AkzoNobel

1)  How did the stock prices of AkzoNobel and PPG react to the various events shown in the
case? Calculate the abnormal return to the data in Exhibit 9.

For both AkzoNobel and PPG, stock prices are scattered in graph 1. The black lines indicate the times
at which the various events took place. The graph shows the effect of those effects in terms of
changes in both corporations’ stock prices. Table 1 shows the abnormal return for AkzoNobel relative
to the AEX, the Dutch stock market index, and STOXX 600 Chemicals, a European stock index
including companies with their primary source of income in the chemicals sector. The abnormal
return for PPG Industries is calculated relative to the S&P500, a market index consisting of the
weighted average of the 500 largest American companies, and S&P500 Chemicals, focused on
companies in the American chemicals industry. In our opinion, the abnormal returns of both PPG and
AkzoNobel relative to their industry indices gives a more accurate representation of the effects of the
various events rather than the abnormal returns relative to both of their more general country
market indices. Since both firms have their primary source of income in the chemicals sector,
AkzoNobel an PPG are compared to more similar companies in terms of operational activities and
similar external factors. The choice of different regional indices implies a stronger cohesion in cultural
and legal factors that affect similar companies. We do include both abnormal returns as an extra
benchmark when analyzing the stock price changes.
We have calculated the abnormal return for each event using the formula below, where the subscript
“-1” stands for the period previous to the current period in which the abnormal return is calculated.
Abnormal Return=Realized Return−Expected Return
P share AN −P share AN−1 AEX 0− AEX −1
Example :α = −
Pshare AN−1 AEX −1
The first event in the attempt of a public takeover of AkzoNobel by PPG is PPG’s first proposal. PPG
was offering €54 in cash and 0.3 PPG shares per AkzoNobel share. This sums up to €83 per share,
which was 28.84% higher than AkzoNobel’s closing price on 8 th March.
On the same day as the first proposal, AkzoNobel announced a review of strategic options for its
Special Chemicals business. This could have also led to a side-effect of the stock price changes. On 9 th
March, the share price of AkzoNobel increased with €8.37 to €72.79. The abnormal return relative to
the AEX was 0.1201 and relative to STOXX 600 Chemicals 0.1229. The share price of PPG Industries
decreased with $3.90, ending on $102.93 that day. The abnormal return for PPG relative to the
S&P500 was -0.0373 and relative to S&P500 Chemicals -0.0333.
On 22nd March 2017, AkzoNobel rejected the second proposal by PPG. This revised proposal had
been sent two days earlier. PPG offered €90 per share, of which €57.50 would be paid in cash plus a
payout of 0.331 shares of PPG common stock. On this day, AkzoNobel’s share price decreased with
€0.82 to €75.78 and had abnormal returns of -0.0028 and -0.0074 relative to the AEX and STOXX600
Chemicals. Abnormal returns for PPG were -0.0041 relative to the S&P500 and -0.0026 relative to
S&P500 Chemicals, partly due to a decrease in PPG’s share price of $0.23 to $104.25.
On 10th April, Elliott Management Corporation, owning over 3% of AkzoNobel’s shares, and six other
investors wrote a statement to AkzoNobel, requesting an EGM to dismiss the chairman of
AkzoNobel’s supervisory board. The investors claimed that AkzoNobel’s management should at least
meet PPG and discuss their proposal, as they refused until that moment. Furthermore, the great
majority of AkzoNobel’s shareholders did want both AkzoNobel and PPG to engage. A day later,
AkzoNobel released a press announcement in which they stated that PPG and Elliot had shared
sensitive information and both had to clarify their relationship. On top of that, AkzoNobel reassured
its complete trust in their supervisory board chairman. As of AkzoNobel’s announcement, their share
price decreased with €0.50 to €79.10. Abnormal returns relative to the AEX and STOXX600 Chemicals
were -0.0048 and -0.0023. The share price of PPG increased with $0.27 on that day, ending on
$106.06. Abnormal returns relative to the S&P500 and S&P500 Chemicals were 0.0040 and 0.0065.
