Seller Resistance Choking Deal Flow

Merger-and-acquisition activity is sluggish, but an increase in hostile takeovers may be in the offing.
Vincent RyanFebruary 13, 2012

Small and slow. Except for a couple of large tender offers, merger-and-acquisition activity in North America was slumberous last week. Most of the deals that did get announced were on the diminutive side — below $100 million.

Evan Greebel, a partner at Katten Muchin Rosenman, says he is seeing plenty of activity in the middle market but that sellers and buyers are still having a hard time agreeing on the value of a business. If worries about macroeconomic conditions dissipate and the European debt crisis stabilizes, that dynamic could lead to more hostile takeovers.

“Buyers are going to act unilaterally when the sellers are not willing to compromise or negotiate,” Greebel says. “I work with some acquirers that are not necessarily focused on doing negotiated transactions as much as they are willing to do unsolicited transactions.” Last week, for example, Roche made a $5.7 billion offer to gene-sequencing company Illumina, which says the bid undervalues the company.

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Full resolution of the Greek crisis will be important if overall deal-making is to increase. Strategic acquirers can pay more for a company because they can capitalize on integration-related synergies. But financial sponsors will need the credit markets to open a bit wider and stay open. Still, lenders are likely to remain conservative about how much equity they want to see from private-equity buyers.

“Lenders want to make sure sponsors are fully invested in the transaction, and want to be able to get their money out if things turn south,” says Greebel. “They want to be sure there is enough equity below them.”

For the week ending February 10, 37 deals were announced, according to data provided to CFO by mergermarket. The transactions had a total disclosed value of $4.5 billion, a sharp drop from the week before. Year-to-date M&A numbers are just as weak. The number of M&A deals is almost half the volume that had occurred to this point in 2011. Dollar volume (of deals that disclosed price) is one-third of what it was in 2011.

In notable acquisitions last week, database behemoth Oracle agreed to buy talent-management software vendor Taleo for $1.8 billion in a deal expected to close in the second quarter. Second by size was the purchase by Thailand-based Indorama Ventures Public Co. (IVL), a polyester chain producer, of U.S. company Old World Industries, a maker of chemical components in IVL’s products. The deal is valued at $795 million.

Two social-media transactions occurred. Online professional-network operator LinkedIn acquired Rapportive, developer of a Gmail software plug-in that displays contacts’ social-media information in a user’s inbox. The sellers were a trio of financial sponsors, including Charles River Ventures.

Also, Groupon bought Adku, a start-up company that lets e-commerce sites tap big data to personalize the shopping experience. The sellers were Greylock Ventures, Battery Ventures, and True Ventures.

Meanwhile, private-equity firms were plenty busy exiting and entering investments. On the purchase side, J.F. Lehman & Co. agreed to acquire a basket of companies from SEACOR Response, an oil-and-gas exploration company, for $97 million. The acquisitions included National Response and NCR Environmental, firms that specialize in oil-spill response and emergency and crisis-management services. J.F. Lehman invests in defense, aerospace, and maritime companies.

Private-equity house Seneca Partners teamed up with TAG Holdings, an industrial products manufacturer, to purchase Barton Manufacturing, a provider of machining and fabrication services. In addition, Platinum Equity picked up DMS Health Technologies, a provider of medical equipment and diagnostic-imaging services, from Otter Tail Corp. LittleJohn Fund IV agreed to buy DirectChassisLink, a company that rents and leases chassis to drayage (short-distance transport) and steamship lines. The seller was Dutch conglomerate A.P. Moller – Maersk A/S.

Selling activity by sponsors was brisk. Charter Oak Equity and High Road Capital Partners sold a manufacturer of highly engineered gearing components, Milwaukee Gear Co., to Regal Beloit, a listed manufacturer of electric motors and generators, for $80 million. The financial sponsors bought Milwaukee Gear in 2008.

iEnergizer, a U.K.-based business process outsourcing firm, bought Aptara, a digital publishing solutions company, from financial sponsors American Capital, Key Ventures Partners, and Blue Water Capital. Aptara converts content on traditional platforms to media suitable for eReaders, smart phones, and tablets. Rambus, a licensing company specializing in high-speed memory architectures, acquired memory-chip maker Unity Semiconductor from August Capital, Morgenthaler Ventures, and Lightspeed Venture Partners.

Finally, Guidance Software, a provider of digital forensics and e-discovery tools, agreed to purchase CaseCentral, a cloud-based e-discovery software company. The sellers were Advanced Technology Partners, Housatonic Partners, and Staenberg Venture Partners. The consideration was a mix of cash, stock, and assumption of debt. Per the agreement, Guidance may pay as much as $33 million in cash earn-outs over the next three years.