THE BATTLE FOR PARAMOUNT : Viacom: We Buy, or You Pick Up Tab : Takeover Bets a Riskier Game Than in Wild Days of 1980s
If you think betting on corporate takeovers is once again a slam-dunk way to make megabucks--just like in the 1980s--consider the poor suckers who paid as much as $49.875 a share for Tambrands Inc. in August.
Rumors were rife all summer that the troubled tampon maker was on the auction block, after the company’s directors ousted their chief executive. Johnson & Johnson and Gillette Co. were believed to be ready and able buyers.
Late Monday, however, Tambrands’ board said the company is no longer for sale. Tuesday, the stock dove $3.875 to $42, not far above the 1993 low of $39.50.
The Tambrands non-deal is a sobering reminder to investors that this ain’t the ‘80s. Despite the high-profile bidding war for Paramount Communications Inc., Wall Street’s arbitragers--traders who make their living assessing takeover odds--don’t see a return to the salad days of yore, when virtually any company was a probable target.
Unquestionably, there will be more big-money takeovers ahead, say the arbs. But trying to make a fast buck by identifying targets in advance has been a difficult game, and it isn’t likely to get any easier, they say.
Hence, the only speculation many of these savvy traders will allow with their money today is the scientific kind that arises after a deal is announced--i.e., calculate the takeover value and try to play any pricing inefficiencies that arise before the marriage is complete.
Appearances to the contrary, Paramount offers a good example of why ‘80s-style takeover speculation is too risky now, says Bonnie Smith, vice president at arbitrager Westchester Capital Management in Mt. Kisco, N.Y.
In retrospect, it is easy to say Paramount was a takeover candidate and that its assets were worth considerably more than the stock price suggested. But that has been true since at least 1989, when Paramount stock first topped $66 on merger talk.
Since then, the company’s earnings have been uninspired, pulling the stock down as low as $42.125 earlier this year, Smith notes. So any trader owning Paramount since 1989 in anticipation of a takeover was stuck with dead money for nearly four years.
Similarly, some investors might have assumed that drug giant Merck & Co.’s $6-billion bid for prescription distributor Medco Containment in July would have sparked a bidding war for Medco among other drug firms. After all, if leader Merck decided that future growth depended on manufacturing and distribution, wouldn’t rivals try to beat Merck to the punch?
Apparently not. Two months later, no other bidder has surfaced. Medco stock, $34.125 the day the deal was announced, is at $35.50 today--a sure sign that Wall Street figures the Merck offer will stand.
In the ‘80s, of course, it often took much less than a bona fide takeover offer to pump up a stock’s price. Smith notes that many arbs would begin buying up shares of any company that suddenly attracted the nominal attention of a corporate raider--even if the potential takeover price was pure hypothesis and even if the raider had no financing in place to do a deal.
The catalyst for a soaring stock price in the late ‘80s often was nothing more than a so-called 13-D filing--a public declaration of ownership that corporate raiders were required to file once they accumulated more than 5% of a company’s stock.
Today, 13-D filings are rare, because raiders are rare. And that’s the biggest difference between that takeover era and this one: Deals are done today company-to-company, for strategic business reasons--not for bust-up, quick-buck reasons.
That means the acquirers usually take their time to assess a potential target--secretly--and decide on a bid. In the vast majority of cases, the talks between the buyer and target start and end friendly.
And precisely because most buyers today are major corporations rather than gunslingers like Carl Icahn and Donald Trump, deals are harder to disturb once the two parties agree, says Richard Nye of Baker, Nye Investments, a New York-based arb firm.
Thanks to the high-flying stock market, most big takeovers are done for stock today, not cash, because the acquirer’s shares represent such an inflated currency. That means the deals generally aren’t dependent on a buyer’s ability to borrow money.
“A strategic deal without financial conditions has a high probability of going through,” Nye notes. Paramount’s situation notwithstanding, that’s why most corporate buyers are willing to offer a rich premium, in stock, over a target’s share price--and why such bids generally aren’t topped.
Yet the amount of control exercised by the buyers also can raise rather than lower the risk that a transaction will not proceed to the end, Smith says. Of the 75 deals that her firm has invested in over the last year, five have been called off because the buyers decided to walk away. “That’s a lot of failed deals,” she says--especially compared to the ‘80s.
Still, there’s no question that the arbs are making money off takeovers again. Their role often is misunderstood, the arbs say: While many people see them as speculators, in fact the historical role of the arb is to function as a risk absorber--for a price.
When a takeover is announced, the arbs are the traders who buy the target company’s shares from owners who don’t want to wait for the deal to be consummated. The price the arbs are willing to pay is based on their judgment of the deal’s certainty and the amount of time it will take to complete.
For their trouble, arbs expect to earn a hefty return. And they haven’t been doing badly this year: The Merger Fund, a Westchester Capital-managed mutual fund that invests in announced takeover deals, is up 12% to date, about double the return of the broad stock market.
The arbs could earn a lot more, of course, by speculating correctly in takeover candidates before deals are announced. Despite the current excitement generated by the Paramount deal, however, many arbs insist that the potential rewards in that kind of merger speculation simply aren’t worth the risks in the ‘90s.
1993’s Big Deals Can you make big money in takeover candidates? Sure--if you can pick ‘em. Here are some of this year’s biggest announced deals. “Deal price” is the value of the deal to the target company’s shareholders the day of the announcement. “Premium” is the deal’s value over and above the target’s stock price the day before the announcement.
Deal price Premium to Deal per share stock price Hanson for Quantum Chemical $20.00 +60% Columbia Hospital for Galen Health $19.57 +39% Mattel for Fisher-Price $32.67 +37% Merck for Medco Containment $39.00 +31% ATT for McCaw $62.38 +22% Viacom for Paramount $69.14 +13%
Source: Securities Data Co.
