Case study

Ciba's Acquisition of Allied Colloids
Part 1

Prof. Ian Giddy, New York University

This is a case study of a competitive merger, in which the Swiss chemicals company, Ciba Specialty Chemicals, played the role of a white knight in a bidding war for the British company, Allied Colloids. The case study is intended to highlight a number of interesting features of hostile and competitive M&A.

  • Read the articles below.
  • Try to answer the following questions:
  • What caused Allied Colloids to become a takeover target?
  • How did Ciba value the gains from a merger?
  • What effect would you expect the acquisition have on Ciba's balance sheet and performance?
  • Who won? Who lost?

A chronology of events in the takeover of Allied Colloids

23rd November 1997 - The Battle Begin

The Independent - United Kingdom ; 24-Nov-1997

AlliedColloids was plunged into a battle for survival yesterday after Hercules, a US rival, launched a hostile pounds 1.1bn bid for the chemicals group. Andrew Yates finds that, with other bidders likely to enter the fray, Allied faces an uphill struggle to keep its independence 

Hercules yesterday launched a stinging attack on AlliedColloids' poor investment record and its management as it made a unsolicited pounds 1.1bn, 155p-a-share swoop for the company. The US chemicals group criticised Allied for its poor share price performance, its disappointing investment performance and its ineffective response to rising raw material prices and the strength of the pound, which has pummelled profits. 

Keith Elliott, chairman and chief executive of Hercules, said yesterday: 'This is a very generous offer. Allied has underperformed the stock market by 38 per cent over the last three years. Other exporters have not underperformed by as much as others are managed better.' 

However, David Farrar, chief executive of Allied, blasted Hercules' bid and promised to mount a strong defence.'This undervalues our company. It is an unrealistic bid. We are not for sale and have a bright independent future,' he said. 

Allied's shares jumped 41.4p to 167.5p, well above the offer price, reflecting the widely held view in the City that the bid is not high enough to ensure success. Analysts are predicting a protracted takeover battle which is likely to involve more than one bidder. 

Michael Eastwood, chemicals analyst at Dresdner Kleinwort Benson, said: 'This is not a knockout bid. A fair price for the business is around 180p.' 

One analyst said: 'Allied is unlikely to remain as a publicly quoted company but it will probably be sold for a higher price. I wouldn't be surprised if Allied was forced to reopen talks with other groups to try and find a white knight.' 

Mr Elliott proclaimed: 'This is a great business combination creating an excellent portfolio of speciality chemicals.' 

Experts believe Hercules could create pounds 200m of cost savings from the deal by 1999. However analysts point out that it does not have a UK base and is not a direct competitor in any of Allied's main businesses. A larger chemicals group which operates in Allied's markets would be able to extract higher cost savings and could afford to up the stakes. 

Likely potential bidders include the US groups Dow and Allied Signal and the European giants BASF and Ciba. The cash-rich UK rival Laporte has ruled itself out of the running so far but may be tempted. 

Only last week Allied admitted it was in tentative takeover talks, only to announce on Friday that they had come to nothing. 

World Reporter. All Material Subject to Copyright

The Guardian - United Kingdom ; 24-Nov-1997 

SPECIALITY chemicals firm Allied Colloids yesterday urged its shareholders to turn down an unwelcome pounds 1 billion bid from its US rival, Hercules, saying it 'fundamentally undervalued' the company. 

The surprise 155p-a-share US bid - 23 per cent ahead of Allied's Friday closing price - came only days after talks between AlliedColloids and another suitor broke down. Hercules said that the timing of the bid was a coincidence and that it had been working on its proposal for several months. Bradford-based AlliedColloids is a major exporter and has been hit this year by the strength of the pound. It produces pollution-control chemicals which help traditionally 'dirty' industries meet higher environmental standards. These include water-soluble polymers used by water and sewerage companies. 

The firm also makes chemicals used to enable paper-making machines to run faster. It employs 3,400 workers worldwide, including 1,900 in the UK, mainly in Bradford. 

