Hilton Itt Case 50

1. Why might Bollenbach have opened his bidding for ITT at $55 per share? What was his likely strategy?

The $55 value is on the lower range of the analyst eztimates, with a best guess estimate of $67.94. Since the value of the stock had been below $45 for 4 months, the offer of 55 dollars represented a 29% premium to investors. Bollenbach knew that management would be resistant of any attempt to be acquired, regardless of price, because of failed previous attempts to negotiate a friendly merger at year end 1996. The 55-dollar benchmark created an expectation for ITT management to achieve that level, or higher and the premium is enough to demonstrate to investors it is a real offer. Their support will be key as they will have a vote deciding the fate of the poison pill provisions which need to be removed to make the deal necessary.

As the deal moves forward, Hilton has a great deal of room for negotiation with investors because their best guess value of ITT's operations is sill 20% higher than their initial bid. By beginning with a low bid, Hilton may risk another competitor entering into the bidding, but their market analysis shows no such competition for such a large deal. Because Hilton still has the ability to offer a higher bid later, and has a 5% stake in the business which would benefit from such competition, Hilton’s low bid says they are not afraid of such a situation.

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original offer was well received on Wall Street, but not by the entrenched ITT management. In an unlikely scenario, the bidding company’s stock price actually went up 10 percent since this acquisition made so much sense for Hilton. The offer was made in January, when ITT’s stock price was around 43 dollars.

2. Why did Bollenbach not raise the bid between January and July?

There were a number of issues to address after Hilton's February 12th offer was rejected. Bollenbach knew that the next steps would be critical or the deal to go through. As such it was necessary to first research the investors and arbiters to have better negotiation tactics when the time comes.

The resistant board of directors had not changed in the mean time and would likely resist any offer, including the unlikely event of another contender entering bidding. If the price of the stock fell below the $55 range, or the Board of Directors changed Bollenback would likely aggressively negotiate with shareholders to close the deal as quickly as possible.

3.

ITT’s value has changed a lot over the recent events. Prior to any offer when ITT’s stock was trading at 43 dollars, the stand-alone value of its equity was 16.4 billion dollars. With the 55-dollar offer to ITT, the company’s value went up to approximately 21 billion. After the offer, the stock was trading at $63.50, which gave the total equity a value of 24.2 billion dollars.

With the proposed trivesture proposal, the company would lose synergistic value as three separate companies, compared to one large company. Examples of these include a number of overhead costs which gain economies of scale. In addition, ITT likely has synergistic revenues coming from the fact that it operates all three business segments. Analyst estimates indicate that the present value of the synergies whichh ITT stands to loose with the proposed trivesture have a NPV between $900 and $1300 million. This assumes a 4% growth rate and a WACC of 10%.

To find the NPV of ITT, we used fcf pro forma values discounted at Hilton's WACC. The investment will be financed by equity and debt. The equity will likely carry an implied cost of at or below that of ITT, which analysts estimate at around 11%. Hilton will likely have a lower cost of equity because of their better historical performance compared to ITT. The cost of debt, however, should be materially different. Standards and Poor just raised Hilton’s rating, which will give them a lower rate in return. Management believes it can acquire all of Itt's equity while maintaining a debt rating of BBB1. Because of the questions reguarding actual rates to use, a sensitivity analysis was conducted within a range of 7% to 11%, with current analyst estimates for ITT's WACC at 9.86% (weighted average of segmented businesses). Below are the FCF estimates relevant to the merger of ITT from Hilton's perspective, and a sensitivity analysis based on possible discount rates:

Value of ITT to Hilton

Lodging $ 355 $ 127 $ 102 $ 159 $ 213

Gaming $ (598) $ (11) $ 195 $ 213 $ 235

Education $ 19 $ 24 $ 27 $ 31 $ 35

World Directories $ 355 $ 127 $ 102 $ 159 $ 213

Trivesture Synergies 69 72 75 78 81

Merger Synergies 100 100 100 100 100

Terminal Value $ 14,114

Discount Rate Enterprise Value Debt Value of Equity Price Per Share

7.00% $12,409.12 $4,000 $8,409.12 $72.49

7.50% $12,140.72 $4,000 $8,140.72 $70.18

8.00% $11,879.52 $4,000 $7,879.52 $67.93

8.50% $11,625.30 $4,000 $7,625.30 $65.74

9.00% $11,377.85 $4,000 $7,377.85 $63.60

9.50% $11,136.93 $4,000 $7,136.93 $61.53

10.00% $10,902.37 $4,000 $6,902.37 $59.50

10.50% $10,673.95 $4,000 $6,673.95 $57.53

11.00% $10,451.49 $4,000 $6,451.49 $55.62

4. What do you expect the price of ITT’s equity would be if Hilton’s bid were to fail? Would it collapse to its pre-tender-offer trading value of around $44? Would it remain stable at its existing level of around $60, or would it rise to meet ITT’s share-repurchase price of $70?

If ITT can successfully avoid the hostile takeover by Hilton, ITT’s stock price would plummet to around its original value of the mid-to-upper forties. Wall Street is deeply in favor

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