The Bids Sure Are Getting Hostile

Unsolicited offers are on the rise in a market ripe for consolidation

What's the matter with a little hostility? Nothing at all, if you ask Dimitri J. Boylan, chief executive of online employment service (HOTJ ). Six months after he set plans to merge with TMP Worldwide Inc. (TMPW ), parent of rival, media giant Yahoo! Inc. (YHOO ) on Dec. 12 barged in with an unsolicited offer to buy HotJobs for $436 million in cash and stock. With $81 million more on the table than TMP was willing to pay by late December and stronger growth prospects, it took less than three weeks for Boylan to say yes to Yahoo's hostile bid. "[I was] surprised to get the phone call, but not surprised by the strategy," says Boylan.

HotJobs isn't the only company on the receiving end of such calls these days. As companies ranging from cable-television provider AT&T Broadband to cruise liner P&O Princess Cruises (POC ) have discovered, hostile takeovers are back with a vengeance. The combination of a weakened economy, downtrodden stock prices, and new accounting practices sent hostile bids soaring in 2001, with more on the way. "We've clearly seen an uptick," says David M. Baum, co-head of mergers and acquisitions in North America at Goldman, Sachs & Co. "And we're likely to see unsolicited activity accelerate."

Indeed, from just $40 billion in 2000, the value of announced hostile deals more than doubled last year, to $94 billion. That's well above the $81 billion peak hit in the 1988 heyday of the hostile deal, and close to the record set in 1999 as the stock market topped out. That year, the combination of lofty share prices and one outsized deal by Pfizer Inc. (PFE )--which paid $90 billion for Warner-Lambert Co.--led to a record $103 billion in hostile deals.

Not surprisingly, all that predatory dealmaking is also spurring more companies to take defensive maneuvers: The adoption of shareholder-rights plans known as poison pills is also back up. And that's not the only way the hostile takeover game has changed since it first burst on the scene in the 1980s. Then, corporate raiders like Carl C. Icahn and Henry R. Kravis scoured the landscape for companies with undervalued assets to restructure and sell. Now, the predators are more likely to be blue-chip industry leaders like Comcast (CMCSA ), which is buying AT&T Broadband, and Weyerhaeuser (WY ), which is trying to combine with Willamette Industries (WLL ) (page 30).

Why the rise in hostile deals now? The recession is the driving force behind the trend. The weak economy, scarce profits, and rampant overcapacity in many sectors have pushed industry leaders to try to strengthen their positions by forcing consolidation (page 32). And for those with the financial muscle, there's little question plenty of assets and businesses can now be gotten on the cheap. With the Standard & Poor's 500-stock index down 13% in 2001 alone, shares of weaker companies are at bargain-basement prices.

For mainstream companies, the repercussions of failing at a hostile bid also have lessened. Because failing to pull off a deal used to be considered a major embarrassment on Wall Street, acquirers felt compelled to engage in bidding wars no matter what the cost--so they thought long and hard before moving ahead. Now, even if a takeover fails, investors often reward a predator. "We're seeing more companies make proposals on transactions that are prepared to walk away if the deal does not create value for their shareholders," says Donald Meltzer, head of global M&A at Credit Suisse First Boston.

Regulatory changes are also giving companies greater incentive to fire away. Bankers expect the antitrust environment under President Bush's Administration to be easier, so CEOs are less worried about making aggressive offers to gobble up smaller rivals. "Coming out of the recession, people are less concerned about these issues than getting things rolling again," says James R. Elliott III, head of North American M&A at J.P. Morgan Chase & Co.

Even accounting rules are helping to spur hostile deals. In the past, predators shied away from all deals--hostile and friendly alike--where their own earnings would have been diluted because of the need to amortize goodwill. That's the difference between the amount an acquirer pays for a company and what its assets are on its own balance sheet. But in July, the Financial Accounting Standards Board decided to end the practice of amortizing goodwill. "One of the great defenses against hostile offers has been eliminated," says tax and accounting analyst Robert Willens at Lehman Brothers Inc. The change has been particularly important in industries built on human capital, such as biotech, technology, and financial services, because the difference between companies' asset values and their stock valuations have typically been large.

That's one key reason hostile deals are soaring in the tech sector. Indeed, 62% of the hostile bids in 2001 involved failing dot-coms, cash-strapped telecom players, and other tech companies, up from 24% of hostile deals just a year earlier. But there's another, more prosaic explanation as well: In the past, acquirers generally avoided hostile deals in tech, since many feared a target's main assets--its engineers, developers, and other valuable employees--would flee. But with the economy in a recession and unemployment rising, unhappy employees have fewer places to move to. "[Tech] takeover targets can't take as much comfort as they have in the past," says Doug W. McNitt, general counsel at webMethods Inc., a Fairfax (Va.) company that specializes in linking computer systems.

That isn't to say companies have been shorn of all defenses. The rise in hostile activity is also spurring another round of poison pills designed to make life tougher for potential acquirers. In 2001, 283 companies adopted poison pills, 74 more than in 2000. And given the plunge in stock valuations they've suffered, it's hardly surprising that tech companies and dot-coms such as BEA Systems Inc. (BEAS ) and E*Trade Group Inc. (EGRP ) accounted for 31% of the poison pills enacted in 2001, up from 24% last year. "Many CEOs are actively reviewing their companies' defensive profiles," says Michael J. Boublik, head of East Coast technology M&A at Morgan Stanley Dean Witter & Co.

Some managements are going so far as to hire investment bankers just in case they get hit with a hostile bid. "Over the last 12 months, we have more than doubled our defense retainer business," says CSFB's Meltzer.

For now, however, the return of poison pills has left investors relatively sanguine. The reason? Unlike in the '80s, when such measures were often used to protect entrenched management, today's pills are more geared to prompting unwanted bidders to increase their offers. Bankers now point to a wealth of evidence that they ultimately pay off for investors. J.P. Morgan Securities' research shows that since 1997, U.S. companies worth more than $1 billion with pills in place received a median premium of 35.9%, vs. 31.9% for companies without. "Your typical investor can point to more situations where boards used pills to get higher bids than to boards that used pills to forestall [deals] altogether," says Patrick McGurn, vice-president and director of corporate programs at Institutional Shareholder Services. Considering many of the other earmarks of these hardscrabble times, it's at least a trend that investors can bank on.

By Emily Thornton in New York, with Faith Keenan in Boston, Christopher Palmeri in Los Angeles, and Linda Himelstein in San Mateo, Calif.

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