Hostile takeovers get a bad rap.
Sure, the back-and-forth rhetoric can turn, well, hostile and the risks of overpaying or wasting time and energy are high. And yes, oftentimes the deals don't even happen, as occurred this week when Canadian Pacific Railway dropped its months-long (and unbidden) pursuit of Norfolk Southern. Be that as it may, some bad blood between deal partners can actually pay off.
Purchases that start out unfriendly or turn hostile generate better returns for the acquirer, on average, than deals where the buyer and seller are in agreement the whole way through, according to an analysis by M&A research firm the Edge. The study looked at close to 4,000 public deals over a period of more than 15 years, about 100 of which were classified as unfriendly.
Buyers who pursued deals even when the target was reluctant saw an average return of 14 percent in the two years after closing their purchases, compared with a 2.2 percent gain for friendly acquirers. Unfriendly buyers also outperformed the comparable returns for the MSCI World Index, the analysis showed.
It's counter-intuitive at first, but this dynamic makes sense when you stop and think about it. An acquirer must really want an asset -- whether to fill a specific hole in its portfolio or to keep a competitor from gaining an edge -- to go through all the rigmarole that an unfriendly deal entails.
The strategic logic then has to be clearly communicated to the target company's shareholders, who will question all of the buyer's assumptions and calculations. That heightened public scrutiny likely makes buyers better prepared for the tough integration work that comes after a merger closes -- so long as they don't lose their heads along the way and overpay, of course.
Hostile deals aren't that common and most don't come to fruition. In the last decade, there were about 475 transactions valued at $250 million-plus that at one point didn't have the backing of the target company's management; less than 40 percent of them have been completed. Compare that to the more than 6,500 friendly deals announced over the same stretch, about 83 percent of which have crossed the finish line.
In the case of Canadian Pacific's pursuit of Norfolk Southern, the buyer misjudged the regulatory hurdles to a combination and overestimated the target shareholders' interest in a deal. When unfriendly acquirers come better prepared though, they have a good shot at creating value for their investors.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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