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Hostile takeovers hit record as market swoons

  Hostile takeovers have more than doubled to a record level in the United States so far this year, boosted by falling stock prices and weakened corporate defenses.

 

US hostile deal activity has reached a record high of $211 billion so far this year, up 140% from a year ago, according to Thomson Reuters data. “Given the volatility in the equity markets and the number of companies trading at distressed levels, companies with strong balance sheets are trying to be opportunistic and go after targets that may be temporarily depressed.” said Stefan Selig, Bank of America Corp’s vice chairman of global investment banking and head of global mergers and acquisitions. Unfriendly deals, including unsolicited and hostile deals, accounted for 22.1% of all US mergers so far this year, compared with 12.1% for all of 2007, according to FactSet MergerMetrics.

Unsolicited deals include any takeover offer made without negotiations or without an auction being held for the target. A hostile bid means the suitor has bypassed the target company’s board and taken its takeover offer directly to shareholders. The uptick in hostile and unsolicited offers comes as buyers with strong balance sheets and cash-on-hand are feeling pressure to find new growth in the weak economy, so they turn to takeovers to find creative ways to build shareholder value, according to Christopher Ventresca, co-head of North American mergers and acquisitions at JP Morgan Chase & Co. Unsolicited deals this year crossed international boundaries as foreign companies such as InBev NV, emboldened by the weak US dollar, grabbed a foothold in the United States.

InBev ultimately won the hand for US brewer Anheuser-Busch Cos Inc for $60.4 billion after sweetening its bid to $70 per share, up from its original unsolicited offer of $65 per share. Unsolicited bids also crossed a broad range of sectors, such as healthcare, energy and power, technology, retail, real estate and consumer products, and investment bankers see no slowdown in the diversity or volume of such activity. “Companies with strong balance sheets and access to capital will continue to put that money to work in a strategic way,” said Jeffrey Stute, co-head of North American mergers and acquisitions at J.P. Morgan. In addition to the weakness in the US stock market, with the Dow Jones industrials down over 16% this year, hostile bidders gained an advantage in recent years after many companies lowered their takeover defenses in the name of good corporate governance.

Many companies have dropped shareholder rights plans -- also known as poison pills because their provisions can make an unwanted takeover much more difficult -- and changed policies for electing directors, making it easier for hostile suitors to succeed, bankers said. “The activist movement and the response by many companies to create more shareholder-friendly features -- such as the declassifications of boards, reductions in the numbers of poison pills -- makes hostile bids more likely to be successful,” Selig said.

The volatility in the stock market and several big-ticket deals helped the US outpace other regions in hostile activity this year. For the first nine months of this year, hostile deal activity in Europe only totaled $104 billion, down from $304 billion a year ago, according to data from Thomson Reuters. The record for any nine-month period was set in 2006 by Europe, with $359 billion in hostile dealmaking.

 

DIFFERENT SUCCESS RATES

History shows that most unsolicited suitors have successfully clinched a deal only after sweetening their bid. The most high-profile exception was media company News Corp, which last year won the hand of publisher Dow Jones & Co Inc without raising its $5.6 billion offer. So far this year, 70% of hostile offers were sweetened, up from 57.1% in all of 2007, according to FactSet MergerMetrics. For example, Oracle Corp, the world’s third-largest software maker, in January won a three-month-long campaign to buy BEA Systems Inc by raising its bid for the company by 14% to $8.5 billion.

The percentage of sweetened hostile offers that ultimately won board approval stood at 28.6% this year, FactSet MergerMetrics found. Sellers can often be slow to accept the reality of a current, lower stock price, according to Bob Filek, a partner with PwC Transaction Services. “For buyers, they look at the market and they are taking a risk going into uncertain times so they don’t want to pay a premium based on the past. They are looking at today and the future,” Filek said.

As the stock market continues to grapple with the credit crisis, companies will have to weigh whether to take an unplanned, uninvited offer against the potential growth they may be able to show on their own. “Shareholders and boards have to weigh whether this is a temporary dislocation in valuation or if current valuations represent a reflection of their long-term prospects,” Selig said.

How do companies ward off unwanted advances?

“The best defense is always a strong stock price. Classified boards always make it more difficult for hostile acquirers, but in the end of the day shareholders are the owners of companies, so they get to make this decision,” Selig said. (Reuters)