A new strategy was presented by AkzoNobel on 19 th April. By splitting the firm in two different
companies, it believed that shareholder value would be created whilst keeping risks uncertainties or
social costs lower. The share price of AkzoNobel increased with €0.21, ending that day on €78.53. Its
abnormal return was -0.0004 relative to the AEX and 0.0037 relative to STOXX600 Chemicals. PPG’s
share price increased with $0.26 to $105 and abnormal returns were 0.0042 relative to the S&P500
and 0.0032 relative to S&P500 Chemicals.
After the first two proposals, PPG made a third and final attempt to buy all of AkzoNobel’s shares.
PPG was willing to pay €96.75 per AkzoNobel share, paying €61.50 in cash and 0.357 shares of
common PPG stock. On this day, 24th April, AkzoNobel’s share price increased with €3.73 to €81.93.
The abnormal returns for that day were 0.0252 relative to the AEX and 0.0181 relative to STOXX600
Chemicals. PPG’s share price increased as well, with $2.07 to $108.01. Relative to the S&P500 and
S&P500 Chemicals, abnormal returns were 0.0087 and 0.0065.
On 8th of May, AkzoNobel rejected the third proposal. In their believes, its own strategy would lead to
more growth and value creation. AkzoNobel’s share price decreased with €2.55 to €76.85. The
abnormal return relative to the AEX was -0.0341 and -0.0254 relative to STOXX600 Chemicals. The
share price of PPG decreased with $2.13, ending on $108.43. Abnormal returns were -0.0193 and
-0.0096 relative to the S&P500 and S&P500 Chemicals.
One day later, Elliott requested a corporate enquiry into AkzoNobel’s actions regarding the bid and
tried to dismiss AkzoNobel’s chairman through an EGM as well. Elliott filed a petition with the
Enterprise Chamber in Amsterdam, a division of the Court of Appeal specialized in corporate law. On
29th May, the Enterprise Chamber denied the request on an EGM and delayed their judgement on the
corporate enquiry. That day, AkzoNobel’s share price increased to €76.37, an increase of €0.16. It
had abnormal returns of 0.0027 relative to the AEX and -0.0002 relative to STOXX600 Chemicals. Due
to Memorial Day, the markets in the US were closed that day
(https://www.stockinvestor.com/30380/stock-market-holidays-2017/)
After multiple attempts by PPG, they announced the withdrawal of its proposal on 1 st June. PPG did
request an extension to the deadline, trying to prevent a cooling-off period of six months. The AFM
rejected this request, whereby PPG concluded not to pursue its proposal. The share price of
AkzoNobel increased that day by €0.51, ending on €75.02. Abnormal returns were 0.0012 and
-0.0013 relative to the AEX and STOXX600 Chemicals. PPG’s share price increased as well, rising with
$2.80 to $109.16. Its abnormal returns relative to the S&P500 and S&P500 Chemicals were 0.0188
and 0.0156.
One and a half month later, on 19th July, AkzoNobel’s CEO Ton Buechner stepped down due to health
issues. AkzoNobel’s share price increased by €0.20 on that day to €78.15. the abnormal return
relative to the AEX was -0.0092 and -0.0038 relative to STOXX600 Chemicals. The share price of PPG
increased by $0.65 to $113.60. Abnormal returns were 0.0004 and -0.0059 relative to the S&P500
and S&P500 Chemicals.
After AkzoNobel’s CEO stepped down, Thierry Vanlancker, acting Head of Specialty Chemicals since
2016, would become the new CEO. He improved his relationship with Elliott and several other
shareholders. This resulted in his appointment as CEO. Before this had been realized, a truce
between AkzoNobel and Elliot was agreed upon. On this day, 16 th August, AkzoNobel’s share price
increased with €0.65 to €77.22. The abnormal returns were 0.0023 relative to the AEX and -0.0014
relative to STOXX600 Chemicals. PPG’s share price increased with $0.80, ending on $103.74 on that
day. The abnormal returns were 0.0064 relative to the S&P500 and 0.0013 relative to S&P500
Chemicals.
The last event included in the data provided was on 8 th September. On that day, Thierry Vanlancker
was appointed as CEO of AkzoNobel on an Extraordinary General Meeting. Moreover, AkzoNobel
released a press announcement stating that their CFO wat stepping down on health ground. Later
that day, measures to ensure delivery of 2020 financial guidance was released as well. AkzoNobel’s
share price decreased with €0.50 that day, ending on €78.10. Abnormal returns relative to the AEX
was -0.0063 and -0.0071 relative to STOXX600 Chemicals. PPG’s share price decreased with $0.42 to
$103.59. Abnormal returns were -0.0026 relative to the S&P500 and -0.0056 relative to S&P500
Chemicals.
