Posted by: Jessica Silver-Greenberg on November 09
Who said dealmaking is dead? While overall merger and acquisition activity has plummeted, there is one area of the deal market that’s abuzz with activity: the hostile takeovers, or unsolicited takeover bids, for those who’d like to put a friendlier gloss on the transaction. Kraft Foods made a $16.3 billion bid today for British candy-maker Cadbury. The food giant isn’t the only well-heeled company to launch that kind of bid. In May PepsiCo tried to acquire PepsiAmericas Inc. And recently Roche, Samsung, and InBev tried their hands at takeovers as well. In fact, hostile takeovers actually make up over 10% of M&A activity in the past 12 months. That means the vultures are feasting.
With overall deal-making still in the doldrums, why are hostile bids on the rise? Cash is the key. Buyers have more cash on hand than just a year earlier. Aggregate cash currently available at the 500 companies listed on the Standard and Poor’s index has ballooned in the past year. The financial crisis basically forced companies to massively cut operating costs, to slim down and hoard cash for the coming frozen credit markets. In an effort to save some cash, many companies didn’t do shareholder-buyback programs. Now, companies have the cash to buy, and the credit markets are opening up as well. Hungry buyers with cash on hand can essentially go on a shopping spree.
There’s a Cinderella quality to this whole tale—a sense that at midnight the ball could end. Buyers are beginning to notice signs that deals will begin in force again. Credit is slowly becoming available and can be borrowed at historically low-rates. Companies that are now reasonable targets, with relatively low valuations, might see their prices rise, and fast. Buyers want to swoop in before prices rise and pick up companies at a bargain.
Further driving the vultures is the weakness of potential target companies. Stock prices are low and worse, for those taken over, the arsenal of defense weapons is sparsely filled. Back just 10 years ago, boards had a number of tactics that they could employ to halt a hostile bid in its tracks. Now those defenses are largely gone. Now less than a quarter of S&P 500 companies have shareholder rights plans. Few companies maintain staggered boards either. Under the old model, board members were purposely given different term-limit dates to prevent an acquiring company stocking a targets’ entire board with allies.
Adding fuel to the takeover craze is absence of any public outcry. The days of howling public outcry when a hostile bid emerged are over. It’s respectable now, in the quest for higher returns, to make a strategic purchase, even if it means a hostile one. Once murmurings of a hostile takeover catch on, there is a great pressure for directors of the target companies to at least entertain the bid and maximize return for shareholders. It’s been said before, but it bears repeating: it’s a buyers market.
BusinessWeek's Adrienne Carter, Jessica Silver-Greenberg, and David Henry deconstruct the mysteries of high finance, Wall Street, and hedge funds for pros and ordinary investors. E-mail them directly if you've got tips about big deals, a hedge fund, or even securities industry gossip.