy and that in its best most recent year had made one-fifth of OCF's operating income was trying to take over OCF OCF intended to fight the offer OCF responded to the Wickes raid by offering its investors the following package: $52 of cash $35 of debentures with a market value of approximately $18 1 share of new common stock The debentures mature in 20 years and accrue 15 interest starting December 1991 payable semi-annually starting June 1992 The 15 interest will be computed on the $35 face amount On August 29, 1986, after the announcement of OCF's proposed recapitalization, Wickes withdrew its offer of $74 per share in cash, for all the shares Goldman Sachs & Co, who acted as financial advisors to OCF in connection with the recapitalization, expressed an opinion in a "comfort letter" stating that "the aggregate consideration of $52 in cash, $35 stated face amount of debentures, and one new share to be received by the public stockholders, for each share of common stock held by them pursuant to the recapitalization is fair to the 'Public Stockholders' " Note that Goldman did not value either the debentures or the new stock Also, Goldman did not address the one way for the recapitalization to be unfair It would be unfair to public shareholders if management received an excessively large number of options at a very favorable exercise price and received more than an appropriate percentage of the new shares There are initially 29,695,000 common shares outstanding If all shares are exchanged, OCF will have to issue approximately $2,079 million of debt
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52(29,695,000) 18(29,695,000)
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