2) According to the forecasts in Exhibit 7 and the following assumptions, was the management
correct that the PPG offers undervalued AkzoNobel?
All of PPG’s offers were respectively €83, €90 and €96.75. To see if PPG undervalued AkzoNobel, we
need to compute the value per share of AkzoNobel and compare this to the first two offers of €83
and €90 per share. To do so, we basically need to know how much AkzoNobel is worth. First, we
compute the equity cost of capital, using the CAPM Method:
Equity cost of capital=Riskfree Rate+ β Equity∗Market Risk Premium
Equity cost of capital=0.48 % +1.125∗5 %=6.11 %
Using the equity cost of capital and all other data given, we can now compute the WACC. To compute
the WACC, we assume that AkzoNobel acquires its target D/V ratio of 20%:
Equity∗E Debt∗D
WACC=Cost of +Cost of ∗(1−tax )
E+ D E+ D
WACC=80 %∗6.11 %+ 20 %∗1.70 %∗(1−27 %)=5.13 %
The WACC is used for calculating the present value of all free cash flows. Table 2 shows the present
value of the forecasted free cash flows in the case study. Over the first three years, present value is
equal to € 2,720.72.
From year four and onwards, we compute the present value using the growing perpetuity formula.
Since there is no further information regarding free cash flows or a relevant growth rate, we will
assume a growth rate that we can use for the perpetuity formula. We do know that Sales Growth is
assumed to be 2.0% from year five and onwards, which could be a quite accurate growth rate for
AkzoNobel. Knowing that other variables used to calculate the free cash flows from sales are
forecasted to grow at a constant rate as well, we ended up with an estimated growth rate of 2%. We
assume that this growth rate will be constant till infinity. Using this growth rate, we can calculate the
perpetuity:
€ 1,036
Perpetuity at time 3= =€ 33,075.79
5.13 %−2 %
Discounting the perpetuity to year 1 gives you a present value of €28,464.46. Together with the
present value of the first four years, the total value of the AkzoNobel is:
Value AkzoNobel=€ 3,568.76+ € 28,464.46=€ 31,185.18
We now have the enterprise value of AkzoNobel, but for PPG to become 100% owner of the
company, they only have to pay for the equity value of AkzoNobel. If PPG wanted to takeover
AkzoNobel without any debt obligations, enterprise value would be significant. However, this would
not be the most efficient capital structure decision for AkzoNobel. Still assuming the 80% of
AkzoNobel’s value consists of equity and taking its cash, stated on the balance sheet, in account:
 Value∗E
Equity value=Enterprise + cash=€ 31,185.18∗0.8+€ 1479=€ 26,427.14
V
In 2017 AkzoNobel has 249 million shares outstanding. The value of AkzoNobel per share is:
€ 26,427.14
Value per share= =€ 106.13
249
Assuming our growth rate assumption is correct, all the offers from PPG indeed undervalued
AkzoNobel.
3) According to the forecasts in Exhibit 8, would AkzoNobel’s standalone plan (selling its Specialty
Chemicals business) create more value to shareholders than the PPG offers?
The third offer of PPG was 96.75. This offer is based on the forecasts if AkzoNobel sells its Specialty
Chemicals. We first compute the present value of these free cash flows. We assume that selling
Specialty Chemicals does not change the D/E ratio. Thus, we can use the same WACC that we used in
question 2, which was 5.13%.
The present value of the first three years using the WACC of 5.13% is € 2,158.35. Now for years 4 and
onwards we again use the growing perpetuity formula with the same estimated growth rate of 2%
which we also used for question 2.
€ 651
Growing perpetuity at time 3= =€ 20,784.11
5.13 %−2 %
If we discount this perpetuity this to time 0 we get an amount of € 17,886.45.
The total present value of the free cash flows is € 2,158.35+€ 17,886.45=€ 20,044.81 .
