Pursuit of critical assets to drive hostile M&A activity in 2020
There were a significant number of hostile M&A bids in 2019.
Deal Dynamics spoke with Washington, D.C.-based Hogan Lovells Corporate Partner Joseph Gilligan to get his read on this activity and what we may see in 2020.
2019 saw several high-profile hostile M&A transactions hit the headlines. Was this activity largely confined to North America?
Hostile takeover activity remained significant throughout 2019, though lower than in recent years, both in terms of the number of hostile transactions and their percentage of overall M&A activity. Many of these hostile bids occurred in the United States, including high-profile matters such as Xerox’s US$33 billion bid for HP, MNG’s US$1.4 billion offer for Gannett, and Crane’s $1.7 billion bid for Circor International.
However, hostile M&A was definitely not a purely U.S. phenomenon in 2019. Many of the largest hostile bids originated from companies outside of the United States. These included proposed mega-deals such as the US$36 billion bid by the Hong Kong Exchange for the London Stock Exchange Group, Barrick Gold’s US$19 billion bid for Newmont Mining and Merck KGaA’s US$6.3 billion bid for Versum Materials.
We also saw the cross-border acquisition of Tiffany by LVMH quickly move from an unsolicited bid to a friendly negotiated transaction when LVMH raised its proposed price from US$14.5 billion to US$16 billion.
Moreover, far from being restricted to specific sectors or geographic regions, hostile bidding was evident across industries and the capitalization spectrum, both in the U.S. and internationally, throughout 2019.
Interestingly, after a long drought for hostile deal making, the Japanese M&A market saw a blitz of offers in 2019 including Itochu’s unsolicited approach for Descente that resulted in its acquisition of a controlling stake, and HIS’s bid for real estate company Unizo Holdings, which triggered an extended bidding war by several global investment firms.
Given the low levels of success historically for hostile offers, were bids in 2019 able to generate better results for potential buyers?
Despite the significant number of hostile offers in 2019, the failure rate for these bids remained high, underlining the difficulties associated with this approach. Even transactions at substantial premiums over current market trading prices faced resistance by target companies and their boards, including Circor’s successful rejection of Crane’s bid notwithstanding a proposed per-share premium of greater than 50%.
Pursuing a process that requires the bidder to actively circumvent a board of directors and seek to directly engage and persuade shareholders is arduous. Boards can employ a broad range of tactics in response and, in some cases, refuse to pursue a transaction even when a majority of shareholders have signalled their support. Would-be buyers often must overcome structural defences, including classified or “staggered” boards, local antitakeover statutes, and shareholder rights plans (commonly referred to as “poison pills”) that are only redeemable by the target’s board.
So in your opinion, does it remain very difficult to succeed with a hostile bid?
Given the significant obstacles in any hostile situation, even aggressive bidders willing to offer compelling premiums and apply maximum pressure to target company boards, including through public relations campaigns that can become very antagonistic, may find it difficult to succeed.
Further, we often advise clients that they should understand before launching a hostile takeover bid that the proposed transaction will become a very public auction in which the target, assuming its board ultimately elects to proceed with a sale transaction, will almost certainly undertake a process to ensure that it has received the highest price reasonably available.
As a result, a hostile suitor launching a campaign should be very confident that it is the party willing to pay the highest price. Otherwise, it may just be triggering the process under which another bidder will become the eventual successful buyer.
However, as we saw this past year with the Merck KGaA acquisition of Versum and the unsolicited but successful approach by LVMH for Tiffany, bidders offering significant premiums with the deep financial resources to provide certainty of payment can still succeed.
There is an abundance of available capital looking to be deployed in the market in 2020. Would you expect to see significant hostile activity in the remainder of the year?
Given the ongoing uncertainty in the general economic climate and the increased focus by governments, including the United States, on protecting certain sensitive technologies and industries, we would not be surprised to see the general slowdown in hostile activity that we have experienced in recent years continue in 2020.
Of course, with interest rates remaining low in many jurisdictions and organic growth for companies in many industries continuing to present challenges, we would also continue to expect those companies that identify strategically critical opportunities to seek to pursue those transactions – even if it requires going around a recalcitrant board of directors and taking the proposal directly to the target company shareholders.
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