Archive for September, 2010

What do Hostile Deals tell us?

Posted on Tuesday, 7 September 2010. Filed under: Commentary, Mergers |

The rise of hostile deals.  Again.

What does this mean?

There was an interesting comment reported by Bloomberg in an interview with Steven Koch, the co-chairman of M&A at Credit Suisse (the video of the interview is here).  He said the following:

If you look over the last several booms that have gone on over the last 20 or 30 years, the M&A cycles that happen, a leading edge indicator of an M&A cycle starting up again, tends to be hostile deals. Because, what happens is, sellers aren’t that happy about selling, at a given price. Where they see the market, they think, this isn’t the best time to sell. But, as buyers tend to heat up, and get a little more interested, before sellers become interested in selling you see a bit of a hostile trend emerge. And, people begin to do deals, but maybe not on such a consensual basis. So, if you look over time, it’s usually an indicator that you’re going to see an M&A cycle start up again. And, it’s sort-of the early form of that.

I must totally agree.  Several additional points to note:

  1. Most of these ‘hostile’ deals will end up friendly when the target company agrees to be purchased at a price much higher than they had expected to see their share price anytime soon.  HP, for example, has now won a bidding war with Dell for 3Par, and the final price was over three times the undisturbed share price of 3Par before the bidding began.  It’s not surprising the board of 3Par ultimately agreed!
  2. ‘Hostile’ usually means ‘unsolicited’.  It doesn’t have to be unfriendly, with the CEOs exchanging lawsuits and even punches (as happened when Sir Philip Green of Arcadia / Topshop accosted Sir Stuart Rose of Marks & Spencer in London in 2004 as he was trying to take over M&S in a truly hostile bid).  And once the right price has been reached, as happened earlier this year when Kraft took over Cadbury, it becomes ‘friendly’.
  3. These deals early in a merger cycle (or even before the cycle begins) are likely to be strategic and not financial acquisitions.  At this particular time, the Private Equity market hasn’t yet returned (despite some ‘green shoots’), so the ‘hostile’ bidders are the strategic buyers that we are seeing in the market now.

There is also a significant body of research that shows that the companies that make acquisitions early in a merger cycle are more successful than the followers (‘me-too’ deals) later in the cycle as the price of companies gets bid up, fewer targets are available and the most attractive ones have already been taken.

If the hostile deals continue, we may just have the real start to the next merger cycle starting.

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