The turbulence in the M&A
market that began in the second half of 2007 continued through all of
2008. Globally, deal volume was down nearly
49% between 2007 and 2008 and the number of announced deals was down over 29%
according to FactSet Mergerstat. In the
Unfriendly transactions, those involving deals that started with unsolicited offers and may have become hostile, represented 23% of all announced deals involving full acquisitions of US public companies in 2008, according to FactSet MergerMetrics. In addition to the unfriendly M&A activity, corporate boards faced a record number of proxy fights in 2008. A total of 123 proxy fights were waged in 2008, an increase of 14% over the previous years total of 108, according to FactSet SharkRepellent's 2008 Year End Review. This is well above the percentage of unfriendly deals we have seen in the past 5 years, where 2006 saw the next highest percentage of just 14%. Healthy corporate buyers, spurred on by the declining stock prices of potential targets, took advantage and made offers in an attempt to secure strategic partners at discount prices. Not only was there a significant increase in the number of unfriendly deals, but there were many high profile companies that were targeted this year, including Anheuser-Busch, Yahoo, Calpine Corp., SanDisk Corp. and ImClone Systems.
Whether the increase in hostile M&A and the current market conditions will ultimately reverse the six year trend of companies reducing takeover defenses remains to be seen, but the level of defense protection continued to decline in 2008, albeit at a slower pace than previous years. The average Bullet Proof Rating of the S&P 1500 declined from 4.57 at end of 2007 to 4.23 in 2008. The Bullet Proof Rating is a relative measurement of a company's takeover defense protection. One surprising development in 2008 was the late year surge in poison pill adoptions. The 28 pill adoptions in December was the most in any month since October 2001 and 2008's full year total of 127 adoptions was the most in any year since 2002. The 76 first time pill adoptions in 2008 was the most in three years, a dramatic reversal from 2007's total of 42 which was the lowest total since the early 1980s, according to FactSet SharkRepellent. The increase in poison pill adoptions is likely related to the precipitous drop in valuations and not a sea change in the current thinking on poison pills which has been waiting until a raider actually appears before adopting one. In the press release announcing the poison pill adoption, several of the companies pointed to current market conditions as the impetus for the adoption.
Going Private Deals
Going private deals accounted
for more than 31% of all agreed deals involving
Negotiated Deal Provisions
As the M&A market heated
up between 2004 and the first half of 2007, we identified noticeable shifts in
how merger agreements were negotiated. The
availability of cheap credit and the increased leverage sellers had in
negotiations led to a steady decline in the inclusion of financing conditions. In 2005, over 13% of agreed deals involving
full acquisitions of
Reverse breakup fees is
another merger provision for which we have seen a significant change over the
last several years. The percentage of
agreed deals involving full acquisitions of
Go shops are another negotiated provision that have received lots of attention over the last few years. A go shop provision allows a target company to actively seek a competing bid for a specified period of time after it has entered into a definitive acquisition agreement, which is prohibited in agreements that do not include go shop provisions. In 2007, when the M&A market was being driven by private equity buyers, almost 11% of all agreed deals involving full acquisitions of US public targets included a go shop provision. Between 2004 and 2006, go shops were negotiated into the definitive agreement much less frequently. There was a noticeable increase to 4.36% in 2006, but this was still 50% lower than the percentage in 2007. In 2008, the percentage of deals with go shops fell slightly to 7.73%, but continue to be negotiated into agreements. The average number of days that the target can seek a competing bid during the go shop period fell in 2008 to just under 37 days from a high of 40 days in 2007. The percentage of deals with a separate go shop termination fee also fell in 2008 to 71% from 84% in 2007. While go shop provisions allow targets to actively seek a competing bid, they are not very effective as they have lead to a competing offer less than 10% of the time since 2004.
One Step versus Two Step
As acquirers prepare to enter into a definitive agreement, they are faced with the decision of whether to use a one step or a two step merger and acquirers are increasingly choosing to use a tender offer instead of a straight merger in their acquisitions. Tender offers give acquirers several advantages over traditional one step transactions, particularly the speed at which the transaction can be completed and the option to use a short form merger once more than 90% of the shares have been tendered in the offer. Prior to December 2006, when the Securities and Exchange Commission clarified the rules governing tender offers, tender offers were used between 7% and 10% in agreed deals between 2004 and 2006. In 2007, the percentage of agreed deals involving tender offers doubled to more than 16% and in 2008, tender offers were used more than 24% of the time.
Another significant development we have seen related to tender offers is the use of top-up options. A top-up option gives the acquirer the option to purchase that number of newly issued shares of the target company necessary to give them one more share than the 90% threshold they need in order to close out the deal with a short form merger. There is generally a minimum threshold that must be reached as far as the number of shares tendered in the agreement before the top-up option can be exercised. Some deals set the threshold at 70% or 80%, meaning that the acquirer cannot exercise the top-up option until 70% or 80% of the shares have been tendered. Some transactions set the threshold as low as 50%. In a case like this, once more than 50% of target shareholders have tendered their shares, the acquirer can exercise the top-up option to get over the normal 90% threshold, which enables them to close out the deal with a short form merger. The lower the threshold on a top-up option, the greater the likelihood that the acquirer can close out the transaction with a short form merger, effectively removing any concern that the target will need to hold a shareholder meeting to approve the transaction. In 2004, 35% of agreed tender offers included a top-up option. By 2006, that number had increased to 64%, and in 2007 they had become nearly ubiquitous, with 94% of all agreed tender offers including a top-up option. In 2008, the inclusion of a top-up option had become standard as 100% of all agreed tender offers included one.
Cash remains the currency of
choice for transactions involving full acquisitions of