Wednesday, December 31, 2008

Take the money and run!

There are a lot of woulda-coulda-shouldas in this year of extreme upheaval in politics, the financial and energy markets. Among these are the various acquisitions that didn’t happen.

This year more than any other year reinforced two hard and fast maxims for small (or smaller) companies

  • It’s better to sell high than try to sell at the peak.
  • Cash is king
On the NYT DealBlog, the “deal professor” Steven Davidoff has a comprehensive list of all the deals that did and did not happen. But earlier in the year, both the NYT and the WSJ listed a few where there must be non-seller regrets.

The latter quoted my favorite Steve Miller song from his hit album of 32 years ago:
Heard on the Street

OCTOBER 27, 2008
Buyout Targets Should Have Gone for It

A few words of advice to recipients of unsolicited takeover offers: In the future, take the money and run.

Companies that have rebuffed takeover offers in recent months are now trading about 50% below the offer price on average. That's telling, considering that a typical takeover premium is about 30%. All told, 25 unsolicited offers have failed this year, according to Dealogic. In all but a few cases, the reason for the failure was the opposition of the target company's board.
From the various lists, four rejected tech deals stood out:
  1. I’ve written about Microsoft offering of $31/share (later $33/share) for Yahoo, but Yahoo rejected that in hopes of getting $37/share. Instead, the stock closed the year at $12.20, or 53% lower than the revised offer price. (Put another way, the offer was 170% higher than where the stock is today). The $47 billion deal was half cash and half stock, so in retrospect, demanding $33 in cash would have been the smartest move for Yahoo shareholders. (Microsoft stock held its value until Sept. 1, and even today is only one-third lower than where it was when Microsoft cancelled the deal).
  2. Almost as big was the proposed combination of former European telecommunications monopolies. In June, France Telecom offered $46 billion for TeliaSonera, itself the result of a 2002 hostile takeover (or at least a bear hug) by the Swedish ex-PTT for its Finnish counterpart. This may not have been as stupid: although the deal was valued at around 60 kronor/share and shares closed the year below 39kr, the deal was half-stock, half-cash. France Telecom shares actually finished around €20 — above where they were when the offer was outstanding in June, as shareholders feared the impact of the acquisition upon debt and strategic focus.
  3. SanDisk — the ubiquitous maker of flash memory cards — spurned a $26/share (nearly $6 billion) cash offer, and so Samsung gave up. Today, shareholders would be 170% richer if management had said yes.
  4. The other highly-publicized (and unwanted) suitor in the tech world was Electronic Arts, which offered $26/share for Take-Two Interactive (maker of Grand Theft Auto 1..∞). That would be a 244% premium over the 7.56 year-end price. That was $2 billion (cash) that shareholders never saw.
Davidoff (a real professor) gives a few managers credit for standing up for a better deal. On the other hand, for nearly all of the rejected deals the stock is trading far below the offer price. The caveat is that for some of these rejected deals, the offer was priced (entirely or in part) with the acquirer’s stock, which in almost all cases collapsed during the bear market of the 2nd half of the year.

In almost all cases, executives reject a takeover because it would eliminate their personal autonomy and control, but claim it’s because shareholders can do better. According to the research (this is not my area), the hostile takeover forces management to focus on fixing the company (to forestall future raiders), and if everything goes well, after the turnaround they engineer a successful sale at a higher price and everyone is happy.

This year, shareholders of the above targets would have clearly been better off accepting any all-cash offer. (They also would have been better off dumping their shares at any price before Sept. 1, but that’s another story). We will not see the summer valuations again for 2, 5 or perhaps even 10 years, so shareholders have lost billions due to executive hubris.

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