MergerTalk: Hostile buyers, thank your lucky hedge funds
Saturday January 28, 9:04 am ET
By Julie MacIntosh
PHILADELPHIA (Reuters) - Hostile and unsolicited take-over activity has run rampant lately, and buyers who are getting in on the action may want to draft thank-you notes to their favorite hedge funds for helping to stir the waters.
Last year was the busiest year since 2001 for unsolicited bids world-wide, and merger experts peg the heavy activity to several factors.
With the M&A boom now in its middle stages, many of the long talked-about and friendly deals, like Procter & Gamble's (NYSE:PG - News) acquisition of Gillette, have already closed.
Mergers that span industries or explore new strategies are still largely taboo. But after several years in lock-down mode, corporate chiefs are more aggressively stalking rivals from their own industries that pose "perfect fits." And the strong debt markets have made that aggression affordable.
The stigma against hostile bids that was prevalent in the 1980s and 1990s has also dissipated. There's even a new set of semantics as take-over offers once called "hostile" are now "unilateral," and Wall Street's former "vulture investors" and "corporate raiders" have become known as "activists."
But without the market's increasingly receptive audience of hedge fund shareholders, executives might be less likely to put themselves on the line to win prized assets.
"Having activist shareholders out there really does embolden the aggressors because they know that when they make a hostile bid, they may be able to get more assistance from shareholders who flow into the stock than they had in the past," said Jim Stynes, vice chairman of mergers and acquisitions in the Americas for Deutsche Bank.
Nearly $108 billion in hostile or unsolicited bids were logged world-wide in 2005, almost reaching the $110 billion of 2001. Cross-border activity was particularly heavy.
Last year's unsolicited activity represented just a fraction of the astronomical $665 billion recorded in 1999, but dwarfed the low levels of 2002 and 2003, according to financial data provider Dealogic.
This year, which is already off to a torrid start, is likely to be just as busy, merger experts say.
BIDDING WARS ALL AROUND
Activist investors often make their opinions known from start to finish during take-over battles, whether they own stakes in the acquirer or the target. But experts said their role is most crucial when an unsolicited bid lands.
"It makes it harder for executives to sweep the bear-hug letters under the rug," said Ravi Chanmugam, Accenture's lead U.S. mergers and acquisitions partner.
Many top executives are still getting used to dealing with vocal hedge fund shareholders, but it may serve them well to tailor their hostile bids accordingly.
"I think CEOs are turning more savvy by targeting their offers in ways that make them attractive to activist shareholders," Chanmugam said. A potential buyer might tinker with the percentage of cash it uses to pay for a proposed deal, for example, to help win hedge funds' approval.
Activists have pushed reluctant companies in a variety of directions in recent months.
Late last year, Knight Ridder Inc. (NYSE:KRI - News) bowed to pressure from major shareholders that had pressed the newspaper publisher to solicit take-over bids. They made the move after noting the success of a revolt by VNU NV (Amsterdam:VNUN.AS - News) investors over the Dutch media company's deal to buy IMS Health Inc.
(NYSE:RX - News).
A slew of companies have also launched unsolicited bids to poach potential targets away from rivals, often at a huge price. Hedge funds have come crashing in to invest in the companies involved and exert their influence, and a number of suitors have learned the hard way that they can't afford to let their guards down in today's active merger environment.
Luxembourg-based Arcelor (Paris:CELR.PA - News) beat ThyssenKrupp (XETRA:TKAG.DE - News) in an expensive bidding war for Canadian steelmaker Dofasco Inc. (Toronto:DFS.TO - News) this week with a $4.9 billion cash bid.
Last month, Botox maker Allergan Inc. (NYSE:AGN - News) offered $3.2 billion for Inamed Corp. (NasdaqNM:IMDC - News). This prompted statements from Inamed shareholder S.A.C. Capital Advisors and eventually forced Medicis Pharmaceutical Corp. (NYSE:MRX - News) to scrap its planned $2.5 billion deal to buy the company. Medicis itself is the target of an unsolicited bid from breast implant maker Mentor Corp. (NYSE:MNT - News).
And Boston Scientific Corp. (NYSE:BSX - News) swooped in last year after rival Johnson & Johnson (NYSE:JNJ - News) lowered its take-over offer for Guidant Corp. (NYSE:GDT - News). The aggressive move triggered a bidding war that Boston Scientific appears to have won for $27 billion, in part because of support from Elliott Associates LP and other hedge funds that owned stakes in Guidant.
While some of these notable battles have been resolved, this year is already shaping up as a hostile-heavy one.
Linde (XETRA:LING.DE - News), a German industrial gases and forklift maker, made an unsolicited $13.5 billion bid for BOC Group (London:BOC.L - News) on Tuesday, and the British rival rejected it. Meanwhile, German chemicals giant BASF (XETRA:BASF.DE - News) said it was sticking with its $4.9 billion take-over offer for Engelhard (NYSE:EC - News) despite the U.S. company's rebuffs.
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