If Time Warner Cable manages to avoid a takeover by Charter Communications, will its stock price plummet?
That is a question likely weighing on Time Warner Cable investors as they consider Charter’s early offer of $132.50 a share, and contemplate what might happen next. (Shares in Time Warner Cable, the second-largest cable operator, closed at $133.45 on Monday.)
So far, Charter has made its initial proposal, but has not started a tender offer or proxy fight to install a new board. Time Warner Cable called the offer “grossly inadequate†and said it would only consider a bid at $160 a share. But with few other serious bidders in the mix, it may be a deal with Charter or no deal at all for Time Warner Cable.
Proponents of a deal with Charter like this position. They figure Time Warner Cable’s share price is propped up by expectations of a deal and that investors will be reluctant to risk the stock collapsing if the prospect of a deal evaporates.
There is probably some truth to that. Time Warner Cable shares have surged in recent months on speculation about a deal. It is also true, however, that all media stocks, and especially those of cable operators, have been trading up lately.
If Charter did simply walk away, Time Warner Cable’s stock would probably take some sort of a hit. There could be some turnover and turbulence as hedge funds that had been betting on a merger back away. And Time Warner Cable does face a declining television subscriber base and technological challenges as it works to compete with Verizon and Comcast.
But if history is any indication, Time Warner Cable may be just fine if it repels any further overtures from Charter. Indeed, a review of many of the most prominent failed hostile bids suggests that targets that avoided being pressured into an unwanted deal often came out ahead.
In 2012, the drug maker Roche tried to acquire Illumina, offering $44.50 and then $51 a share. Illumina fended off the hostile bid, but in the months afterward, its stock dropped as low as $39.54 a share. Since then, however, Illumina shares have soared, and less than two years later trade at more than $138 apiece.
A year before that, Air Products and Chemicals made a hostile bid for Airgas, offering $70 a share for the company and going so far as to install new directors on the board. Airgas nonetheless beat back Air Products to remain independent. After some initial volatility, Airgas stock has enjoyed a steady rise, and now trades at more than $107 a share.
Other examples abound. In 2009, CF Industries rejected Agrium’s offer of $92.99 a share in cash and stock. Today, shares of CF Industries trade at more than $232.
Vulcan Materials fended off a stock offer worth about $37.31 a share from Martin Marietta Materials in 2012. Vulcan shares initially fell, but now trade above $58.
That same year, Genomma Lab bid $16.60 a share for Prestige Brands Holdings. Prestige called the deal “inadequate and opportunistic†and turned it down. Today, Prestige trades at more than $30 a share.
The Canadian convenience store operator Couche-Tard offered $38.50 a share for Casey’s General Stores in 2010. Casey’s turned that bid down, and its shares now trade around $66.
And many years ago, the cable operator Comcast made an ill-advised lowball bid for Disney, valuing the company’s stock at about $26.47 a share. Disney swatted Comcast away, and now enjoys a stock price of more than $72 a share.
There are counterpoints, of course. Leap Wireless called a $69 a share offer from MetroPCS “insufficient†in 2007. MetroPCS walked away and eventually merged with T-Mobile. Last year, Leap sold to AT&T for $15 a share, making that $69 a share look very good in retrospect.
BHP Billiton had its bid for the Potash Corporation of Saskatchewan blocked by Canadian regulators, saying it was not in the country’s best interest. Since then, Potash shares have slumped.
And for years, the biggest argument against this line of reasoning was Yahoo. In 2008, Jerry Yang defended the tech company against a bid from Microsoft, which offered to buy Yahoo for $33 a share. Yang prevailed, but it cost him his job, and Yahoo’s share price plummeted, falling below $10. But in recent months, Yahoo shares have rebounded, and now trade above $36.
So what will come of Charter’s pursuit of Time Warner Cable? If Charter continues its campaign, it will probably have to raise its offer. And even if it does get new board members elected, they could determine Charter’s bid to be inadequate, in a repeat of Air Products failed pursuit of Airgas.
But if Time Warner Cable does rebuff Charter’s bid, it will be betting that history will repeat itself, and that it will fare more like Illumina than Leap Wireless. If it does not, Charter’s offer, even one that initially seemed “opportunistic,†could wind up looking very good indeed, and Time Warner Cable shareholders could be left in the cold.