Shares in Allied raced ahead of the Hercules offer price as details of the bid were announced. City analysts decided the price was not high enough and may flush out other bidders. 

Only last week some analysts had suggested the company was worth 160p-180p per share - or up to pounds 1.25 billion - in the event of a bid. Last night they closed up 41.5p at 167.5p. 

AlliedColloids is viewed as an attractive niche operator in a high-margin business. Multinational giants such as Dow Chemical, BASF, Elf Atochem and Ciba have all been tipped as potential bidders. 

Chief executive David Farrar said he had received an approach from Hercules on Sunday and was asked to name his price. He refused to co-operate and yesterday vowed to fight the bid. 

'This is a sound business in a high-growth market,' he said. 'We are not up for sale and we are not looking for bids.' 

Hercules is a Delaware-based multinational, with half of its business based in the US. It is valued at nearly pounds 3 billion on the New York stock exchange and, like Allied Colloids, its core businesses include water-soluble polymers and paper technology. 

It employs 6,300 people, half of them in the US. Its only UK plant is a small paper-technology factory at Pendlebury, near Manchester. 

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Lex Column: Allied Colloids
Financial Times ; 24-Nov-1997 

With an opening shot for Allied Colloids 53 per cent above the pre- speculation price, Hercules is certainly flexing its muscles. But is it all brawn and no brain? Admittedly the offer does look rapidly earnings- enhancing for Hercules. Much less clear, however, is whether it would create value for shareholders. Including debt of Pounds 120m and advisers' fees of around Pounds 15m, the acquisition will cost at least Pounds 1.2bn in all. With Allied expected to have post-tax 1998 earnings of Pounds 61m, the deal would earn Hercules a measly 5 per cent return on investment in its first year. Set against a sector cost of capital of between 10 per cent and 12 per cent, this will not set pulses racing unless huge savings can be found. This is doubtful. Although they do sell to the same customers, there is no real product overlap between the two companies. At most Hercules may scrimp Pounds 10m annually from central costs and sales and marketing. But this alone does not make the deal stack up. 

This will almost certainly not be a knock-out bid, not least because Allied sees a bright future as an independent company. And other bidders, such as cash-rich US firms like Rohm & Haas or Dow Chemical, may join the fray - hence Allied's shares are trading some 11p above the 155p offer. The other potential bidders would have greater fire-power than Hercules if it came to a bidding war. And, because of their larger overlaps, they could pay significantly more and not destroy shareholder value. 

Copyright © The Financial Times Limited 

Allied Colloids independence call
Financial Times ; 25-Nov-1997 

AlliedColloids, the UK speciality chemicals manufacturer which has rejected a Pounds 1.07bn hostile bid from Hercules of the US, yesterday stressed that it was preparing a defence to remain independent. 

Allied's advisers said the company believed it could offer shareholders value as an independent company and would not be seeking white knights. In order to convince shareholders that Allied is worth more than the 155p-a-share which Hercules is offering, the UK group will need to illuminate the future potential of investments made over the past few years which have yet to materialise, said industry analysts. 

Hercules, which is currently preparing its official offer document, may wait for Allied to release its interim results, due out next Tuesday. 'If they produce results out of line with expectations, they are going to have difficulty defending their position,' said Hercules' advisers. Industry analysts have suggested Allied may defer its results announcement. 

Investment bankers yesterday said there was a 'certain amount of interest' among chemical companies in Allied. However, any company interested in entering a counter bid is likely to wait for the defence document by Allied and watch its share price fluctuations. 'The share price could go anywhere between 180p to 200p,' said one banker. 

Hercules, also a speciality chemical maker, has blamed the management at Allied for poor returns on capital and the underperformance of its share price relative to the market. Allied countered that the share performance reflected the speciality chemicals sector rather than its individual earnings growth. Emiko Terazono 

Copyright © The Financial Times Limited

PR Newswire - USA ; 25-Nov-1997

NEW YORK, Standard & Poor's today placed its ratings on Hercules Inc. on CreditWatch with negative implications. This action effects Hercules' single- 'A' senior unsecured debt and corporate credit ratings, its single-'A'-minus subordinated debt rating, and its 'A-1' commercial paper rating. 

