TORONTO — A widening the gap between how bidders value their corporate targets and how those targets value themselves has led to an increase in high-profile hostile takeover bids.
Experts in merger and acquisition activity say companies looking for takeover opportunities know there are many struggling companies out there that should be willing to sell themselves at a discount.
At the same time, a bounce in stock prices — the S&P/TSX composite index has gained more than 50 per cent since its low in March — and a general improvement in the economic outlook means that many companies facing a possible takeover are no longer desperate to sell and will hold out for what they see as a fair offer.
A couple of protracted takeover battles serve as cases in point.
Canadian fertilizer giant Agrium Inc. (TSX:AGU) has been persistently trying to acquire Illinois-based CF Industries (NYSE:C) for eight months.
Back in February, Agrium bid US$3.6 billion or US$72 per CF share for the company, but CF described that bid as “grossly inadequate.”
Since then, the bid has been twice sweetened to more than US$4 billion and extended multiple times, but CF insists that it wants to remain independent and is itself trying to acquire Terra Industries Inc.
In another example, New York-based JLL Partners Inc. has been fighting to buy Canadian drugmaker Patheon Inc. (TSX:PTI) since last December, when it bid US$2 per share for the 71 per cent of Patheon it didn’t already own.
Patheon described the bid as “substantially undervalued.”
Since then, JLL has continued to increase its stake in the company to 57 per cent. It seemed like Swiss drug company Lonza Group would appear as a so-called “white knight” in the battle, but JLL used its majority stake to block Lonza’s takeover proposal.
It’s likely the amount of hostile M&A activity will increase as the economy and financial markets improve. Companies that have managed to stay strong see plenty of takeover opportunities, said Colin Walker, managing director at Crosbie and Co., a specialty investment banking firm.
“Companies that have firepower in terms of strong balance sheets and have the capacity to be acquisitive, this market has put them in a very strong position,” Walker said.
“On the other hand, especially in the micro-cap and mid-cap space, you’ve got a lot of orphan companies that are facing strategic issues.... It’s something that you see a lot of at this point in the cycle.”
However, this doesn’t mean all — or even very many — hostile bids are successful. Spitznagel estimated that only between 10 and 20 per cent of hostile bidders are able to win over shareholders.
More often than not, hostile bids will send the target hunting for a white knight to step in and rescue them with a higher bid, and this is often successful.
“With most hostile takeovers, probably in 80 or 90 per cent of the cases, the companies ultimately get acquired but not always by the hostile bidder,” said Ed Giacomelli, also a managing director at Crosbie.
“So it’s a tactic that’s used, but fairly sparingly, because once you launch the hostile bid, you’re typically on the outside looking in.”
By definition, a hostile takeover bid doesn’t have the approval of the target company’s board of directors, which limits access to company information and makes negotiations difficult.
Because of this, hostile bids tend to account for a very small portion of M&A activity at any given point.
Giacomelli said he expects to see an “uptick” in overall M&A activity in the third quarter, particularly in the natural resource sectors.
However, he said it won’t be a return to the “heady days” of 2007 when M&A activity was at a high point.
“The reality is there isn’t a lot of liquidity in the market. The banks are not yet lending at the levels and certainly not at the multiples they were lending at two years ago,” Giacomelli said, adding that the market will also need more visibility on earnings before M&A activity really picks up.
Other recent hostile bids have included a prolonged battle by TransAlta Corp. (TSX:TA) to take over green energy producer Canadian Hydro Developers Inc. (TSX:KHD), which ended earlier this month with the two companies reaching a tentative agreement on a $755-million deal.
And Petro Andina Resources Inc. (TSX:PAR) was able to turn a hostile bid by Dutch firm Pluspetrol Resources Corp. into a friendly deal after Pluspetrol upped its bid from $400 million to a deal worth $500 million.
Meanwhile, it appears that a $597-million takeover bid by Toromont Industries Ltd. (TSX:TIH) for Enerflex Systems Income Fund (TSX:EFX.UN) could turn hostile after Toromont accused Enerflex’s board of thwarting progress towards a “transaction that our respective security holders would enthusiastically embrace.” Enerflex took issue with the statement.