Hedge Funds | Mergers & Acquisitions

Hostile Takeover Bids for Big Firms Across Industries Make a Comeback

By DAVID GELLES    June 12, 2014 8:25 pm

Endurance Specialty Holdings’ offer for Aspen Insurance Holdings in April did not get much attention from the broader business world.

But the takeover effort, now in its third month, pointed to a change on Wall Street today: Hostile deal making is back. Endurance, a Bermuda-based insurance group led by John R. Charman, tried to negotiate a friendly deal with Aspen. But after months of private approaches that Aspen rejected, Endurance went public in April with an unsolicited offer.

“We felt we didn’t have any other choice,” Endurance’s chief financial officer, Michael J. McGuire, said in an interview. “All along, we have been trying to engage in a friendly negotiated transaction. We were very committed to giving them an opportunity to engage in private. But at each stage of the game, they refused to engage at all.”

Johnny Green/Press Association, via Associated Press Endurance Specialty Holdings, an insurer led by John R. Charman, tried to negotiate a friendly acquisition of Aspen Holdings. But when that failed, it made a hostile offer.

Now Endurance, which is waging a proxy fight to replace the Aspen board, has joined a list of prominent bidders making unwelcome offers for big companies across industries.

Pfizer’s $119 billion proposal to acquire AstraZeneca was unsolicited. Valeant Pharmaceuticals is waging a $53 billion hostile effort to take over Allergan. And several bidding wars have broken out over targets that never put up a “For Sale” sign.

“Boards are much more comfortable considering unilateral transactions,” said Jim Head, co-chief of mergers and acquisitions for the Americas at Morgan Stanley. “The reputational cost of doing it seems to be lower than it ever was.”

Hostile and unsolicited deal activity is up sharply this year, according to Thomson Reuters. Even excluding Pfizer’s withdrawn bid for AstraZeneca, nearly $100 billion in hostile offers have been made, accounting for 7 percent of global offer volume. That is the highest amount since the deal boom of 2007, and it is occurring as broader deal volumes are soaring.

One factor driving the increase in hostile activity is greater confidence in the boardroom. With the general economic outlook relatively stable, stock prices riding high and growth in the United States steady, executives are more willing to pursue acquisitions they have long considered.

Targets, however, are similarly bullish, making it easy to spurn suitors.

On Tuesday, Allergan formally rejected a $53 billion offer from Valeant Pharmaceuticals. In doing so, it said Valeant’s bid “substantially undervalues” the company, using a common phrase.

In January, Time Warner Cable said an acquisition proposal from Charter Communications “substantially undervalues” the company.

And in December, when Jos. A. Bank Clothiers rejected a bid from Men’s Wearhouse, it used the same phrase. “We continue to believe that your offer to acquire Jos. A. Bank substantially undervalues our company and that your proposal is not in the best interests of our stockholders,” the Jos. A. Bank board wrote in a letter to Men’s Wearhouse.

Such posturing is not always a successful defense, though it can drive up the price. In the case of Jos. A. Bank, the company was ultimately sold to Men’s Wearhouse. Charter Communications lost to Comcast, which ultimately agreed to acquire Time Warner Cable.

Changes in corporate governance have also made it easier for companies to make hostile bids.

Fewer companies have board members with staggered terms today, so shareholders can vote out an entire slate of directors at once if the directors are seen as entrenched. Poison pills, which prevent outside shareholders from attaining large positions, are less common. And the concentration of big company stock in the hands of a small number of large, institutional investors has made it easier for bidders to win shareholder support.

“Buyers are willing to assess jumping announced deals for prized assets, and the technology has made it easier,” Mr. Head of Morgan Stanley said.

The rise of shareholder activism has also been influential. In some ways, the threat of activists has replaced the threat of hostile deal making. Companies now prepare for activist investors as they once did for hostile bidders.

But signs suggest that activists and hostile bidders are willing to work together. William A. Ackman, the chief executive of the hedge fund Pershing Square Capital Management, is working with Valeant in its effort to acquire Allergan, setting a potential precedent for deals to come.

And with the increase in hostile activity, even private equity firms are being drawn into the fray. Kohlberg Kravis Roberts has made an unsolicited $3 billion offer for Treasury Wine Estates, an Australian vintner. Treasury rejected the offer, but its stock is up, signaling investors’ belief that KKR will raise its bid.

In some cases, unsolicited deals are leading to bidding wars. On Monday, Tyson prevailed over Pilgrim’s Pride in a bidding war for Hillshire Brands.

Early this year, Time Warner Cable resisted engaging in deal talks with Charter, but wound up striking a friendly deal with Comcast in February. Bidding wars this year have produced deals worth about $147 billion, the highest amount since before the financial crisis, according to Thomson Reuters.

Constraints on hostile deal making remain. Such efforts require a commitment of resources and the willingness to engage in a war of words with a reluctant target, all without any guarantee of success.

“It has never been something that anyone does lightly,” said Antonio Weiss, Lazard’s global head of investment banking. “You cannot try on a hostile bid and see how it goes.”

The tough regulatory environment may also be playing a role in limiting the number of hostile deals. Many hostile deals are horizontal mergers, with competitors taking over one another. Such deals often face scrutiny from antitrust regulators, making a hostile approach that much riskier.

“You’re exposing your strategy to the public without knowing you can carry through with it,” Mr. Weiss said.

Nonetheless, investment bankers predict an increase in hostile activity.

“This should be the easiest time on earth to win a hostile,” said one senior banker who declined to be named because he was involved in several hostile deals.

In the case of Endurance, the company said it was willing to follow through with efforts to replace the Aspen board if necessary. “We’re not shy about driving hard to deliver shareholder value,” Mr. McGuire said.

A version of this article appears in print on 06/13/2014, on page B1 of the NewYork edition with the headline: Hostile Takeover Bids for Big Firms Across Industries Make a Comeback.

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