The move to 5G wireless technology has not only sparked increased interest in chipmakers but also in firms sup[1]plying critical components used in fabricating semiconductors. Such suppliers count the likes of behemoths Intel and Samsung among their customers. Their sheer size gives them substantial negotiating leverage over their sup[1]pliers. Consequently, suppliers are taking steps to achieve the scale necessary to produce the increasingly sophisti[1]cated products demanded by chipmakers while holding prices at competitive levels.

On January 28, 2019, Entegris Inc. (Entegris), a provider of products used to purify, protect, and transport critical materials used in semiconductor chip fabrication, announced that it had reached a share for share exchange deal structured as a merger of equals with Versum Materials Inc. (Versum). The deal valued Versum, a provider of spe[1]cialty materials for semiconductor makers, at $4.3 billion. Entegris argued that the combination of the two firms would create a specialty materials firm with greater product breadth and world-class research and development ca[1]pabilities. However, the deal also had an unintended side effect.

The announcement caught the attention of Germanys Merck KGaA, a family-owned leader in health care and performance materials, which entered the fray in early February with an unsolicited all-cash $4.8 billion offer to buy Versum. After being rebuffed several times by Versum, Merck implemented a hostile tender offer in late February worth $5.5 billion.

Versum argued that synergy with Entegris was greater than with Merck; Merck countered that the Versum board was not acting in the best interests of its shareholders. Versums board announced on February 28, 2019, a rights plan giving all shareholders the right to purchase common stock at a heavily discounted price, triggered if a bidder bought more than 12.5% of the firms shares. Versums board could redeem the rights at $0.01 per right at any time. Any person or group owning more than 12.5% of the firms stock before the plan was introduced would be exempt. The plan was structured such that it would not be triggered by the merger agreement to combine Versum and Entegris.

Merck threatened a proxy contest to change the boards makeup to include members favorable to their offer and willing to rescind the rights plan. Both Merck and Versum solicited shareholders to support the list of directors they were supporting. Under increasing shareholder pressure, Versums board entered into negotiation with Merck. The two firms jointly announced on April 12, 2019, that they had reached an agreement in which Merck would buy all outstanding Versum shares at $53 per share payable in cash. The deal valued Versum at $5.8 billion; Merck would also assume Versums $700 million in outstanding debt. The deal was expected to be immediately accretive to Mercks earnings per share and to create $85 million in annual synergies by the third full year after closing.

Mercks revised bid constituted a 10.4% increase from its initial bid and a 28% premium to Versums closing price of $41.40 on February 26, the day before Merck announced its initial bid. According to the agreement with Versum, Entegris had 1 week to decide to submit a counterproposal but decided not to do so and walked away with a $143 million termination fee paid by Merck as the new owner of Versum. Shareholder reaction was swift. Merck shares fell by 1.95% to $21.93; Versum shares traded up slightly at $51.95. Entegriss shares rose by 2.79% to $40.37. The contest for Versum was over in less than 1 month, a product of hard bargaining by both parties.

Discussion questions:

1. Describe the takeover tactics used by Merck. Why were they employed, and were they effective?

2. What takeover defenses were employed by Versum in this case? Why were they used, and were they effective?

3. Discuss the arguments for and against hostile corporate takeovers.

4. What is the true purchase price Merck agreed to pay for Versum?

5. Why do the shares of acquiring companies tend to perform better when cash is used to make the acquisition rather than equity?

6. What does the reaction of investors to Mercks takeover of Versum and Entegris deciding not to revise its bid tell you about how they viewed the outcome?