This is the enterprise value, if we compute the equity value we get:
Value∗E
Equity value=Enterprise + cash=€ 20,044.81∗0.8+ € 1479=€ 17,514.85
V
The sale of Specialty Chemicals will be worth 10.1 billion, and its transaction is expected to close
before the end of 2018. Between March 2017 and December 2018 are 21 months. So, if we discount
the the sale of Specialty Chemicals by 21 months we first need to compute the monthly discount
rate:
5.13 %
Monthly discount rate= =0.43 %
12
Using this monthly discount rate and discounting the sale of Specialty Chemicals by 21 months the
present value of the sale is 9,234.19 million.
If we compute the value per share we need the present value of the free cash flows and the sale of
Specialty Chemicals, and divide them by the number of shares:
€ 17,514.85+ € 9,234.19
Value per share= =€ 107,43
249
This value is higher than the offer of € 96.75 per share from PPG. Selling Specialty Chemicals creates
more value to the shareholders than taking the offer from PPG.
4) Considering the synergies forecast by PPG, what is the maximum price it could pay for
AkzoNobel?
According to the case study, PPG claimed that synergies of at least $750 million per year would arise
due to a merger between both companies. These yearly income flows need to be discounted, but no
information regarding a combined entity is available. Thus, we need to forecast a WACC to discount
the synergies.
As discussed in previous questions, AkzoNobel’s WACC is equal to 5.13%. PPG’s WACC is equal to
6.67% (https://www.gurufocus.com/term/wacc/NYSE:PPG/WACC-/PPG-Industries). We assume that
the possible after-merger WACC is the average of the two pre-merger rates. Since PPG is the larger of
the two firms, one could say that the WACC should lean more towards 6.67%, but one could also
argue that the WACC will end up lower. A larger company could benefit from a lower cost of debt.
The larger a company becomes; the more debt issuers expect them being able to pay off their debts.
It leans towards the principle of “too big to fail”. The risk of not being able to repay debts becomes
smaller. The new after-merger WACC is:
WACC AkzoNobel +WACC PPG
WACC=
2
5.13 % +6.67 %
5.9 %=
2
Present value of all future synergies is:
750
PV synergies=12,711,86=
0.059
The maximum price PPG could pay for AkzoNobel is the value of AkzoNobel together with the
premium consisting of the present value of the synergies. The value of AkzoNobel is calculated in
question 2, which is €106.13. The present value of all synergies is $12,711.86 million. The prevailing
exchange rate was $1.0726/€ at that time, valuing the synergies at €11,851.45 million. The premium
per share is:
€ 11,851.45
=€ 47,60
249
The maximum price PPG could pay is:
€ 106.13+€ 47,60=€ 153.73
5) Which methods did AkzoNobel use to defend itself? Could they have used other methods?

AkzoNobel defended itself by not selling the company, because in their believe, this was best for
their stakeholders. The first offer was turned down by Buechner and the chairman of AkzoNobel’s
supervisory board, Antony Burgmans. They motivated their decision, stating: “The offer was rejected
arguing that it was not in the interests of stakeholders, that the risks were too high, and the offer
price undervalued AkzoNobel”. Whilst saying that the offer was rejected due to the lack of interests
of stakeholders, preventing a takeover is not good for stakeholders as well. Preventing a takeover
costs money, which could be considered when choosing a defence method. By making this
statement, AkzoNobel tends to make PPG look unsympathetic. Referring to the takeover as hostile,
they try to get the share- and stakeholders to choose AkzoNobel’s side in not wanting to sell the
company.

AkzoNobel also argued that the risks were too high. The first risk consists of the composition of the
proposal. PPG offers their shares as a part of the payment, to which AkzoNobel argues that the
potential of PPG’s shares is small. Another risk is the high leverage of the combined companies. This
also implies that the shareholders have more risk of not getting paid after the merger. Besides these
risks, AkzoNobel also stated that there would be a pension risk for their pensioners. They stated the
following: “The transaction will cause very substantial issues which may have a material adverse
impact on both the financial situation of the company and our pensioners. That is certainly not in the
best interest of AkzoNobel and its stakeholders”. It is obvious that AkzoNobel rejects the offer with
each argument representing that it would be bad for stake- and shareholders[ CITATION Pal19 \l
1043 ].
