TAKING OVER “DANA PETROLEUM”TAKING OVER “DANA PETROLEUM” FACING HOSTILE TAKEOVER BIDSFACING HOSTILE TAKEOVER BIDS

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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

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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 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

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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 researcher’s 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 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

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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 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.

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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 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.

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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

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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

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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:

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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.

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