CASE Airbus vs. Boeing Thomas Jonhson, the chairman and CEO of Airbus, Inc, was in his office looking forward to a relaxing weekend. It had been a good week. The company's annual results showed that 2023 had been the best year in the company's history. Sales and net profit were up over 9 percent from last year, and there was over $1.1 Billion dollars in the cash account to invest in the coming year. Suddenly the phone rang and it was Claris Oriol, his secretary. "Did you hear the latest news?" Claris asked. "No, what's up?"" Thomas replied, with a suspicious feeling that his evening wasn't going to be so relaxing after all. "Andrew Smith, head of Boeing, announced that he has bought 10 percent of our outstanding shares, and now he is making a tender offer for all the rest at 165." "I knew it!" Thomas spat out. "He was visiting us a few weeks ago, talking about whether we would sell the company to him. We rejected his offer because we want to stay independent, and he left not very satisfied by our answer. He's got some plan to restructure the company around a five-member board of directors instead of the 15 we have now. Now he's trying to do it anyway, whether we like it or not!" "Looks like it," Claris agreed, "so what do you think we should do?" "OK, call urgently Andres Colomba, the general operating officer, and Michael Scott (CFO) and tell them to get up here as soon as possible for an urgent meeting," Thomas directed. "Oh, and call also Amanda Ross from public relations to come, too; we're sure to have a press release about this." After about half an hour, those that Thomas had called began arriving, armed with pencils, papers, and calculators in anticipation of the coming meeting. Thomas, in the meantime, had managed to compile some financial data about Boeing, which he had summarized on a sheet of paper along with comparable data on his own company, Airbus, (see Figure 1). He passed the sheet around among the others. "OK, let's start with what we know," Thomas led off. "BOEING already has 5 percent of our outstanding shares, and is making a bid for the rest at 165" Figure 1 Financial Data "I hate to be the devil's advocate," Amanda said, thinking of the 1,000 shares he owned personally, "but that sounds like a pretty fair offer. What will happen if he succeeds?" Most of us will be out of a job, and this company will become just another card in Andrew Smith's poker hand," Thomas said acidly. "Our employees deserve better than that, so let's talk about what we can do to keep it from happening." "What about a poison pill?" Andres suggested. "We could take out a fair-sized loan based on our heavy cash position, and BOEING would have a tough time absorbing itjust look at the amount of debt they're carrying now!" Airbus Boeing Total earnings expected in the coming year ...........ccouveuenee 7 billion $ 1,9 billion Number of shares outstanding ......... 788,076,898 612,900,000 Earnings per share .............cc........ 1.24 $ -3.67 Priceearnings ratio............c......... 33.1 -38.3 Market price........cocvvveeeiiiiieicinnnnnn. 158 178 Book value per share.................... 634 $ -27.73 Growth rate before merger ............... 11.64% 11.72% Liquid assets (cash and equivalent). 16,469 million $12,691 million Total assets .......cooevvvveiiiiiiviiceeenen 118,871 million $137,012milion Total equity ........cccvvererereereieieeennes 17,730 million -$17,233 milion Dividend payout ratio.................... 37% 0% "That would probably work, but it's not very good for us, either," Amanda agreed. He was still thinking about the seven dollars a share profit to be made in a buyout. "So, how about someone else? You know, a white knight who would top BOEING's offer but would keep the structure of the company substantially the same as it is now." "I don't know who we could ask," Thomas said, "and besides that, the basic problem would probably still occurwe would lose our status as an independent entity." Michael had been working on some figures on hir pad, and he spoke up now. "There's another alternative," he said, "that I'm surprised you all haven't mentioned, given the financial status of the two companies." "What, what!" Thomas said. "Don't keep us in suspense!" "It's the Pac Man defense," he continued, unruffled. "What we do is launch a tender offer of our own for all of BOEING's outstanding stock. If it's successful, we not only thwart the takeover attempt but we gain a new business in the bargain." "Didn't Jeff Lorantry try that with Axis back in 2022?" Thomas asked. "As I recall, it didn't turn out very well for them." Airbus vs. Boeing Required "You're right, it didn't," Michael agreed, "and no one else has tried it since. But, just comparing numbers here between Airbus and BOEING, I think it might work out quite well for us. I've been doing some calculating here, and I think an offer to BOEING's shareholders of $ X a share would be accepted, and we could conclude the whole affair rather quickly." "I'm interested," Thomas said. "Tell you what, put your finance staff on it over the weekend and have them work up the proposal formally. Get the legal and accounting people to help you, too. In the meantime, Amanda, tip off the news media that we will have an announcement of our own shortly and draft up a public notice for BOEING's shares at $ X each. Don't release it yet, but be ready to on Monday. Oh, and be sure to include in it that I said the deal will not cause any dilution of Airbus's earnings per share. One last thing. Michael, draft an open letter to our shareholders for my signature, explaining what's happening and reassuring them that we will keep their company intact and prosperous. "Any questions? If not, let's get on itMr. Andrew Smith is about to get a surprise!" 1. BOEING's offer is 165 a share for each of Airbus's stock. How much cash it will need to have to buy the company? | b. Assume BOEING plans to borrow the money which is needed to make the takeover. If BOEING uses the amount of liquid assets presently on hand at Airbus to offset the amount it needs to borrow, what is the net amount it will have to borrow? c. Assuming BOEING does borrow the amount. (From question above) What will be total debt of BOEING after the purchase is completed? (In making your calculation, consider all forms of debt that the combined firm will have.) d. Now compute BOEING's debt-to-equity ratio. Given this ratio, do you think it is likely that BOEING will be able to obtain the necessary debt financing? e. Suppose BOEING decides to issue stock to raise the money needed for the purchase (the amount you computed in b above will be raised through a stock issue instead of by borrowing). How many shares BOEING should issue? (Assume the price at which it will be issued is $178 and disregard flotation costs.) f. If BOEING does raise the money by issuing new shares of its stock, what will be BOEING's Earnings Per Share after the purchase is complete and earnings are combined? g. Do you think BOEING's shareholders will be happy if this deal goes through? What about the old Airbus shareholders? h. Do you think that Airbus's stockholders are better off as a result of BOEING's attack and Airbus's Pac Man defense (assuming it succeeds)? i. Do you think your actions will produce more efficient companies, or you think it might destroy traditional values, European economy and employees' careers