Major events in the Cities Service Takeover and Corresponding Percentage Abnormal

Returns of the firms and their significance

1981: Anticipation of Cities Services takeover:

These below events suggested that a takeover may be going to happen in the near future.

1. There were merger negotiations between Conoco and Cities Services, but it was terminated.
2. 7.2% of Cities Services stock was purchased by Nu West Group Ltd. Later these stocks were
repurchased by Cities.
3. U. S. Steel was rumoured to be interested in purchasing Cities. But it also did not happen.
4. Mesa petroleum purchased 4% of Cities Service.

With this in background the analysis of Cities Service takeover are as follows:

28th May, 1982: There was a speculation that Mesa Petroleum intends to bid for Cities Services. Bid
price between $45 to $50 per share of Cities Service. This can be considered as an event which gave
an abnormal return of 5.23% for Cities Service. The t-value of 2.01 suggests that this event had a
significant effect on the return. Moreover, this gave Mesa petroleum an abnormal return of 5.91%
with a t-value of 2.43, which is also significant. So, market viewed this rumoured investment to be a
positive net present value event.

1st June, 1982: In a defensive move Cities Service bid $17 a share for 51% of Mesa petroleum. This
was done at a premium of 1.5% based on the closing price of Mesa on May 28, $16.75. Also, Mesa
gave a proposal of a friendly merger to Cities Service for $50 a share for 45.9% of Cities and $50 of
Mesa securities for the remaining shares of Cities. But these announcements did not have a
significant return (t = 6.87), the abnormal return being 3.56% for Cities and a significant (t = 6.87)
abnormal return for Mesa of 16.69%. The large significant positive abnormal return can be
attributed to the increase in probability that Mesa would itself be a target for takeover.

7th June, 1982: Mesa bid $45 a share for 15% of Cities Service. This event gave a negative abnormal
return of -4.76% for Cities. This happened because market deemed this tender offer to be less
favourable to Cities shareholders than the offer on 1st June.

8th June, 1982: Cities announced a friendly merger bid of $21 a share for 51% of Mesa and 0.45
shares of Cities for the remaining of Mesa. Based on closing price of Cities $36.25 on June 7, the 0.45
shares of Cities had a value of $16.31. This event gave insignificant positive AR for Mesa and
insignificant negative AR for Cities.

17th June, 1982: Gulf Oil announced acquisition of Cities Service for $63 a share for 51% of Cities and
$63 of Fixed Income securities for the remaining shares. This event had a dramatic effect on the
share prices of Cities Service and Gulf Oil. Cities Service share price rose to $53.125 from $15.375.
The AR was 43.38% with a t-value = 11.81, very significant. Gulf Oils AR was negative -14.19% with a
t-value = -5.48. The net equity value change for both the firms were $338 million, which represents
the expected value of synergy between the two merging firms.

21st June, 1982: Cities Service and Mesa terminated their hostile bids and related litigation. Cities
repurchased its stocks from Mesa at $55 a share and Mesa agreed not to attempt a hostile takeover
of Cities in next five years. This event generated a insignificant positive AR for Cities, 0.95% but Mesa
suffered significant loss of 15.83%.