On the same day that AkzoNobel rejected the first proposal, they announced that they wanted to
make the Specialty Chemicals business an independent listed entity. This is a method which could
make it harder for PPG to takeover AkzoNobel. In this case, PPG needs to buy two entities if they
want to own AkzoNobel as a whole. AkzoNobel could demand a higher price and the two entities can
fight the takeover propositions together. They probably hope PPG would give up because of these
difficulties.
AkzoNobel also rejected the second proposal, with similar arguments as they had used before.
Another argument here was the fact that “the Revised Proposal does not meaningfully address our
concerns of a significant culture gap between both companies and how any issues arising from this
would be addressed”. AkzoNobel is a Dutch company with high importance to the Dutch people and
its economy. According to AkzoNobel, PPG did not pay enough attention to this with their offers.
Later that day, AkzoNobel announced to hold an investor event with the intention of providing
updated financial guidance. Increasing debt is generally seen as a strategy that in the short term
helps the company avert a takeover, but over time could hurt shareholders. The goal is to create
concern regarding the company's ability to make repayment after the acquisition is
completed[ CITATION Pal19 \l 1043 ]. This method is also referred to as recapitalization. The
company changes its capital structure to make itself less attractive as a target[ CITATION Ber17 \l
1043 ].
Another rejection reason from AkzoNobel is the fact that “the Revised Proposal does not address the
uncertainty created by the significant anti-trust implications of the combination of PPG and
AkzoNobel and the large negative impact thereof on AkzoNobel's business”. They went for a defence
method which is called ‘regulatory approval’. All mergers must be approved by regulators, monopoly
gains from takeovers and the use of antitrust regulations will limit the change of regulatory approval[
CITATION Ber17 \l 1043 ].
In the third rejection letter AkzoNobel announced that they would pay-out a special dividend, as well
as a vast majority of the net proceeds from the separation of Specialty Chemicals. This is also a
method of recapitalization to make AkzoNobel look less attractive to PPG. The restructuring itself can
produce efficiency gains, often removing the principal motivation for the takeover in the first
place[ CITATION Ber17 \l 1043 ].
The last defence method that has been used is the ‘white knights’ method. AkzoNobel sold their
Specialty Chemicals business to the Carlyle Group and GIC. This method’s goal is selling the company
to another, friendlier company[ CITATION Ber17 \l 1043 ]. And another effect is that this makes it
harder for PPG to own AkzoNobel as a whole. They have to negotiate with two different companies
and this will make it harder to buy.
The last part of the case mentioned that AkzoNobel also considered a share buyback and capital
repayment, but these options had several limitations. The biggest limitation was the risk of getting a
lower stock price after those actions. The shareholders wouldn’t be pleased with this and a capital
repayment has to be combined with a reverse stock split. This is a form of ‘triggered option vesting’.
There are other defence methods that AkzoNobel could have used. One is the ‘poison pill’ method.
With this, AkzoNobel would give existing target shareholders the right to buy shares in the target at a
deeply discounted price once certain conditions are met[ CITATION Ber17 \l 1043 ]. Another method
is getting a staggered board. Instead of having the entire board come up for election at the same
time, a staggered board of directors means that directors are elected at different times for multiyear
terms[ CITATION Pal19 \l 1043 ]. AkzoNobel also could have used a ‘golden parachutes’ method.
Golden parachutes are lucrative severance packages inked into the contracts of top executives that
compensate them when they are terminated[ CITATION Hay19 \l 1043 ]. Another way of stopping the
takeover is getting a ‘voting rights plan’. This clause can prevent stockholders with for example less
than 10% from voting on the takeover bid. They could also require a supermajority of votes, for
example 80%, to approve the merger. Another method is the ‘greenmail option’ method. This is
when a targeted company agrees to buy back its shares from the prospective raider at a higher price
in order to prevent a takeover[ CITATION Pal19 \l 1043 ]. AkzoNobel could have also made an
acquisition itself. They could have made some stock swaps with another company. This makes
AkzoNobel harder to takeover because of the dilution of their ownership percentage [ CITATION
Pal19 \l 1043 ].
https://www.stockinvestor.com/30380/stock-market-holidays-2017/
https://www.amsadvocaten.com/dictionary/corporate-law/enterprise-chamber-of-the-amsterdam-
court-of-appeal/
https://www.gurufocus.com/term/wacc/NYSE:PPG/WACC-/PPG-Industries
Appendix:

Graph 1:

Table 1:

Table 2: