The hostile takeover is on life support, if it’s not dead altogether.
This year, there have been a grand total of three hostile offers, according to FactSet MergerMetrics. Two of the three were for small companies worth less $25 million. Last year, there were only 12 hostile bids, FactSet reported.
These days, the directors of the 5,000 or so public companies have a better chance of being hurt in a car accident than by a hostile bidder.
Is this a short-term blip, or perhaps a real death? Either way, what does it mean for corporate America?
Like many things, this all dates to the 1980s. Corporate raiders like T. Boone Pickens and Carl C. Icahn bestrode the landscape. Hostile offers for household names like Martin Marietta, Beatrice Foods and Revlon made headlines. The big event was Michael Milken’s predator’s ball where the raiders convened to meet and finance heir next big bid.
Companies have fought over the last 30 years to kill the hostile takeover. They adopted takeover defenses, like the poison pill, which effectively made it impossible to acquire a company without running a costly proxy contest to unseat the board.
Companies also heavily lobbied states to adopt laws making hostile takeovers much harder. Arizona, for example, adopted its anti-takeover laws in 1987 to protect Greyhound from a hostile takeover. Legislators claimed that the company’s takeover would have a “staggering†effect on the state. While companies made hostile takeover more difficult, hostile takeovers did not go away. In the 1990s and much of the past decade, hostile takeovers still percolated along, despite the barriers erected.
So what has changed?
It’s the market. In the 1980s, companies were arguably much less efficient. Many were conglomerates like Beatrice, which sold everything from bras to orange juice. The low-hanging fruit could be grabbed not only by hostile raiders but also by private equity firms.
But today’s markets are more complicated. Activist investors search out undervalued companies, while institutional investors also do their part in aggressively pushing management for better stock performance. Simply put, the forces on companies to perform better appear to have worked, leaving fewer undervalued targets for hostile bidders.
Hostile takeovers have also become riskier. Not only boards, but shareholders at target companies are much more willing to say no if they feel a bid is underpriced.
And the effort to undertake a hostile bid distracts the bidder’s management. In this economy, chief executives just don’t want to take that risk, instead preferring to concentrate on running their businesses, a mind-set reflected in the takeover market’s decline. While the dollar value of mergers for the first half of 2013 was up 27 percent year-on-year to $509.7 billion, the number of takeovers was down 23 percent from last year with only 4,659 deals.
To be sure, this doesn’t mean that buyers are not trying unsolicited bids. This has mostly involved putting in bids for target companies, hoping that market pressure will force them to accept the offer. This year, there have been 19 such offers, a number on track to exceed the 30 last year, according to FactSet MergerMetrics. But these bids do not include an actual offer to shareholders, and instead are simply a request to the board to consider an acquisition. It’s like saying, “Pretty please, can we acquire you?â€
As in kindergarten, this plea sometimes works and sometimes it doesn’t. Amylin recently bid $10 billion for Onyx, a bid that was rejected but has led to Onyx putting itself up for sale. This is one outcome, but in many other cases, the unsolicited bid is simply ignored.
What does this all mean for corporate America and its shareholders?
The real concern from the decline of a hostile takeover is that its disciplining effect will disappear. Shareholders often prefer to be passive, often failing to oust underperforming directors and managements. The hostile takeover was thought to act as a substitute form of pressure.
The fear of a hostile bid forced directors and executives to take hard measures to increase a company’s stock price and performance. The hostile takeover market therefore functioned to discipline poorly performing directors and executives.
Simply put, though, a minuscule chance of a hostile bid is not much of a threat.
Perhaps the biggest sign that companies don’t fear hostile takeovers or even unsolicited bids is their own conduct.
As we saw in Air Product’s effort to take over Airgas in 2010, the biggest takeover defense a company can have is the combination of a staggered board, which requires directors to be elected over multiple years, and a poison pill.
Ten years ago, 60 percent of companies in the S.&P. 500-stock index had a staggered board, according to FactSet SharkRepellent. Today, only 11 percent do. Corporate governance activists have pressured many companies to eliminate this defense, but this may not be a sign that companies have converted to good corporate governance policies. Instead, it may simply mean that they don’t see the hostile takeover as a threat.
The hostile raider, however, has been replaced by the activist shareholder. Investors like Mr. Icahn (yes, he’s still going strong) and Daniel S. Loeb are making billions and calling themselves shareholder champions.
The focus has shifted to these activists, and already companies are vigorously repeating the acts of the 1980s to adopt defenses against them.
Halliburton adopted a bylaw this month that prohibited activists from compensating insurgent directors. Halliburton is hoping this move will mean that an activist will not be able to hire good insurgent directors. Other companies are rushing to adopt activist defenses and law firms and investment banks are focused on making money offering their defensive services.
Still, activism is also in its infancy, and it can perhaps have different effects. After all, Mr. Loeb’s hedge fund, Third Point, sold the bulk of its shares in Yahoo last week, leaving the company to once again fend for itself. Mr. Icahn has also made an art of eking out extra pennies from companies. A hostile takeover ends the matter because the company is acquired, but shareholder activism can take many forms and might not be long lasting, leaving the company to flounder in the public markets.
But unlike hostile takeovers, there is a real fear on Wall Street of the activists. For now, the question is whether activism will remain on the upswing and be the disciplining force that the hostile takeover occupied.
In the meantime, absent a bull market and a return to risk-taking, the hostile takeover will remain in stasis. That may be good news to companies, but a clear loser is the rest of the world, which watches the greed and hubris that unfold when the barbarians are at the gate. Instead, we’ll have to watch scripted versions of these deadly sins unfold on reality television.