The CreditWatch action follows the announcement of a UK1.1 billion (US$1.8 billion) unsolicited cash offer by Hercules for AlliedColloids Group P.L.C., a U.K.-based specialty chemicals group. The total cost of this transaction, including debt of Allied Colloids, would exceed US$2 billion. If the acquisition is successful, it is expected that Allied Colloids' products would complement Hercules' above-average specialty chemicals portfolio, including its paper technology, water soluble polymers, and resins businesses, and would also provide a new water management chemicals platform. 

However, on a pro forma basis, assuming this proposed transaction is fully financed with debt, Standard & Poor's estimates funds from operations to adjusted total debt would decline to around 20% from the mid-40% area currently. In addition, adjusted debt leverage would rise to near 75% from around 50% currently. 

In addition, management of Allied Colloids has apparently rejected the offer made by Hercules. If a competitive bidding situation should emerge, then the pro forma financial profile of Hercules could potentially deteriorate further. 

If this acquisition is unsuccessful, ratings on Hercules would most likely be affirmed, with a negative ratings outlook. 

Standard & Poor's will meet with management to review the acquisition and the company's business and financial strategies. -- CreditWire. 

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10th December  - Allied vows to cut costs  - Hercules unimpressed

The Independent - United Kingdom ; 10-Dec-1997

AlliedColloids, the chemicals group, yesterday pledged to cut costs dramatically and raise operating margins in its bid to repel a pounds 1.1bn hostile takeover approach from Hercules, a US rival. 

In its defence document Allied predicted that it could wipe pounds 5m off its raw material bill next year. The group also plans to cut costs by revamping its manufacturing facilities and introducing new technology and IT systems. However, this is likely to lead to job cuts among Allied's 3,900 strong work force, including some of the 1,900 people it employs in Bradford. Allied insisted that the 155p-a-share offer drastically undervalued the group given its consistent improvement in sales and an increase in margins in the last six months. John Harnett, AlliedColloids' finance director, said: 'We have repositioned ourselves for the battle to come. It is a poke in the eye to Hercules, we just haven't knocked them out yet.' 

Hercules slammed Allied's defence, claiming it had made flattering comparisons and pointing out that operating profits fell 17 per cent in the last six months compared with the first half of the financial year. 

Keith Elliott, chairman and chief executive of Hercules, said: 'The Allied Colloids document is uninspiring. Our cash offer continues to look very generous for a stock that has destroyed shareholder value and has consistently underperformed the FTSE All Share and FTSE Chemicals Indices.' 

Allied refused to comment on whether the group was looking for another bidder to act as a white knight. But sources suggest several rivals have already registered an interest in Allied. 

Allied's shares were unmoved at 167p. 

World Reporter. All Material Subject to Copyright


19th January - White Knight Ciba gallops to the rescue

Lex Column: Allied Colloids
Financial Times ; 19-Jan-1998 

What a difference a weekend makes. On Friday, Hercules dismissed Allied Colloids' final defence document as 'predictable'. By tea-time yesterday it had raised its bid by 26 per cent to 195p after Ciba Speciality Chemicals moved in as a white knight. Does this auction mean the winner will overpay? Ciba'a 182.5p offer - at 23 times Allied's forecast 1997-98 earnings per share - was at the top end of recent bids in the sector. Indeed a range of bidders, from ICI to Henkel, could be paying too much as volume growth slows in speciality chemicals and competition from Asia intensifies. Hercules' latest Pounds 1.34bn offer weighs in at more than 24 times Allied's 1997-98 earnings and 16 times operating profits. But the tantalising aspect of Allied is the scope for improving its operating margins. If they can be pushed up from less than 17 per cent to 21 per cent (the US group's level), that is worth more than Pounds 20m at constant sales levels. If sales continue to grow at 9 per cent a year, operating profits could be nearly Pounds 40m higher by 1999-2000. These two big ifs might just about justify the extra Pounds 275m on the table. 

