February 27, 2008 / 5:31 PM / 11 years ago

Unsolicited bids surge during market weakness

PHILADELPHIA (Reuters) - Microsoft Corp’s (MSFT.O) $44.6 billion offer to buy Internet firm Yahoo Inc YHOO.O is not an aberration but part of a broader trend of suitors making bold unsolicited bids during a time of weak stock prices and tight credit markets.

Microsoft chairman Bill Gates speaks to shareholders at the company's annual meeting in Seattle, Washington, November 13, 2007. Microsoft's $44.6 billion offer to buy Internet firm Yahoo is not an aberration but part of a broader trend of suitors making bold unsolicited bids during a time of weak stock prices and tight credit markets. REUTERS/Robert Sorbo

So far this year, more than 25 percent of all announced bids in the U.S. have been unsolicited or hostile offers, according to research firm FactSet MergerMetrics. That’s up from 16 percent in the same period a year ago.

“It’s not a random phenomenon. It’s a reflection of what’s happening in the market,” said Allen Michel, professor of finance and economics at Boston University’s School of Management.

Although the Dow Jones industrial average has slumped 10 percent since its high in October 2007, companies and managements have yet to acclimate to the new lower valuations their stocks command, bankers and analysts said.

“A company is not going to be interested in being bought for a premium that just returns their value to what it was trading at six months ago,” Michel said.

“Companies and management might like to believe they have a higher value than they do. So they aren’t interested in the offers they’re getting, so friendly negotiations aren’t happening,” Michel said.

Earlier this month, Japan’s Sumitomo Heavy Industries Ltd (6302.T) announced its $532 million unsolicited offer to buy Axcelis Technologies Inc (ACLS.O), which had rebuffed requests for merger talks for about 18 months.


Axcelis rejected the offer, saying it undervalued the company and failed to acknowledge Axcelis’s “prospects for reclaiming its market share and creating value for its shareholders.”

“There’s a disconnect between what companies think they are worth and what they are actually worth now,” said the head of global banking at a U.S. investment bank, who declined to be named. “It often takes about six months for companies to accept the new reality and new valuation levels because they are still thinking about the golden days.”

The tight credit markets and inability to raise cheap money to fund acquisitions also has reduced the number of potential suitors who can bid for companies. As private equity firms find it more difficult to fund large deals, there is less competition for potential acquirers.

“From a seller’s standpoint, PE (private equity) was a backstop either in a public or private auction. For the buyer, they were constantly outbid by the PE firms, so why waste your time?” said an arbitrageur who asked to remain anonymous.

Unsolicited bids can eventually turn into friendly, negotiated transactions.

For example, Oracle Corp ORCL.O, the world’s third-largest software maker, in January won a three-month-long campaign to buy BEA Systems Inc BEAS.O by raising its bid for the company by 14 percent to $8.5 billion.

BEA’s largest shareholder, activist investor Carl Icahn, said he helped get the two companies talking and brokered a new deal after BEA initially rejected Oracle.

BEA had said Oracle’s original offer undervalued the company, but no other buyers emerged even after BEA’s investment bank, Goldman Sachs (GS.N), solicited bids from other software makers.


With fewer potential bidders, companies have less ability to ignore an unsolicited offer, bankers said.

“It’s harder to hide now. Companies can’t hold a robust auction — it’s like throwing a party and no one comes. So you have to accept the bid that exists and not live in a fantasy that something better will come along,” said a mergers and acquisitions lawyer who also requested anonymity.

Of course, not all unsolicited bids succeed. Some suitors must bypass management and take their offers directly to a company’s shareholders. Such hostile bids have a risk.

In a study of 50 hostile offers since 2003, FactSet MergerMetrics found that 65 percent of those bidders increased their original offer and 31 percent of the deals with sweetened bids were accepted by the target’s board.

Of the remaining 35 percent of suitors that did not sweeten their bids, only 10 percent of those were eventually recommended by the target’s board, FactSet MergerMetrics said.

According to media reports, Microsoft may launch a proxy fight to convince Yahoo’s shareholders to accept the takeover offer.

Such proxy battles have increased this year, with 34 proxy fights announced so far, compared with 23 proxy fights in the same period a year ago, according to FactSet SharkWatch.

“Some managements might not accept that today’s stock prices are the true reflection of a company’s value,” Boston University’s Michel said. “Shareholders tend to understand that the value is less today and they are willing to take what they can get.”

Editing by Brian Moss

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