M&A Goes Hostile

With the economy on the mend, cash-rich companies are ready to make deals again. But many targets, wary of lowball offers, aren't willing to sell. The latest standoff: Kraft Foods (KFT) vs. Cadbury (CBY). On Nov. 9 the U.S. packaged goods maker decided to take its $16.3 billion bid to shareholders of the European candymaker after getting spurned by the board in September.

Hostile takeovers are back. Since the downturn began in 2007, unsolicited bids have accounted for 11% of announced acquisitions in the U.S. That compares with an average of 6.8% over the past decade, according to Dealogic (TRI). "These deals are heating up and will continue," says Michael G. O'Bryan, an M&A attorney with New York law firm Morrison & Foerster. After resisting for eight months, biotech company Genentech agreed to a $46.8 billion acquisition by drugmaker Roche (RHHBY). PepsiCo (PEP) finally persuaded Pepsi Bottling Group (PBG) to make a deal for $4.2 billion.

Why are buyers getting so aggressive? Vulnerable companies, whose share prices have been battered, may be in a state of denial. Some targets think they're worth way more than their current market value and are unwilling to accept deals even when the suitor plans to pay a nice premium. "Companies have gotten used to buyers factoring future earnings into the offer price," says Paul Weisbrich, a senior managing director at investment bank McGladrey Capital Markets. "Now buyers are saying, 'Hell, no.' "

That attitude is being reflected in some recent bids. Kraft initially offered $16.7 billion for Cadbury in September, roughly 31% above its market value then. When the Cadbury board balked at the price, Kraft CEO Irene Rosenfeld refused to budge. Two months later, Kraft even cut the bid slightly to $16.3 billion. "Kraft's offer does not come remotely close to reflecting the true value of our company," says Cadbury Chairman Roger Carr. Says a Kraft spokesman: "We believe this offer is fair and attractive."

Less Potent Poison Pills Vultures may have more success than in the past. In recent years shareholders have stripped companies of many traditional takeover defenses, fearing directors would use them to reject deals that were in the best interest of investors. Among the casualties: so-called staggered boards in which only a few members come up for election each year. That prevents corporate raiders from staffing the entire board with sympathizers. Fewer than 35% of companies in the Standard & Poor's 500-stock index have staggered boards, compared with 60% in 2002.

Multiyear poison pills have also lost favor. The plans can deter a takeover by giving management-friendly investors the right to buy a large number of shares, thus diluting the hostile bidder's stake. During the 1980s, they became a popular method of blocking raiders such as Carl Icahn. But in the 1990s investors railed against the long-term policies, which often extended up to 10 years and didn't require shareholder approval.

Boards are finding ways to spruce up this tactic for modern times. Some companies are introducing short-term poison pills that can be deployed only for a specific period of time, say, 12 months or less. Investors find the new version more appealing than the old one: It can be used to briefly ward off unattractive buyers while still ensuring that boards will consider other offers. In September, Facet Biotech (FACT) adopted a one-year poison pill after snubbing a deal from rival Biogen Idec (BIIB).

And more boards are asking for shareholders' permission before instituting poison pills. This year 26 companies, including builder KB Home, have planned to put such policies to a vote—the most of any year in the past decade, according to researcher RiskMetrics Group. Says Morrison & Foerster's O'Bryan: "Targets are adapting" to the new environment.

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