Tyco Rescues AMP from AlliedSignal Background In late November 1998, Tyco International Ltd., a…

Tyco Rescues AMP from AlliedSignal

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 Background

 In late November 1998, Tyco International Ltd., a
diversified manufacturing and service company, agreed to acquire AMP Inc., an
electrical components supplier, for $11.3 billion. In doing so, AMP
successfully fended off a protracted takeover attempt by AlliedSignal Inc. As
part of the merger agreement with Tyco, AMP rescinded its $165 million share
buyback offer and its plan to issue an additional 25 million shares to fund its
defense efforts. Tyco, the world’s largest electronics connector company, saw
the combination with AMP as a means of becoming the lowest cost producer in the
industry. Lawrence Bossidy, CEO of AlliedSignal, telephoned an AMP director in
mid-1998 to inquire about AMP’s interest in a possible combination of their two
companies. The inquiry was referred to the finance committee of the AMP board,
which expressed no interest in merging with AlliedSignal. By early August,
AlliedSignal announced its intention to initiate an unsolicited tender offer to
acquire all of the outstanding shares of AMP common stock for $44.50 per share
to be paid in cash. The following week AlliedSignal initiated such an offer and
sent a letter to William J. Hudson, then CEO of AMP, requesting a meeting to
discuss a possible business combination. Bossidy also advised AMP of
AlliedSignal’s intention to file materials shortly with the SEC as required by
federal law to solicit consent from AMP’s shareholders. The consent
solicitation materials included proposals to increase the size of AMP’s board
from 11 to 28 members and to add 17 AlliedSignal nominees, all of whom were
directors or executive officers of AlliedSignal. Within a few days, the AMP
board announced its intentions to continue to aggressively pursue its current
strategic initiatives, because the AlliedSignal offer did not fully reflect the
values inherent in AMP businesses. In addition, the AMP board also replaced
Hudson with Robert Ripp as chair and CEO of AMP.

AMP Pressures Shareholders to Vote against AlliedSignal’s
Proposals

 The AMP board also authorized an amendment to the AMP
rights agreement dated October 25, 1989. The amendment provided that the rights
could not be redeemed if there were a change in the composition of the AMP
board following the announcement of an unsolicited acquisition proposal such
that the current directors no longer comprised a majority of the board. A
transaction not approved by AMP’s board and involving the acquisition by a
person or entity of 20% or more of AMP’s common stock was defined as an
unsolicited acquisition proposal. By early September, AlliedSignal amended its
tender offer to reduce the number of shares of AMP common stock it was seeking
to purchase to 40 million shares. AlliedSignal also stated that it would
undertake another offer to acquire the remaining shares of AMP common stock at
a price of $44.50 in cash following consummation of its offer to purchase up to
40 million shares. In concert with its tender offer, AlliedSignal also
announced its intention to solicit consents for a proposal to amend AMP’s
bylaws. The proposed amendment would strip the AMP board of all authority over
the AMP rights agreement and any similar agreements and to vest such authority
in three individuals selected by AlliedSignal. In response, the AMP board
unanimously determined that the amended offer from AlliedSignal was not in the
best interests of AMP shareholders. The AMP board also approved another
amendment to the AMP rights agreement, lowering the threshold that would make the
rights redeemable from 20% to 10% of AMP’s shares outstanding. AlliedSignal
immediately modified its tender offer by reducing the number of shares it
wanted to purchase from 40 million to 20 million shares at $44.50 per share.

MP Builds Additional Defenses

 AMP announced a self-tender offer to purchase up to 30
million shares of AMP common stock at $55 per share. The AMP self-tender offer
was intended to provide AMP shareholders with an opportunity to sell a portion
of their shares of common stock at a price in excess of AlliedSignal’s $44.50
per share offer. Also, on September 28, 1998, AMP stated its intention to
create a new ESOP that would hold 25 million shares of AMP common stock. Allied
Signal indicated that if the self-tender were consummated, it would reduce the
consideration to be paid in any further Allied Signal offers to $42.62 per
share.

