M&A Lessons from 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 (NYT) and the WSJ (NWS) 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
(www.wsj.com/heard)

OCTOBER 27, 2008
Buyout Targets Should Have Gone for It
By MATTHEW KARNITSCHNIG

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 (MSFT) offering $31/share (later $33/share) for Yahoo (YHOO), 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 (FTE) offered $46 billion for TeliaSonera (TLSNF.PK), 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 (SNDK) — the ubiquitous maker of flash memory cards — spurned a $26/share (nearly $6 billion) cash offer, and so Samsung (SSDIF.PK) 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 (ERTS), which offered $26/share for Take-Two Interactive (TTWO) (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.

Disclosure: Author holds positions in MSFT

Comments

[M-P:]

I was not happy with the Yahoo! decision ... I thought Yang breached his fiduciary duty and was too close to his "baby" to not get his imagined price. I have shares in both MSFT and YHOO. The author is right in that management does not want to lose control - the shareholder language often seems specious. Time will tell is these firms made the "right" decisions, but in the near term it doesn't appear that they maximized shareholder value. The cash issue is all about certainty - if you believe in the synergies, you'll pay cash; if you're less certain and you have some bloated stock currency, you'll pay in stock.

Jan 02 11:02 AM

[Alactract.w...:]

The challenge this year is no one is willing to start the bidding price out of fear. Yet when the merger offers do start, they will fly. At that point many takeover candidates will be low balled and they will probably accept the offer. Shareholders will get a pitance because managements will be itching to show a capital gain in stock at almost any price. The positive of it all is a lot of inventory taken off the market, thereby creating greater demand ( hopefully ) for the quality stocks that remain.

Jan 02 05:58 PM

[Gaucho420:]

I think this column is invalid, as is the analysis, as well...were in a very severe recession, perhaps heading towards a depression.

Everyone has 20-20 hindisght and had any of these companies had the foresight to see the financial system collapse, they would've accepted their bids.

However, 1) all assummed the economy would not fall off a cliff and 2) all priced their takeover target price per a regular economy.

Its easy to say take the money and run in hindisght in a depressed economy, as no matter what your individual story as a company or sector, when the tide lowers, all boat sink.

So while its great to say you should've taken the money and ran, the bottom line is one sector (finance) has caused every other sector to collapse as it is the lifeblood of the economy.

In TTWO case (I'm a shareholder who cashed out near $27, but thought it should be worth much, much more and still do based on potential), how could they see a collapse of the economy coming? I wish for them they had...but again, hindsight's 20-20 and what happend to it and EA's stock is really more reflective of the fear of a depression that is palable and everywhere in equities.

A little more research next time...its easy to say you should've taken the money following an economic collapse as that is always the answer and will always be the answer in hindsight under this scenario that over-shadows all scenarios, but it is not at all reflective of any of these mergers individual stories at the time they said NO.

Weak analysis.

Jan 13 11:36 AM