The surprising thing about both Hercules and Ciba is that neither claims to have product overlaps with Allied, making synergies hard to spot. But both companies need a deal. Ciba, which has a strong balance sheet, is itching for something to buy. Hercules, however, has staked more of its reputation on this bid. The winner certainly risks overpaying. 

Copyright © The Financial Times Limited

The Independent - United Kingdom ; 19-Jan-1998 

The battle for control of Allied Colloids, the speciality chemicals group, exploded yesterday as Hercules, its US rival, twice increased its hostile bid for the group to foil an approach from Ciba, the Swiss pharmaceuticals giant. Andrew Yates reports on a takeover tussle that has burst into life. 

The saga began at 9am when Hercules increased its bid from 155p to 175p a share, valuing Allied Colloids at more than pounds 1.2bn and effectively ending all hopes that the group would retain its independence. It took just 12 minutes for AlliedColloids to fire back by announcing that it was in discussions with Ciba about a 182.5p bid designed to bury Hercules' hopes. The two sides had been in discussions with Allied's management all weekend in an effort to thrash out a deal. 

Ciba promptly ordered, BZW, its brokers, to launch a raid on Allied's shares in an effort to seal the bid. By early afternoon it had bought 4.5 per cent of Allied in the market. 

However, just as analysts were predicting that Ciba had won the day, Hercules struck again. At 4.26pm - four minutes before the market closed - the US group announced it had decided to up its offer to 195p a share, worth almost pounds 1.35bn. 

Even this did not signal the end of the battle. Ciba was last night locked in talks with advisers and Allied's management, and is considering raising its offer. 

The fireworks surprised the City, which before yesterday had assumed that a bid of 175p was enough to win control of Bradford-based Allied, whose shares had been priced as low as 101p in recent months. 

Hercules' increased offer came just days after Allied produced its final defence document. It has been fighting for control of the British group since November and has consistently attacked its profits record and management. Few observers had expected the group to raise the stakes this high. Allied Colloids shares soared as the fight over the company mounted, and closed the day more than 16 per cent higher at 196.5p. 

Keith Elliott, Hercules' chairman and chief executive, said: 'Our second final offer of 195p per share in cash is more than generous and we are confident that shareholders will see it as such.' 

Hercules claimed its increased offer would still prove to be earnings- enhancing. Analysts believe that to achieve this it would have to slash costs, which could bring severe job losses in the UK and the US. 

One analyst said: 'Hercules are desperate to do a deal after losing out to Allied when they bought CPS (a US speciality chemicals business) and to ICI for other chemical businesses. Ciba will have to think long and hard about trumping what is a very good price for Allied.' 

Industry sources were suggesting last night that Ciba would be unlikely to go much higher that 195p if it did choose to weigh in with a higher offer. The bidders are fighting over Allied Colloid's technology, which separates particles from liquids and is used widely in water and sewage treatment as well as the textile and paper industries. 

Source: World Reporter (Trade Mark) - FT McCarthy. 

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21st January - Mighty Swiss defeats Hercules - Allied jobs saved 

The Independent - United Kingdom ; 21-Jan-1998

The battle for Allied Colloids, the speciality chemicals business, came to an exciting climax yesterday when Ciba, the Swiss giant, weighed in with a pounds 1.4bn knock-out bid to thwart Hercules, its US rival. Andrew Yates reports on a deal that should safeguard 1,850 jobs at the UK group's Bradford headquarters. 

David Farrar, the chief executive of Allied Colloids, said: 'I believe we have saved the jobs in Bradford and the jobs of the 3,400 people who work for us around the world. Ciba have said they want to grow our business and a reduction in the workforce is not a factor.' Allied had feared large job losses if it succumbed to an unsolicited bid from Hercules. Mr Farrar will keep his position as head of Allied's businesses, which will become a separate division of Ciba. The Swiss group also hinted it would retain John Harnett, Allied's finance director. However, the rest of Allied's board could be casualties of the deal. Mr Farrar stands to make pounds 271,000 from his share options and will receive another pounds 144,000 for selling his stake in the group. 

