Record Stock Gains for Acquirers Defy Wall Street Selloff Wisdom
As Laurie Brlas, chief financial officer of Cliffs Natural Resources Inc. (CLF), prepared to announce a deal to buy a rival mining company this year, she was confident investors would eventually see the wisdom of her company’s plan.
She didn’t expect them to see it so fast. After agreeing to purchase Consolidated Thompson Iron Mines Ltd. for about $5 billion, Cliffs shares gained 4.1 percent, benefiting from an unprecedented amount of support in the stock market for large acquisitions. Apparel maker VF Corp. (VFC) surged 10 percent June 13, when it announced a deal to buy Timberland Co. for about $1.8 billion.
“There was a very good chance the immediate next day might have had a different outcome,” Brlas said in an interview.
The typical takeover announcement pushed a buyer’s shares more than 1.1 percentage point above its benchmark stock index both this year and last, the most in at least a decade, based on a Bloomberg analysis of more than 3,800 transactions worldwide since 2000. The increases challenge the notion on Wall Street that acquirers should brace for a selloff and show companies are being rewarded for pursuing growth after exhausting internal options to cut costs and boost sales.
“Organic growth continues to be a challenge for many companies,” said Christopher Ventresca, co-head of North America mergers and acquisitions at JPMorgan Chase & Co. in New York.
Earnings increases have slowed for members of the Standard & Poor’s 500 Index even after companies pared expenses and reined in spending during the recession. Companies that have released results since April 11 reported a 20 percent gain in profits on average, compared with 40 percent in the previous reporting season, according to data compiled by Bloomberg.
‘Betting on Timing’
The market’s support this year is most pronounced for cash takeovers, in what may be a sign that companies are under pressure to spend the record cash hoards they amassed during the recession. Returns are limited, with the yield on a 10-year U.S. Treasury note hovering near 3 percent. The largest 1,000 non- financial companies are holding about $3.5 trillion of cash and equivalents, according to data compiled by Bloomberg.
The bullishness on deals may also be a wager on the economic cycle, said Steven Baronoff, the New York-based head of M&A at Bank of America Corp., who says he has been pointing out the phenomenon to clients for about a year now.
“Investors are betting on timing,” he said. “The general view is that deals done in year one or two of a recovery perform better.”
The optimism may prove premature if the economy heads back into recession after seven straight quarters of growth, or if access to credit tightens. More than $1 trillion has been erased from U.S. equity markets since the S&P 500’s peak on April 29, and domestic manufacturing in May grew at its slowest pace in more than a year.
Many deals during 2007 and 2008, such as Royal Bank of Scotland Plc’s purchase of ABN Amro Holding NV and Dow Chemical Co.’s acquisition of Rohm & Haas Co., later proved to have overextended the buyers before the onset of the credit crunch.
Buyers’ stocks have beaten their benchmark indexes following a takeover announcement a majority of the time in 8 of the past 12 years, the analysis shows. The most recent three years have set records for gains. The median reaction before 2009 was a 0.2 percentage point advance over the benchmark, the data show.
The Bloomberg analysis looked at 3,804 takeovers since Jan. 1, 2000, that were worth at least $200 million and in which the buyer was a public company and was no more than 10 times as large as the target. For each transaction, it calculated the stock-market return from the day before to the day after the announcement, minus the return in a benchmark stock index.
Even deals that don’t work out can boost a stock. Michael Pearson, chief executive officer of Valeant Pharmaceuticals International Inc. (VRX), offered $5.7 billion in cash for another drug company, Cephalon Inc. (CEPH) News of the offer in March sent Valeant’s shares up 13 percent.
While Cephalon eventually found another buyer, Valeant’s stock has held on to its gains, which Pearson ascribed partly to the market’s realization that Mississauga, Ontario-based Valeant could strike another big deal.
“There are a lot of other Cephalon-like companies out there,” he said.
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