Takeover Offers Not What They Used to Be
The new wave of big takeover deals may leave shareholders of some target companies with a sense of sellers’ remorse.
This year, the typical premium that an acquiring company is offering for a target -- that is, the value of the offer above the target’s stock price -- is well shy of the norm during the market’s boom year of 1999, and below the levels of the bust years of 2000-01, data show.
Even without knowing what takeover bids were worth a few years ago, investors in some of this year’s target companies may sense that they aren’t getting much of a premium.
Yahoo Inc.’s cash and stock offer Monday for Overture Services Inc. was valued at about $24.41 a share, based on Yahoo’s closing stock price. That represented a 13% premium to Overture’s closing share price of $21.51 on Friday.
In another big deal announced Monday, paper giant Boise Cascade Corp. agreed to pay a total of $9 a share in cash and stock for office supplies retailer OfficeMax Inc. That was a 25% premium to OfficeMax’s share price Friday.
Investors who have been buying into this year’s stock rally on the hope that shares are severely undervalued may find the takeover premiums to be sobering. Yahoo would be paying less than what Overture’s stock fetched as recently as six months ago; the price that Boise would be paying for OfficeMax would be half what that stock was worth in 1998.
Of course, there’s no law on Wall Street that says a stock is supposed to return to its previous heights. But bankers and lawyers who advise companies on mergers say that acquiring firms have been chastened by the long bear market and are particularly sensitive about getting a good deal for a target -- which means paying as small a premium as possible.
“I think a lot of these bigger companies have been afraid of their own shadows” when it comes to making any sizable expenditure of cash or stock, said Bernie Zaia, a managing director at investment banker Barrington Associates in Brentwood.
That shows up in overall deal data: The median takeover premium on 308 deals this year is 25.5%, according to data tracker FactSet Mergerstat Inc. That compares with 30.8% in 1999, 32% in 2000, 30.9% in 2001 and 25% last year.
The FactSet Mergerstat data calculate the premium based on a target’s stock price five days before the takeover bid is made.
Jeff McKenzie, a managing director at merger advisory firm Houlihan Lokey Howard & Zukin in Century City, said that although some target companies still can command high premiums, many find themselves with little leverage in negotiating with a bidder.
“In some cases companies are getting taken out at small premiums because they should never have been public to begin with,” McKenzie said.
The return of the hostile takeover this year may reflect the extent to which acquiring companies are being stingy in their offers -- and the unwillingness of some targets to accept such offers.
PeopleSoft Inc., for example, has rejected Oracle Corp.’s offer as too low, even though it represented a premium of 29%, which was better than many targets have commanded this year.
Some shareholders, too, have been angered by what they view as attempts to steal companies on the cheap.
A number of big shareholders in manufactured-homes company Clayton Homes Inc. have rejected the takeover offer made by Warren Buffett’s Berkshire Hathaway Inc. Berkshire in April offered a 13% premium for Clayton, in a deal valued at about $1.8 billion.
Shareholders of most target companies, however, have been willing to accept the deals they’re being offered this year.
In a rising stock market, a deal that includes the acquiring company’s shares gives a target firm’s shareholders a way to continue playing the market recovery, analysts note.
What’s more, in cases where a target company has had substantial turnover in its shareholder rolls in recent years, the average holder may be earning a handsome profit even if the premium offered is lower than management might have hoped for.
Part of the due diligence process undertaken by acquiring firms is to pull the list of the target’s shareholders and “try to estimate their average cost basis,” said Jonathan Layne, a partner at law firm Gibson Dunn & Crutcher in Los Angeles.
That becomes a bargaining chip for the acquiring company in the process of arriving at a deal price. If many shareholders bought the stock at lower prices, the acquirer can say, “We’re providing a big premium to your current shareholders,” even if the offer is well below what the stock was worth at the market peak, Layne said.
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2003 big-deal premiums: a sampling
Here are some of the biggest takeover deals announced so far this year and the “premiums” shareholders of the target firms have been offered. The premium is the percentage by which the deal’s per-share value on the date of the announcement exceeds the stock price on the day before the announcement.
*--* Deal value Deal Acquirer Target (billions) premium Oracle PeopleSoft $5.3 29% General Dynamics Veridian $1.6 28% BB&T; First Virginia Banks $6.9 25% ArvinMeritor Dana $5.2 25% Boise Cascade OfficeMax $1.2 25% First Data Concord EFS $6.9 17% Yahoo Overture Services $1.6 13% Berkshire Hathaway Clayton Homes $1.8 13% IDEC Pharmaceuticals Biogen $6.1 4% Devon Energy Ocean Energy $5.0 4%
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Source: Thomson Financial
