M&A: Behind the Boom in Unsolicited Bids

The availability of cash to financially strong strategic buyers and weakened takeover defenses at target companies appear to be fueling the action

By Frank Aquila

Although merger and acquisition activity has fallen significantly since the start of the credit crisis in 2007, one corner of M&A seems rather busy these days: unsolicited takeover bids. The recent increase in the size and number of these offers has been perceptible even to the casual observer. Moves by household names Kraft Foods Kraft Foods (KFT) and PepsiCo PepsiCo (PEP) are just the latest examples of blue-chip companies pursuing unsolicited acquisition proposals.

Other big names have done the same. Despite the severity of the credit crunch in 2008, InBev, Roche, Microsoft (MSFT), Samsung, BHP Billiton (BHP), and Electronic Arts (ERTS), a veritable who's who of multinational companies, were just a few who went public with unsolicited bids.

To be sure, these are not your father's hostile bids. The nomenclature that developed around the unsolicited bids of the 1970s and '80s justifiably evoked the imagery of pirates and raiders. Although the nature, tactics, and objectives of strategic buyers have little in common with those employed by the greenmailers and corporate bust-up artists of that bygone era, many of the same terms continue to be used—hostile bidder, bear-hugs, poison pills, and white knights. While the terminology may have remained the same, little else has.

Corporate Cash on the Rise

With the continuing trend towards global consolidation, the precipitous drop in share prices from all-time highs in 2007, the strengthening economy, and the growing respectability of unsolicited bids, there will likely be a steady stream of such proposals in the months and years to come. Indeed, a recent Citigroup report projects that unsolicited M&A activity will increase further over the next year.

So why, in a period of declining M&A activity, are we seeing a pick-up in unsolicited activity? Although each situation is unique, the availability of cash to financially strong strategic buyers and weakened takeover defenses at target companies appear to be common denominators in recent unsolicited bids.

Cash, and the availability of additional credit if necessary, clearly is key. Following the collapse of Lehman Brothers last September, most businesses responded quickly and made significant cost cuts. Many companies went into survival mode, conserving cash in any way possible. Even as share prices decreased significantly, companies opted to retain cash rather than continue shareholder buyback programs. As a consequence of these actions, the aggregate cash held by the Standard & Poor's 500-stock index companies has risen from roughly $600 billion a year ago to over $700 billion today, according to ThomsonReuters.

Depleted Anti-takeover Arsenals

This cash, together with the ability to borrow more at historically low interest rates, means that healthy companies can now turn their attention to long-term growth and implementation of their strategic plan. If a target company fulfills a potential bidder's strategic needs but is not for sale, an unsolicited bid often becomes the only alternative. Increasingly, strategic buyers view unsolicited bids as just another means to achieve their strategic objectives.

And while would-be strategic buyers have the means and the motive to make their approach, many target companies find themselves vulnerable to unsolicited bids.

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