Hostile Takeovers Are Dying Out

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The hostile takeover is dying.  According to FActSet MergerMetrics, there have been three hostile offers this year.   Two of these offers were for small companies worth less than $25 million.  There were only 12 hostile bids last year.

Organizations have fought for the last 30 years to kill the hostile takeover.  They implemented takeover defenses, such as the poison pill, which made it impossible to acquire a company without creating a costly proxy contest that would have unseated the board.

These organizations lobbied heavily for states to create laws that would make hostile takeovers much harder.  For example, to protect Greyhound from a hostile takeover, Arizona adopted its anti-takeover laws in 1987.  Legislators decided that the company’s takeover would have a negative effect on the state.  Even though companies made hostile takeovers more difficult, they didn’t go away completely.  Over the last decade, there were a few hostile takeovers in spite of the difficulty.

What’s changed?

The market has changed.  Companies were much less efficient in the 1980s.  The majority of companies in this era were conglomerates like Beatrice, which sold everything from bras to orange juice.  Hostile raiders and private equity firms were all over the low-hanging fruit.

Today’s market is more complicated.  Activist investors look for undervalued companies, while institutional investors aggressively push management for a better stock performance.  As such, there are fewer undervalued targets available for hostile bidders.  In addition, hostile takeovers have become riskier.  Today, shareholders and boards will say no when they feel a bid is underpriced.

Also, the bidder’s management is distracted when working on a hostile bid.  In today’s economy, chief executives don’t want to take that risk.  Instead, they prefer to concentrate on running their businesses.  This is a mindset that’s reflected in the takeover markets decline.  Even though the dollar value of mergers in the first half of 2013 increased 27 percent over last year, takeovers decreased 23 percent over last year.

Buyers are still trying unsolicited bids.  Mostly, they put in bids for target companies in hopes that market pressure will force them to accept the offer.  According to FactSet MergerMetrics, there have been 19 such offers this year, which has the potential to exceed the 30 of last year.  However, there’s not an actual offer to shareholders in these bids.  Instead, they include a simple request to the board to consider an acquisition. 

So what does this mean for corporate America and its shareholders?

Shareholders are concerned that the decline in hostile takeovers will cause the disciplining effect hostile bids had on management to disappear.  The fear of a hostile takeover created pressure for directors and managers to work hard at increasing the company’s stock price and performance. 

Source: www.dealbook.nytimes.com

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