Hostile. It’s a word that is increasingly prevalent in today’s booming M&A market. Time and again we watch as high-profile acquirers pursue deals with relentless vigor, even in the face of rejection. We all remember last year’s blockbuster takeover attempts by Pfizer, Valeant and Dollar General. But if hostile deal-making was back in 2014, it’s back with a vengeance in 2015.
As of mid-June this year, the number of hostile takeovers launched by US companies doubled from the same period last year, reaching 40 bids since the start of 2015.1 The first half of this year also saw $240 billion of unsolicited or hostile deals announced globally, the highest levels since pre-crisis 2007.2
So what is it that’s driving buyers towards more aggressive M&A strategies? For some, employing this bold strategy may be more of a necessity than a choice.
A wave of consolidation is taking place across numerous industries in the US. Large corporations experiencing stagnant growth are looking to M&A as a strategy to boost revenues, grow market share and reduce costs. In a consolidating sector, such as health insurance, pharmaceuticals or energy, the remaining targets are diminished. Therefore, a buyer must act sooner rather than later as there may not be anything meaningful left to buy. Buyers who are unsuccessful in completing acquisitions may even run the risk of becoming takeover targets themselves. Once companies in these sectors begin striking deals, the race is on, leaving rivals to strategize about whether to make a takeover attempt and/or how to respond to one.
For example, health insurance company Humana’s decision to explore a sale prompted peers Cigna Corp., Aetna Inc., Anthem Inc. and UnitedHealth Group to also explore M&A transactions. In just a few short months, Anthem has explored takeovers of smaller rivals Cigna and Humana. Humana has also drawn interest from Aetna and Cigna, the two rumored targets of UnitedHealth Group. Now that Aetna has agreed to buy Humana for $37 billion, and Anthem has officially announced an agreement to acquire Cigna Corp for $54.2 billion, it’s clear that UnitedHealth was too late to the party, and has been left behind to face an uphill battle alone.3
Horizontal mergers such as these face increased regulatory scrutiny, which may cause targets to reject a greater number of takeover offers than in previous years. In response, some buyers have agreed to significant breakup fees if antitrust issues block the deal. However, sometimes breakup fees may be insufficient relative to the disruption and harm that could be caused in the period leading up to approvals. Such is the case with Swiss agricultural chemical group, Sygenta. The company recently turned down Monsanto’s $45 billion takeover offer, which included a $2 billion breakup fee if the merger were to be shot down by regulators.4
Industry consolidation is just one force driving hostile takeover bids. Acquirers also face pressure from shareholders to use their significant cash reserves to create value, rather than seeking greater share buybacks. US equity valuations are expensive, with the typical stock in the S&P 500 now trading at more than18x forward P/E.5 This makes shares pricey to purchase back. However, companies can use their own high-valued stock to purchase a target’s equity and achieve growth through M&A. As it turns out, shareholders have been duly rewarded for these efforts. Unlike in prior years, the stock prices of buyers have gone up 66% of the time after a deal has been announced. 6
This positive share reaction has helped to boost hostile takeover attempts in another way as well: by boosting boardroom confidence to pre-crisis levels. The stigma attached to an unsolicited takeover attempt appears to have lessened dramatically. As a result, executives are more willing to initiate unfriendly transactions without fear of their companies’ stock prices dropping. A relatively stable economy, steady growth in the United States and a continuously favorable deal-making environment has also motivated buyers to aggressively pursue acquisitions they have long considered. But acquirers aren’t the only ones feeling optimistic. Takeover targets are quick to reject hostile takeover bids that they feel undervalue their companies.
It’s important to note that the growing popularity of hostile takeover attempts is not an indication of their likelihood of success. Just two years after ConAgra Foods completed its $5 billion hostile-turned-friendly acquisition of Ralcorp Holdings, the company has announced that it will be exiting Ralcorp’s expensive private-label business.
At the end of the day, every company has a price. The difference now is that most acquirers have the resources and motivation to find out just what that is, and match it. Boardroom confidence and shareholder pressure combined with favorable deal-making conditions may ultimately drive bullish acquirers to overspend on hostile takeover attempts. But time will tell if the benefits of these risky and unfriendly processes will outweigh the costs.
3. Reuters
4. NY Times
5. Bloomberg