Ciba has won the battle to take over Allied's pioneering technology which separates particles from liquids and is used in water treatment and the paper and textile industries. 

The group rejected analysts claims that it had overpaid for Allied and had little in common with its UK rival. 

Rolf Meyer, chairman of Ciba, said: 'This deal will enhance shareholder value by the end of 1999. This is a complementary business and will provide a platform for growth.' 

This is Ciba's first big purchase since demerging from Novartis, the Swiss drugs giant, last spring, and will account for 14 per cent of the group's business. Mr Meyer predicted that it would not be the group's last deal as the Dollars 100bn (pounds 61.3bn) a year speciality chemicals business continues to consolidate. 

The agreed offer marks the end of an increasingly bitter bid battle which burst into life over the last few days. Allied approached Ciba in an effort to find a white knight soon after Hercules had made a 155p a share, pounds 1.1bn, bid for the group at the end of November. Ciba only initiated detailed talks last weekend after Allied published its final defence document. Then on Monday the drama escalated after Hercules upped its offer to pounds 1.2bn. Ciba indicated it could come in with a higher bid, only for Hercules to increase its bid for the second time that day to pounds 1.34bn or 195p a share. 

Yesterday Ciba showed it had deeper pockets than Hercules when it unveiled a 205p a share bid. The US group promptly withdrew its offer. Ciba, which already owns 4.6 per cent of Allied, was building up its stake in Allied yesterday. 

Analysts were predicting that Hercules would now consider other targets and could still be eyeing up UK chemicals groups. 'Hercules has been thwarted more times now than it would care to remember and it wants to do a deal.' 

Mr Farrar admitted he had mixed emotions: 'I have been with this company for 17 years . . . and I am tinged by sadness. However, I have been delighted by the outcome which is tremendous result for shareholders and AlliedColloids.' Allied's shares rose 1.5p to 201p. 

Source: World Reporter (Trade Mark) - FT McCarthy.
World Reporter. All Material Subject to Copyright 

Lex Column: Cost of capital
Financial Times ; 21-Jan-1998

Cost of capital Switzerland's Ciba Speciality Chemicals has a low cost of capital so it is able to pay a price for Britain's Allied Colloids other bidders would find ruinous. Right? Well, not quite. To see why, consider that Ciba has a low cost of capital because it is based in a country with low inflation and interest rates. Ten-year Swiss government bonds yield 3 per cent while UK gilts yield 6 per cent. Add in a risk premium of, say, 4 per cent and it is true that a typical Swiss investment should earn a 7 per cent return. But 7 per cent is not the right figure a Swiss company should apply to investments in the UK. In making a cross-border investment, it runs the risk that sterling will fall. Indeed, the UK has higher long-term interest rates precisely because the market's best guess is that sterling will depreciate against the Swiss franc. 

Look at the matter from another angle. Anybody wishing to buy Allied Colloids could finance the acquisition by borrowing in Swiss francs or in even cheaper yen. But would the cost of capital have fallen? Far from it. Unhedged foreign borrowing can have calamitous consequences as many east Asian companies are now discovering. In short, in determining the appropriate return for a particular investment or acquisition, companies should choose a figure appropriate to where they are investing not where they are borrowing. As a result, no bidders have an advantage simply because of where they are based. 

Copyright © The Financial Times Limited 

22nd January - Huge offer wins the day for Europe


Investors Chronicle - United Kingdom ; 22-Jan-1998 

The transatlantic battle for control of Bradford-based speciality chemicals company AlliedColloids spread to Europe this week. Ciba Speciality Chemicals, a Swiss chemicals giant, launched what looks like a knockout blow with a pounds 1.42bn cash offer. US predator Hercules has retreated to Delaware, saying the price was too high.

