Circon (A) Harvard Case Solution & Analysis

Q1. What motivated Circon’s Chairman and CEO Richard Auhl? Were his financial incentives strongly aligned with those of the shareholders?

Mr. Richard Auhllis a man of principle who believes there is no such thing as a hard situation there are only weak people and if you can make the people strong no situation will ever be harder, Auhll liked challenges he didn’t like being forced down, he had an innovative mind and he liked to do something new and different every time, having completed his engineering degree and working in a relevant company he switches to MBA and starts to work in a technology company.Auhll has a soft corner for lost causes, Circon was a lost cause which he had picked up and started work on,and from coal he made it into a gem.

ACMI as well as Cabot falls into the same category as that of Circon Inc. he had an undoubting self-confidence no matter what the task he believe with hard work, innovation, commitment and trust among employees, customers and suppliers will result in success but unfortunately Cabot was more of a challenge for Auhll but till the end he never gave up on it.

His approach and belief, that he cannot be wrong had led him on a different path as that of the shareholders, the takeover bid was within the interest of the shareholder for them to enjoy heavy rewards for their holdings, butAuhll was not giving up him company without a fight short term gains were not the targets he was in pursuit of long term sustainable competitive advantage where as shareholders wanted short term benefits, hence the difference in interest.

2. What mechanisms did Auhl put in place in response to the telephone call from USSurgical’s Leon Hirsch?

On 1st August 1996 Mr. Auhll received the telephone call from Leon Hirsch through which he made aware that US Surgical’s are on the verge of making a hostile takeover on his company Circon Inc. Auhll taking precautionary measures to be able to overcome the hostile takeover bid from US surgical implements the Poison Pill strategy and the Silver Parachute strategy, the aim of these strategies is to make the company less attractive for acquisition.

Under the Poison Pill strategy a special resolution is passedin, the board meeting, under this resolution the executives take charge and right of negotiations to be conducted with the takeover party rather than the shareholders, once this has been conducted then the executives do everything within their power to make the company less attractive usually there are two means through which it is conducted within the poison pill strategy that are the flip-in and the Flip-over strategy. Under these strategies the management, releases shares at a discounted price to the shareholder and or signs a takeover deal stating after acquisition they would have to provide shares at a discounted price, in both cases reducing the benefit of the acquiring company but increasing the benefit of the current shareholders.

The Silver Parachute strategy basically covers the current employees of the company, ensuring if after the takeover they are made redundant, they would be paid heavy compensations which lead to a heavy fixed cost for the acquiring company which creates doubts for the acquiring company, the payoffs also include high salaries, bonuses and other incentives etc.

3. Did Circon’s poison pill represent a strong or a weak barrier to a hostile takeover? If ahostile bidder had triggered the poison pill, what precisely would have happened to Circon’sprice and the hostile bidder’s stake in the company?

The Poison Pill represents a strong barrier against the hostile takeover, as within this strategy the management will either implement the Flip-in or the Flip-over strategy and might even implement both the strategies................

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