Mergers and Acquisitions - the Hilton - Itt Wars

Irina Shaykhutdinova

Mergers and Acquisitions

11/23/2010

The Hilton-ITT Wars

1. What is the stand-alone value of ITT? Why is it relevant to look at the break-up value when valuing ITT? How does the stand-alone value compare to ITT's historical market value? What was ITT's value to Hilton?

According to the proposed tender offer by Hilton made on December 1996 the enterprise value of ITT is $10.76 billion (most likely outcome - best guess) including information services business (education and directories) and entertainment business. However, it is relevant to look at the break-up value of ITT because company is operating in different industries. In fact, Hilton Corporation did not intend to continue operations of any ITT services besides lodging and gaming businesses. It expected to create value for ITT's shareholders by monetizing and selling noncore assets of the company.

The ITT's share price before the offer was around $43 - 46.50. This means that ITT's equity was historically priced at around $5 - $5.4 billion. Whereas Hilton's offer of $55 per share suggested value of ITT's equity at $6.4 billion giving a premium of 29%. Moreover, Hilton's valuation suggested value for ITT equity at $6.78 billion giving a premium of 35%.

The value of synergies for Hilton was valued at $1.14 billion, which assumes value of ITT's equity with synergy at $7.9 billion giving ITT share price at $67.94 and a premium of 58% over ITT historical market price.

2. Why did Bollenbach open his bidding for ITT at $55 per share? What was his likely strategy? What were his tradeoffs in deciding on this bid? Why did Bollenbach not raise the bid between January and July?

Bollenbach's opening bid of $55 per share represented a 29% premium. Whereas, in Hilton's tender offer he accepts that a premium of about 50% over the current price for ITT shares would be appropriate, implying a bid price range of $65 - $70 per share. However, Bollenbach also believes into a history of poor shareholder-value creation by current ITT managers, who were more interested in cashing in than performance. Therefore, a low bid gave Bollenbach opportunity to raise the bid in the case of the bidding war and offer a higher bid right before the shareholder meeting in order to encourage ITT shareholders to replace the ITT board and vote in for the acquisition.

Bollenbach's strategy can be considered as risky. A low bid can lead to other existence of other bidders for ITT on the market. Moreover, a low bid would most likely stop ITT shareholders from voting to replace the board of directors as ITT management took the kinds of actions that Hilton management proposed to do after the merger. These actions already led to increase of ITT