Archive for October, 2009
A significant driver to M&A activity is the relatively short tenure of CEOs as chief executive.
At the M&A Research Centre at Cass Business School, we have been looking at the link between CEO changes and M&A deals, whether acquisitions or divestitures. We aren’t ready yet with the final analysis (being part of a highly rated business school does mean that we have standards of research that exceed many others and therefore needs appropriate review before being released). But as a teaser, we have found in the preliminary research that the typical CEO doing a big deal announces his first major acquisition in well under a year and, interestingly, that announcement usually precedes the announcement of his or her first big divestiture. I certainly found it interesting that the CEO embarks on the first steps of his or her new vision before starting to unwind the previous CEO’s organisation!
Stay tuned here, as we expect to have these results soon.Read Full Post | Make a Comment ( 2 so far )
A strange thing is happening to bid premiums, at least here in Europe. They’re dropping. Or is this strange? Should we have expected it?
The facts, first:
- According to Financial News Online (you can see the story here if you have a subscription, and apologies to those who don’t, as it is a subscription-only website) and based on information they used from Dealogic, the average bid premium in the Third Quarter 2009 was only 17.5%, down from 20.8% in the Second Quarter and 26.9% in the First Quarter 2009. Last year’s Q3 premium was 27.0%.
- Globally (and including these figures for Europe), the bid premium for the Third Quarter 2009 was higher than the European average, and came in at 23.5%, which was slightly higher than the 22.8% of the Second Quarter 2009, but well down on the 30.3% premium of the First Quarter.
What’s happening here? The Financial News Online article quoted an analyst at UBS with an explanation that buyer and seller valuations were converging, and thus the lower premiums. However, this can’t really explain the low premiums, as then we would expect these levels (high teens to low twenties) when the markets are more predictable and everyone — or almost everyone — seems to agree on the direction of the market. But we don’t see these low levels typically.
I’ve discussed bid premiums before here in this blog (at a time when bid premiums were increasing) and in both my recently published books (Intelligent M&A: Navigating the Mergers and Acquisitions Minefield and to a lesser degree in Surviving M&A: How to make the most of your company being acquired). A large number of studies have shown remarkable consistency in bid premiums over the past thirty years. Premiums do average within a relatively narrow range from 20% to 40%, but are usually fairly tightly banded around the mid-point of 30%, although the last several years have been in the 28-30% range globally. As there was some consistency as well in equity valuations during the past 30 years (usually, but not always, of course), if the UBS analyst’s explanation was correct, we should usually be seeing average bid premiums in the high teens to low 20’s. But we don’t.
What I rather think is happening here is that we have the ’52 week high’ problem. What’s this? One figure that is very often used by boards, senior execs and advisors alike in determining a value for a target is the 52 week high in the share price. Why? Because if the offer is higher than the 52-week high (or close to it), then the board can recommend to the shareholders that it is a fair valuation. This even if the share price is recently rising, but is even more the case if there’s been a decline but management have been saying the decline is temporary. This recommendation is tough to make if the offer price is below the 52-week high because some (and maybe the most voiciferous) shareholders may consider the bid a ‘sell-out’.
With share prices so low in late 2008 and 2009, it’s easy to exceed the 52 week high with an offer these days. Also, with a large number of economists and market analysts still predicting a second decline in the market (the second half of the so-called ‘W’ economy), it is not hard to agree a smaller premium over the 52 week high if you think it might go down again. Also, in today’s market, the 52-week high is probably yesterday’s closing price!
Will this decline in average premiums continue? I think not, as the market has not so fundamentally changed that we shouldn’t expect it to be much different than the long-term trend.
Now, one further question remains: Why are premiums so much lower in Europe? The simple answer may be the smaller number of deals and therefore a less reliable average in this very slow market for M&A deals. Perhaps as well the lack of financial buyers to raise bid premiums and there’s also the general lack of debt in the market to finance these bids (although these are global issues as well). But is there something else going on?Read Full Post | Make a Comment ( None so far )
There’s been a lot of attention on hostile M&A deals since Kraft launched its unsolicited bid for Cadbury last month (September). Nothing quite like chocolate to make the headlines — in fact so much so, that several journalists I’ve spoken to recently have said that they are completely tired of writing about that deal.
Because it was an unsolicited offer — bordering on being a hostile deal (which will ultimately depend on what develops) — I’ve been asked about whether this is a harbinger of things to come: that is, will there be lots more hostile deals as the market recovers and what’s really been happening to hostile deals recently anyway.
