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Hostile Bids Are Back

Hostile Bids Are Back

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Published by Priyesh Wankhede

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Published by: Priyesh Wankhede on Oct 07, 2012
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Mergers and acquisitions
When battles commence
Hostile bids are back again. Who shouldrejoice?
Feb 19th 2004 |
london, new york and tokyo
| from the print edition
THIS week, in both America and Europe, corporate bosses locked horns as the biggest hostilebids in years twisted and turned their way towards a denouement. Even in gentlemanly corporateJapan, where hostile bids are a rarity, at least two big companies are fighting off the unwantedattentions of outsiders. The boom in mergers and acquisitions in the late 1990s was notable foragreed deals between CEOs who made them as sweet as possible for themselves. Is the boomthat many forecast for this year going to be equally notable for long contested corporate tussles?And, if so, who is going to benefit the most this time?So accustomed are investors to the idea that companies overpay for acquisitions that news of atakeover bid almost invariably sends the target company's share price soaring. Comcast's hostilebid for The Walt Disney Company on February 11th pushed up the moviemaker's share price to$28, well above Comcast's initial offer. Comcast has been busily trying to persuade investors thatit is not interested in paying current market prices for Disney. Yet who can blame them forhoping? On February 17th, Cingular, an American wireless telecoms company, agreed to buyAT&T Wireless, a weaker rival, for $41 billion in cash, about twice the price that the market wasputting on the intermittently profitable firm just over a month ago.To be fair, the price for AT&T Wireless had been pushed up during a bidding war last weekendwith Vodafone, a rival telecoms carrier. Shares in Vodafone, whose British management wassupposed to have sworn off big, visionary mergers, soared sympathetically following the newsthat it had lost the battle.With their usual fancy, investors have imagined that everyone from John Malone, the boss of Liberty Media, to Barry Diller, a media mogul who runs a collection of internet businesses,wants to get their hands on Disney. But as
The Economist 
went to press, no second bidder hadyet emerged.On March 3rd, Disney's boss, Michael Eisner, will face his shareholders at the firm's annualmeeting in, of all places, Comcast's home town of Philadelphia. A chunk of them may besupporting the efforts of two former Disney directors, Roy Disney (nephew of founder Walt) andlawyer Stanley Gold, to give Mr Eisner the boot. Even more shareholders will want to know whynegotiations to renew a deal with Pixar, an animation company whose partnership with Disney
has produced hits like “Finding Nemo” and “Toy Story”, fell apart last month. Over everything
hangs the suggestion that, having rescued Disney in the 1980s, Mr Eisner's management hasmore recently been depressing the share price.Disney's board politely rejected Comcast's offer this week, pointing out that the cable company'sshares (which it wants to use as currency) have fallen since it made its offer
and that Disney'shave risen. So the suitor is offering significantly less than the company is fetching on the NewYork Stock Exchange. As the mathematics of the offer ebb and flow, the market's attention willturn to Disney's defences and how well it can exploit them.
Poisonous tactics
How successful the next wave of hostile bids is will depend largely on a shifting legal andregulatory framework which, despite some surviving obstacles, seems to be making them easierthan in the 1990s. In America, corporate law is the province of state governments. There was atime when, as in Europe, American firms could hope to rely on friendly local governments tohelp them out of a tight spot. As hostile bids flourished during the 1980s, states such as NewJersey, Ohio and Pennsylvania rushed to pass management-friendly anti-takeover laws.This still happens occasionally. Last year, Simon Property and Westfield America, twoshopping-mall operators, dropped their $1.7 billion hostile bid for Taubman Centers, a rival,after the state of Michigan passed a law that effectively killed their bid. But such laws havebecome highly controversial, and they may now be beyond the hopes of all but the mostgenerous patrons.About 40% of the 5,500-odd publicly owned companies tracked by Institutional ShareholderServices, a research organisation, employ a poison pill. Typically, this is a device that allowsshareholders in firms threatened by a hostile bid to buy new shares in their company at a bigdiscount. That makes it more costly to take over the firm by tendering for its newly enlarged poolof equity.At the same time, 60% of American firms have a staggered board, under which different groupsof directors are elected in different years. This device hinders attempts to take over companiesbecause it can take years for shareholders to materially change the composition of the board. In arecent paper, Lucian Bebchuk of Harvard Law School argues that staggered boards costshareholders about 4-6% of their firms' market value by allowing entrenched managers anddirectors to spurn attractive offers.Oracle has had to tackle both a poison pill and a staggered board in its current attempt to takeover PeopleSoft, a rival software firm. The legality of PeopleSoft's poison pill awaits a rulingfrom the courts in Delaware where the company (like the majority of publicly owned Americanfirms) is incorporated. Although that ruling may now never come
this month, justice-department lawyers said they would recommend that the deal be blocked on antitrust grounds
there remain interesting questions about the way in which the rulings of Delaware's courts areevolving.
What will Delaware wear?
The state's most famous ruling came in 1989. That year, its supreme court judged that Time's
directors could “just say no” to a $200
-per-share hostile bid from Paramount, forcingshareholders to accept a $138-per-share friendly bid from Warner instead. More recently,however, Delaware has found itself undermined by several federal incursions into its authority.As part of its efforts to ward off further federal attacks, Delaware may feel the need to revisit thethinking behind the Time Warner ruling. If PeopleSoft does not present it with an opportunity,perhaps Disney will.Oddly, for a company frequently accused of entrenched management, Disney has neither apoison pill nor a staggered board. The firm dismantled both defences after a row with activistshareholders in 1999. It has turned for help in its defence to Marty Lipton, a founding partner atthe law firm Wachtell, Lipton, Rosen & Katz and a leading source of advice on howmanagement should defend itself from hostile attacks.The Disney board may eventually have to confront two tough questions. One is whether it canstill (as Time did) just say no at any price. The other is whether it can approve and justify extra-legal defensive measures. These could include Disney itself buying a firm or returning billions of dollars to its shareholders via, say, a big share buy-back. Both moves could well kill off Comcast's interest in the company.Europe is also currently hosting a giant hostile takeover bid, one that in value at least is on a par
with Disney's. The €46 billion ($58 billion) bid by Paris
-based Sanofi-Synthélabo for its biggerpharmaceutical rival, Aventis, was rejected this week by Aventis's board because the cash-and-shar
es offer “is clearly inadequate from a financial standpoint”. Aventis also claims that there are
problems with its rival's products
in particular with Sanofi's popular anti-thrombosis drugPlavix, which is facing a challenge to its patent in America.Defences in Europe against hostile bids are notoriously more robust than those in America. Butthe battle between the two pharmaceuticals giants shows that, despite the efforts of somecountries to maintain elaborate takeover defences, the walls may be slowly beginning tocrumble.Aventis, a Franco-German group, has bought itself some time by launching an appeal against adecision by France's financial-markets authority that there are no grounds to block the bid. Itmight also search for a white knight to counter the bid: the Swiss group Novartis and America'sJohnson & Johnson are two potential suitors that have been mentioned, although both haverefused to comment.

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