AMP Seeks a White Knight

 Credit Suisse, AMP’s investment banker, approached a number
of firms, including Tyco, concerning their possible interest in acquiring AMP.
In early November, Tyco stepped forward as a possible white knight. Based on
limited information, L. Dennis Kozlowski, Tyco’s CEO, set the preliminary
valuation of AMP at $50.00 per share. This value assumed a transaction in which
AMP shares would be exchanged for Tyco shares and was subject to the completion
of appropriate due diligence. In mid-November, Ripp and Bossidy met at
Bossidy’s request. Bossidy indicated that AlliedSignal would be prepared to
increase its proposed acquisition price for AMP by a modest amount and to
include stock for a limited portion of the total purchase price. The revised
offer also would include a minimum share exchange ratio for the equity portion
of the purchase price along with an opportunity for AMP shareholders to participate
in any increase in AlliedSignal’s stock before the closing. The purpose of
including equity as a portion of the purchase price was to address the needs of
certain AMP shareholders, who had a low tax basis in the stock and who wanted a
tax-free exchange. Ripp indicated that the AMP board expected a valuation of
more than $50.00 per share.

Tyco Ups Its Offer

Tyco indicated a willingness to increase its offer to at
least $51.00 worth of Tyco common shares for each share of AMP common stock.
The offer also would include protections similar to those offered in
AlliedSignal’s most recent proposal. On November 20, 1998, the AMP board voted
unanimously to approve the merger agreement and to recommend approval of the
merger to AMP’s shareholders. They also voted to terminate the AMP self-tender
offer, the ESOP, and AMP’s share repurchase plan and to amend the AMP rights
agreement so that it would not apply to the merger with Tyco.

AlliedSignal and Dissident AMP Shareholders Sue AMP

 In early August, AlliedSignal filed a complaint against AMP
in the United States District Court against the provisions of the AMP rights
agreement. The complaint also questioned the constitutionality of certain
antitakeover provisions of Pennsylvania state statutes. Concurrently, AMP
shareholders filed four shareholder class-action lawsuits against AMP and its
board of directors. The suits alleged that AMP and its directors improperly
refused to consider the original AlliedSignal offer and wrongfully relied on
the provisions of the AMP rights agreement and Pennsylvania law to block the
original AlliedSignal offer. In late August, AMP filed a complaint in the
United States District Court against AlliedSignal, seeking an injunction to
prevent AlliedSignal from attempting to pack the AMP board of directors with
AlliedSignal executive officers and directors. The complaint also alleged that
the Schedule 14D-1 SEC filing by AlliedSignal was false and misleading. The
complaint alleged that the filing failed to disclose that some of AlliedSignal’s
proposed directors had conflicts of interest and that the packing of the board
would prevent current board members from executing their fiduciary
responsibilities to AMP shareholders.

The Court Agrees with AMP

In early October, the court agreed with AMP and enjoined
AlliedSignal’s board-packing consent proposals until it stated unequivocally
that its director nominees have a fiduciary duty solely to AMP under
Pennsylvania law. The court also denied AlliedSignal’s request to deactivate
antitakeover provisions in the AMP rights agreement. The court further held
that shareholders might not sue the board for rejecting the AlliedSignal
proposal.

AlliedSignal Appeals the Lower Court Ruling

AlliedSignal immediately filed in the United States Court of
Appeals for the Third Circuit. The court ordered that although AlliedSignal
could proceed with the consent solicitation, its representatives could not
assume positions on the AMP board until the court of appeals completed its
deliberations. The district court ruled that the shares of AMP common stock
acquired by AlliedSignal were “control shares” under Pennsylvania law. As a
result, the court enjoined AlliedSignal from voting its AMP shares unless
AlliedSignal’s voting rights were restored under Pennsylvania law. AlliedSignal
was able to overturn the lower court ruling on appeal.

Case Study Discussion Questions

1. What types of takeover tactics did AlliedSignal use?

2. What steps did AlliedSignal take to satisfy federal
securities laws?

3. What antitakeover defenses were in place at AMP before
AlliedSignal’s offer?

 4. How did the AMP board use the AMP rights agreement to
encourage AMP shareholders to vote against AlliedSignal’s proposals?

5. What options did AlliedSignal have to neutralize or
circumvent AMP’s use of the rights agreement?

6. After announcing it had purchased 20 million AMP shares
at $44.50, why did AlliedSignal indicate that it would reduce the price paid in
any further offers it might make?

7. What other takeover defenses did AMP use in its attempt
to thwart AlliedSignal?

8. How did both AMP and AlliedSignal use litigation in this
takeover battle?

 9. Should state laws be used to protect companies from
hostile takeovers?

10. Were AMP’s board and management acting to protect their
own positions (i.e., the management entrenchment hypothesis) or in the best
interests of the shareholders (i.e., the shareholder interests’ hypothesis)?
Explain your answer.

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