'I think Ciba's drinking water needs treating with some of AlliedColloids' products,' said Phillip Morrish, an analyst at Nikko Europe. 'It's hugely overpaid.' The 205p per share offer is more than double Colloid's share price last November. Ciba said a Colloids director established contact with it immediately after Hercules' first bid last November. Face-to-face talks began on Saturday.

David Farrar, Colloids' chief executive, wished Hercules luck. Under the offer, Colloids will become a division of Ciba as the hub of a new water treatment business. Mr Farrar who is staying on to head up the division, whose headquarters are to be based in Bradford. By cashing in his shares and options he should receive around pounds 400,000.

He said: 'We first spoke to Ciba on Saturday. I was delighted to talk chemistry - in every sense. Ciba's culture and attitude to the environment is similar to Colloids' and it's looking to grow the company,' he said.

'My responsibility was to shareholders, and we have delivered excellent value. But I also had to consider Colloids' key asset: its employees.'  He declined to comment on suggestions that key staff would leave if Hercules had won and ejected Mr Farrar. It is believed that Ciba does not plan to blitz Colloids with an aggressive cost-cutting programme, as was expected of Hercules. 
Ciba is certainly paying a hefty price, but there is a slight suspicion the war may not be over yet. Although Hercules has pulled out, another US chemicals group is rumoured to be raising funds for a war chest.

The takeover battle escalated on Monday after Hercules raised its cash bid from 155p to 175p. Colloids' response - that it was discussing a recommended cash offer with Ciba of 182.5p a share - was the catalyst for Hercules showing the colour of its money. Literally within hours the US group produced a further offer of 195p, even though no formal bid from Ciba had appeared.

'They have been much more emotional than they should have been,' said one analyst of Hercules's offer. However, Ciba did back its words with hard cash by quickly spending almost pounds 60m to pick up some Colloids shares in the market.

'Ciba can achieve good synergies with Colloids,' said Dresdner Kleinwort Benson analyst Michael Eastwood.

Ciba chairman Rolf Meyer said that his group had been looking to buy a water treatment business for 18 months and therefore had been in a position as quickly as it did.

Source: World Reporter (Trade Mark) - FT McCarthy. 
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19th April - Ciba sounding optimistic despite heavy debt

AFX (UK) ; 19-Apr-1998

Ciba Specialty Chemicals Holding Inc chief executive Hermann Vodicka said the acquisition of Allied Colloids Group PLC will have a positive effect on earnings per share as early as 1999. 

In documents released after the group's annual meeting, Vodicka also said he expects the integration of Allied Colloids to show cost synergies of around 50 mln sfr per year. "These will be realised in the areas of purchasing, transport, administration and insurance," he said. 

Ciba SC said it plans to further increase its water treatments operations through the acquisition of Allied Colloids , with other activities of Allied Colloids complementing its existing businesses "extremely well." 

The company in March said it expects a decline in 1998 EPS due to costs related to the acquisition of Allied Colloids. 

Ciba SC said the Allied Colloids acquisition is being largely financed by debt, enabling it to reach its targeted debt-to-equity ratio. For 1998, Ciba SC said it has set itself further performance improvement targets. "In the light of the good sales development in the first quarter and barring unforeseen economic changes, the company is confident of meeting these targets," it said. 

The company also said shareholders approved the creation of a total of 10 mln shares in authorised and conditional capital. 

"Four million shares each of conditional and authorised capital will ensure flexibility to finance future acquisitions and facilitate active participation in the further consolidation of the specialty chemicals industry," it said. Furthermore, the company said it plans to use 2 mln shares in conditional capital for employee share and option programmes. 

On the current consolidation process, Ciba SC chairman Rolf Meyer said: "Companies with clear strategies, highly qualified management and the ability to enhance effectively innovation and operational performance with motivated employees, will continue to be successful in the turbulent area of specialty chemicals." 

Source: World Reporter (Trade Mark).
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