M&A premiums: What’s happening?

Posted on Friday, 26 June 2009. Filed under: Commentary, Mergers |

Just last month, Liam Vaughan at Financial News wrote about increasing M&A premiums as ‘buyers in the M&A market are being forced to pay more over and above a takeover target’s share price than they have for nearly a decade.’  According to Dealogic, Liam said the average one-month premium last month was 29.5%, up from 24.1% the previous quarter and 24.3% for the same quarter last year.  He quoted me saying the following:  ‘Corporates don’t want uncertainty in today’s market which is why they go for a bear hug offer to ensure recommendation from the board…’

Now, one month does not a trend make, but this is certainly much higher than the 2007 average premium of 21.2%.

He also quoted me (sorry, their website is subscription only, but if you have a subscription, the link is here):

‘Scott Moeller, director of M&A research at the Cass Business School, said:  “Strategic buyers with cash are able to make acquisitions on a longer-time basis.  They also don’t want to enter into a protracted offer period so will go for a bear-hug [higher and pre-emptive] offer to ensure a recommendation from the board.”’

This is all the more interesting because of the relative lack of financial buyers in the current market competing for targets (and therefore driving up deal prices).  One would normally think that the disappearance of a substantial group of buyers (the private equity and venture capital firms) would cause premiums to decline.

Then, just last week, Liam again wrote about this topic (once more, if you have a subscription, the article is here), using data from a recently released JP Morgan M&A report which had also noted the increase in premiums recently.  The JP Morgan study found that the premium (offer price over share prices one month earlier) were 23.8% in 2007 (yes, different analysts come up with differnt figures, but at least this isn’t too far from the other figure for 2007 above) and notes that the 2009 year-to-date figure is 29.8% (fortunately, remarkably similar to the figure above for May 2009).

Interesting in the JP Morgan study, the one-day premium figure for 2009 year-to-date is 32.7%. This one-day figure for 2009 is higher than the one-month premium.  Usually, it is lower (or 2007, for example, the one-day premium was only 16.6%).  Why is it usually lower?  Two reasons are normally given:  1)  that there are leaks to the market either intentionally or not (including outside observers who are correctly ‘guessing’ that two companies are in talks with each other) and 2) that the markets in industries with a lot of M&A activity are normally on the upswing (as was certainly the case through much of 2007, the year of the last M&A market peak).

So why is the one-day premium in 2009 HIGHER than the 30-day premium and therefore different from the typical experience?  I believe this is a reflection of the declining stock markets for much of this period – as the deal prices are usually set well before announcement date, and at least by a week or two if not longer.  Therefore, in 2009, the price was set but then by announcement date the target’s share price had declined some more.

The declining market also offers another reason for higher premiums at a market low, such as we have now.  The relative bargains for such companies makes it easier for healthy companies to afford to buy the targets, and especially if the acquisition was part of a long-standing plan to make the purchase, and the buyer is opportunistically making the purchase now that it is available at a cheaper price than they ever had imagined possible.

I’d be interested in hearing any other ideas as to why premiums are up year-to-date, and whether anyone believes they will decline yet again in the next merger wave as the stock market comes back.

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