Unsolicited bidders rarely win with opening bid


InBev NV may hold firm with its $46.3 billion offer for Anheuser-Busch Cos Inc, but history indicates that few unsolicited suitors successfully clinch a deal without sweetening their bid.

“In hostile deals reaching a definitive agreement, it is very likely that the initial bid will be increased. Only a small percentage of hostile deals that close do so without such an increase,” said Allen Michel, professor of finance and economics at Boston University's School of Management.

The most high-profile exception was media company News Corp, which won the hand of publisher Dow Jones & Co without sweetening its $5.6 billion offer.

“The thinking of most bidders - with (News Corp Chairman Rupert) Murdoch being the stunning exception - is that they need to set aside some money to do an increase,” said Columbia University Law School Professor John Coffee.

“Murdoch wanted something so badly that he put a price out so high that no one could match it. He may have overpaid even,” Coffee said.

Yet InBev, the world's second-largest brewer by volume, has said its $65-per-share cash offer represents the full and fair value for Anheuser-Busch.

The offer marks an 18% premium over Anheuser-Busch's record-high stock price in October 2002 and would put the valuation for Anheuser-Busch within the average price range for other beer-industry deals, and above the company's recent cash-flow trading value.

InBev Chief Executive Carlos Brito said last month that $65 per share was the top price the Belgian brewer would be willing to pay. Brito said $65 per share was “a great price, full price, that's it.”

InBev has said it prefers a friendly, negotiated transaction, but has laid some legal groundwork to challenge Anheuser-Busch's board in preparation for a potential hostile bid.

InBev and Anheuser-Busch could not be immediately reached for comment.

The amount of unsolicited or hostile takeover bids has increased as weak stock prices have enticed large corporations with the luxury of cash on their books or the ability to raise funding despite tight credit markets.

So far this year, unfriendly offers accounted for 21% of all US mergers and acquisitions of publicly traded companies, according to research firm FactSet MergerMetrics.

That's an increase from previous years, when unfriendly deals represented 12% of US merger activity in 2007, and 14% in 2006, FactSet MergerMetrics said.

The bulk of those unsolicited or hostile bidders, however, had to raise their offer price to get the deal done.

Only 3% of deals in which the offer price remain unchanged actually reached a definitive merger agreement this year, FactSet MergerMetrics said. That compared with 9% a year ago.

Yet, when an unfriendly suitor increases its offer, it has a much better chance of winning its prey, research showed.

Almost 67% of sweetened, unfriendly bids led to a definitive agreement so far this year, and 40% of increased offers led to deals last year, FactSet MergerMetrics said.

InBev may try to follow News Corp's success and stick with its original price.

It would be premature for InBev to raise the offer now unless Anheuser-Busch's board showed some willingness to negotiate, Coffee said. Anheuser-Busch is too large for a white knight suitor to acquire it, which reduces pressure on InBev to hike its offer, he said.

“There's no reason to bid against yourself,” Coffee said.

Anheuser-Busch last week rejected InBev's offer and set out a plan to cut $1 billion in costs and improve earnings in a bid to convince investors that InBev's overture was too low.

“You haven't seen BUD launch any real strategy besides cutting costs. You have to get the stock price up to the offer price or you need to set out a strategy that will inspire confidence or you'll have a tough time defending against a bid,” Coffee said.

Anheuser-Busch's stock price failed to rally on the company's cost-cutting moves and the stock remains below InBev's offer. Shares of Anheuser-Busch were down 42 cents at $61.52 in Wednesday trading on the New York Stock Exchange.

“Clearly, US investors do not expect the company (Anheuser-Busch) to be sold above $65," Bernstein Research analysts said in a report.

“This could imply that investors see significant political and legal barriers to a deal or that they believe that $65 is just about enough. We tend to believe the latter.”

One of Anheuser-Busch's own financial advisers, Goldman Sachs, has pegged a lower 12-month value on the stock.

In May, after InBev's potential bid for Anheuser-Busch appeared in media reports, Goldman Sachs reaffirmed its 12-month price target of $49 for Anheuser-Busch's stock.

Of course, a 12-month price target doesn't reflect a company's long-term growth potential, but it is notable since Goldman is helping Anheuser-Busch defend against a $65 per share cash bid.

InBev would have to raise its offer to at least $70 per share to persuade Anheuser-Busch to negotiate a friendly merger, some analysts have said.

But Bernstein Research analysts said any offer above $70 a share would be bad for InBev shareholders.

At $70 per share, InBev would see some earnings boost from the deal, but the return on invested capital shrinks. At $75 per share, the Bernstein Research analysts said they viewed the deal as bad for InBev investors.

“The InBev management and controlling shareholders are so heavily leveraged to InBev's stock in terms of their personal finances that they will be reluctant to pay more of 'their own money' than is absolutely necessary/prudent,” the analysts said. (Reuters)

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