UPDATE: Market Downturn Opens Door To More Takeover Battles
Dow Jones
March 09, 2008: 10:20 PM EST
NEW YORK (Dow Jones) -- The deep chill on Wall Street is heating up unsolicited takeovers, with companies bearing solid balance sheets pouncing on the depressed stocks of reluctant targets at a rate now outpacing what the market witnessed a year ago.
Since Jan. 1, $52.6 billion has been thrown around in unsolicited merger offers in the United States, according to data from Dealogic. That's down 24% from a year ago. But as a percentage of total takeovers, including the more- common friendly ones, it's up 11 points to 33%.
Analysts say that trend is likely to continue throughout 2008, creating opportunities for nimble investors steeled against market volatility.
Heavy selling on Wall Street, triggered by tight credit markets and a steadily deteriorating economy, has left plenty of good companies short on cash and dangling close to historically low stock values. This leaves them vulnerable to unwanted acquisitions by bigger companies with healthy finances and cheap access to capital.
"This year, we're going to see a survival of the fittest in the market," said Kjerstin Hatch, an analyst with Madison Capital Management.
Just this week, United Technologies Corp. (UTX) announced it wants to buy ATM and voting-machine maker Diebold Inc. (DBD) for $2.63 billion, or $40 a share for a stock that was trading at $54.50 less than a year ago. Prior to UTC's bid, Diebold shares had dropped by more than half to $23.07, swept lower along with the broader market. .
With the S&P 500 Index (SPX) down 12% since the start of the year, UTC's aggressive bid for Diebold fits an oft-repeated pattern.
"Unsolicited offers are the most recent, popular trend in dealmaking," said Bob Filek, a partner with PricewaterhouseCoopers' transaction services. "When you have market dislocation like we do now, you get buyers anxious to make acquisitions to take advantage of low prices. Of course, on the other side are the targets who want to wait for better times."
Earlier this month Microsoft Corp. (MSFT) made the biggest unsolicited bid to date, offering $44 billion for Yahoo Inc. (YHOO) not long after its shares hit an all-time low of $18.58. Though the bid valued Yahoo at $31 a share, it was still below its 52-week high of $34.08.
There was also Electronic Arts Inc.'s (ERTS) $2 billion offer for rival Take- Two Interactive Software Inc. (TTWO)
Setting the sights
In each case, the target firms had been in the acquiring companies' sights for some time, and in each case the targets rejected the offer, saying they weren't interested in teaming up with anyone and that the offer price seriously undervalued the company, or both.
Unwanted offers often end in some kind of deal, but slowly. A steep premium also can motivate investors to pressure a target's board to accept the proposal.
"What's happening now is similar to what happened in the late '90s and early 2000s" said David Stone, an M&A lawyer and partner with Neal, Gerber & Eisenberg. "There were all these high-flying stocks that plummeted, and it took a long time for those owners to realize their companies were never worth those market caps they were given."
In addition, the premiums can ward off other hostile bidders, including private-equity funds, which have so far remained on the sidelines as credit markets continue to roil from the burst housing bubble.
Still, some analysts think the real spike in M&A activity won't be seen until this summer, when foreign capital steps in, injecting cash into the credit markets and giving private equity an opportunity to reenter the marketplace.
Analysts say the hardest-hit sectors -- banks, financials, real estate and retail -- are breeding the most deals. Companies keen on pursuing a purchase might not even wait for the market to hit bottom before making an offer, taking advantage of private equity's absence and looking past short-term volatility toward long-term gains.
So what constitutes a good target?
"I'd look for larger-tier companies that have share erosion of 50% or more over the last 12 months," said Andre Peschong, a hedge-fund manager with Bridgewater Capital Corp. and the writer of Dealflowdiaries.com. "It also has to have over $500 million market cap; under that it's a greater risk because the footprint isn't large enough."
Among troubled banks, Washington Mutual Inc. (WM) is an example of a likely target. Its shares are off 75% from its 52-week high, and the thrift now has a market cap of about $9.3 billion. Recently it was reported that Washington Mutual, along with other banks, was looking for a cash infusion.
Indeed, most of the hardest-hit financial stocks are only now beginning to realize the extent of their problems. On Monday, private-equity firm the Carlyle Group announced that it hired Olivier Sarkozy, a prominent UBS investment banker, to co-head its financial group as it seeks to capitalize on that troubled industry.
"The financial sector is going to be very active once people get perspective as to the extent of their problems," said Fred Lipman, partner with Blank Rome LLP.
Sizing up the downtrodden
Investors who want to bet on a buyout should choose midsize players with plenty of branches in a market not already shared with a bigger bank, according to Madison Capital's Hatch. In addition, look at the size of deposits, quality of personnel and its geographical footprint.
Bank of America Corp. (BAC) was interested in struggling mortgage provider Countrywide Financial Corp. (CFC) as a strategic asset in part because of its network of offices, Hatch said.
Real estate, for its part, still remains one of the best asset classes, but real-estate investment trusts, or REITs, that are highly leveraged are likely to look for consolidation partners.
"The REIT industry has been beaten up pretty bad, and the guys that need to refinance in the next 12 to 24 months will have a hard time," Hatch added. That leaves them open for well-capitalized REITs that will have an easier time getting financing."
Among retailers, there's been plenty of pain, but they could be even riskier to play. Regional companies could dip close to insolvency before being snatched up by a larger rival, but others are just as likely to simply vanish into bankruptcy.
"In retail, bonds are safer," Hatch commented. "You get a decent return, and if the company does go bankrupt you can still get a good recovery."
Meanwhile, private equity is waiting for a catalyst to trigger buying, and that catalyst could be foreign capital -- particularly from Europe, China and Japan, whose currencies have made great strides against the U.S. dollar.
"Right now there's no support for the dollar, but European groups are keenly aware that a new [presidency] will support the dollar, so now it's cheap for them," Bridgewater Capital's Peschong said. Given that it takes six to nine months to close a deal, foreign capital could be flowing into U.S. equities by June.
More liquidity in the marketplace would be the signal to private equity that the market has bottomed. In 2007, private equity raised about $307 billion in new cash, according to Peschong. That was a record year, with an enormous pool of capital chasing deals.
(END) Dow Jones Newswires
03-09-08 2220ET
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