Here’s the facts:
- Hostile (including unsolicited deals) are uncommon, despite the headlines they cause as they are, by their very nature, much more newsworthy than friendly deals. Think back to Microsoft / Yahoo and all the column inches in newspapers that deal had! In fact, these deals represent only 1.01% of all deals announced so far this year (that’s less than 80 deals year-to-date), which isn’t far off the average of the prior three years of 1.04%.
- If we annualise the number of deals to date in 2009, we get only about 100 for the full year — again on average with the prior three years which included some good years and one very poor one. Still, 2008 had 127 hostile / unsolicited deal announcements, which was a recent high.
- Most of these deals never get to completion: approximately 60% get withdrawn, and unsurprisingly last year was a recent high with 63% being withdrawn — most likely because of the market turmoil in the fourth quarter which is usually a very busy quarter for M&A deals.
- Despite all of the hype around the Kraft / Cadbury deal, it actually isn’t one of the largest. If we look back over the past four years, the biggest hostile / unsolicited deals were (1) BHP Billiton with an offer of $188 billion for Rio Tinto, (2) RBS (together with Santander and Fortis) at $98 billion for ABN AMRO, (3) E on’s $82 billion bid for Endessa, (4) France Telecom’s offer of $47 billion for TeliaSonera and (5) Xstrada’s bid for Anglo American of $43 billion. Then came Microsoft’s bid of $42 billion for Yahoo, so that one didn’t even make the top 5; the Kraft / Cadbury offer is way down at 16. By-the-way, of those top six bids, only one was ultimately completed and, as I said on Reuters TV yesterday, I am sure that Sir Fred Goodwin wishes he had withdrawn his bid as all the others did.
So what’s likely to happen now? My view is that hostile bids (or at least unsolicited bids) will continue at this relatively low pace. No big surprises there but still some interesting stories because hostility always makes for a nice headline. But there just won’t be too many of them. CEOs and boards seem to know (intuitively?) that these types of offers just have too many ways to fail. Which is why, of course, most get withdrawn and why most take place in non-people businesses such as metal, mining and other extractive industries and in technology and industrials where assets are purchased, not so much the employees or management.
Then again, many of these offers may have been made with the full expectation that they would be rejected. Making an offer can be a strategic signal to the market or even a way to destabilise a competitor. But care must be taken, because the bidder can be affected in a bad way too.Read Full Post | Make a Comment ( None so far )
M&A debt financing: R.I.P., or, like a phoenix, will it rise from the ashes to stalk companies again?
I think ‘phoenix’ is a better analogy than the term Vanity Fair used recently in their exposé of Goldman Sachs when it was labelled a ‘vampire’. Both rise from the dead. And there may be those who do believe that financial sponsors (venture capitalists, hedge funds and private equity firms) suck the very lifeblood from the companies they purchase. But in terms of the rise of debt financing for M&A deals, since much of this has historically supported the purchase of strategic acquisitions by corporate buyers, I prefer the term ‘phoenix’.
Just as the phoenix rises from it own ashes after it has (been) burned, the markets have come back to life (see our reporting of this here in our article entitled ‘Has the M&A market returned? Can we start harvesting the green shoots already?’).
What is still missing, however, are the huge amounts of debt-financed M&A, and this may be missing for a while yet. The private equity and venture capital industries are still largely absent from the announced deal flow (notwithstanding the recent purchase by a venture capital group of 65% of Skype from eBay), as are highly leveraged corporate deals. With the debts markets fundamentally changed from two years ago and earlier, this will take further time to change, but change it will. The disappearance of junk-bond financing at the end of the 80’s was a temporary phenomenon and the creative genius of investment bankers will again be applied to the debt markets in the future, even if not immediately and while the structured debt market remains under a microscope in the halls of Westminster and Washington.
Note as well that corporate buyers have been able to access the debt markets. Does this mean that acquisition war chests being filled? In the US, over a third more investment grade debt has been issued this year than last year at this time, and in Europe the figure is closer to 40%.
Some of this WILL be spent on acquisitions, and well over $1 trillion has been raised in just those two markets alone. That’s a large war chest, even if most of the debt is being used for other purposes such as the need to strengthen balance sheets for the core business after all the hits those same companies took in this recession.
Is this another ‘green shoot’?Read Full Post | Make a Comment ( None so far )