TAKING OVER DANA PETROLEUM FACING HOSTILE TAKEOVER BIDS

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TABLE OF CONTENTS

1. TITLE ---------------------------------------------------------------------------------------------------------2. KEYWORDS ------------------------------------------------------------------------------------------------3. AIMS OF RESEARCH -------------------------------------------------------------------------------------4. INTRODUCTION & BACKGROUND -------------------------------------------------------------------5. RESEARCH PROBLEM ------------------------------------------------------------------------------------6. LITERATURE REVIEW ------------------------------------------------------------------------------------6.1 POTENTIAL CHALLENGES IN TAKEOVER ------------------------------------------------------

2 2 2 2 3 3 5 7 7 8 9 10 11

7. RESEARCH METHODOLOGY & DESIGN -------------------------------------------------------------7.1 QUALITATIVE DATA ----------------------------------------------------------------------------7.2 QUANTITATIVE DATA ---------------------------------------------------------------------------

8. TAKEOVER ETHICS ---------------------------------------------------------------------------------------9. TAKEOVER LIMITATIONS -------------------------------------------------------------------------------REFERENCES ---------------------------------------------------------------------------------------------------

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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 companys 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 companys 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
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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 researchers community has different viewpoints about takeovers, mergers, and acquisitions in increasing the wealth of the shareholders. According to Jensen (1984),
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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 shareholders 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 shareholders 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

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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 organizations 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.

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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 shareholders 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. However, these managers are engaged in making decisions on the basis of that information that may not come from reliable sources.
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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 consequences of the takeover procedure, and actions needed to successfully merge two managements and workforces. In order to apply due diligence process, the companies

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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 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
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(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 companys Weighted Average Cost of Capital. In rare cases, takeovers can be based on replacement cost of target companys 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: To keep target companys qualitative and quantitative data safer To ensure that the data should be acquired from authentic sources
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 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 authors 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.

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