What’s happening to bid premiums?
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?