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More companies are under assault as unsolicited bids proliferate.
Avital Louria Hahn, CFO Magazine
October 1, 2008
Hostilities are running high in M&A. Through late August, 48 unfriendly deals (hostile or unsolicited) had been made, worth $131 billion, versus 54 in all of 2007, worth $77 billion, according to FactSet MergerMetrics. InBev's $52 billion purchase of Anheuser-Busch topped the headlines, but targets of all sizes now find themselves in buyers' crosshairs.
Experts offer a straightforward explanation for the trend: there are plenty of flush strategic buyers looking for bargains, and plenty of hurting companies that don't want to become bargains. Credit-starved financial buyers have retreated, but a weak dollar empowers foreign companies that have lots of cash and strong credit ratings.
Given their high stakes, hostile bids place CFOs in the spotlight. As chief advocates of a company's value, CFOs at companies under siege must persuade shareholders and the media that an unsolicited bid undervalues the company. "The CFO's role is to be a cheerleader for the hidden value of the company," says John Crowley, who until mid-August served as CFO of FairPoint Communications. Now advising companies on M&A strategies, Crowley says that an effective target-company CFO "can help raise an unsolicited bid by highlighting such items as lines of business about to take off, a pending turnaround of a problem area, cost-cutting about to yield results, and even weak operations that might mask the profitability of the crown jewel."
At acquiring companies, CFOs function as top strategists, furnishing invaluable guidance in identifying a target, weighing its merits, and then persuading board members, shareholders, employees, and the media that a deal makes sense. They also know when to put the brakes on. Hostile bids usually involve higher premiums than friendly ones, and an acquirer that absorbs the wrong assets or overpays for the right ones will suffer.
Because by their nature hostile bids somersault over due diligence, strong familiarity with the target's business is valuable if not essential. So is superior stock performance. The InBev/Anheuser-Busch clash involved two companies in the alcoholic-beverage business with very different market valuations. While InBev's stock price was up 50 percent since 2002, resistance to overseas expansion at stodgier Anheuser-Busch left its stock flat during that period.
Anheuser CFO W. Randolph Baker played the we-are-undervalued card in a June conference call, declaring that "InBev's proposal significantly undervalues the unique assets of Anheuser-Busch and its long-term earnings and cash-flow prospects."
The U.S. brewer did embark on a plan to cut costs, increase prices, buy back shares, and influence public opinion via a tepid public-relations campaign, moves that appeared to have some effect. Ultimately, InBev raised its offer from $65 a share to $70, and lingering resistance to the takeover crumbled. As Jeff Gell, a partner and co-head of global M&A at Boston Consulting Group, says, "The best way for a buyer to turn a hostile bid into a friendly deal is to throw money at it."
Faced with an unsolicited bid, companies respond in one of two ways, either with an ad hoc defense or a well-conceived plan. Responses based on hasty, tactical moves risk leaving the company severely impaired even if a suitor is fended off, or garnering less cash for shareholders than they might have gotten.
A well-conceived strategy, in contrast, allows a target to retain negotiating leverage even when it becomes clear that resistance is futile. "Go-shop provisions" in purchase agreements, for example, give targets the right to pursue other potential bids even as they iron out terms with the first bidder.
Poison pills, long an emblem of corporate management more focused on self-preservation than shareholder value, may be making a comeback. Under pressure from shareholder activists, many companies that formerly embraced a wide range of tactics, from mandatory spin-offs to super voting shares to massive stock buybacks or dividends, dropped those provisions in recent years. But while the pills may not be a cure-all, they can provide some relief, argues James T. Lidbury, a managing partner at Ropes & Gray LLP.
Nobel Learning Communities popped a poison pill to fend off legendary Wall Street dealmaker Michael Milken this past summer. Although Nobel CFO Tom Frank admits that Milken never publicly expressed an inclination to wrest control, he says the company's board and managers had cause for alarm. A 13D filed in 1998, when Milken began building a stake in the private-school company, included his right to assert operating control. Milken, moreover, already controlled Knowledge Universe, a for-profit school network in position to absorb Nobel.
So in July, when Milken, through several investment vehicles, increased his share to 37 percent, Nobel management feared a "creeping acquisition." In response they deployed a shareholder-rights plan that would be triggered when a shareholder acquired 20 percent or more of Nobel common stock or when a current shareholder owning more than 20 percent (Milken owned 22 percent) acquired additional shares. Faced with Nobel's poison pill, the Milken bid stalled.
A more novel tactic involves the "squeeze-out." When ImClone Systems was approached by Bristol-Myers Squibb (which already held a 17 percent stake in the cancer-drug maker), it spurned an initial $60-a-share offer despite the fact that the price represented a 30 percent premium. Instead, ImClone announced a plan to split itself into two parts, one focused on drug development and one on marketing, a prescription aimed at boosting its combined value and thus meriting a higher stock price, if not pricing itself out of contention altogether. At press time, the deal remained in play.
Looking ahead, experts say the trend toward hostile deals will likely continue as long as two key conditions persist: valuations of potential targets remain a relative bargain, and would-be acquirers have the cash, credit, or highly valued stock needed to push a deal whether the target is receptive or not.
Avital Louria Hahn is a senior editor at CFO.