Surge in U.S. takeover premiums may be deceptive

March 4, 2010

This year’s U.S. takeover premiums have surged to levels not seen in nearly a decade. Acquirers have paid an average of around 40 percent above market prices to nab their M&A quarry. Investors on the receiving end shouldn’t get too excited, though. Rather than reflecting ebullience, it looks as though healthy companies are pouncing on laggards at historically low prices.

The willingness of boards to bless managers’ juicy takeover attempts does at least suggest a return of some kind of animal spirits. And though M&A premiums are high — 40.4 percent on average in the first quarter, according to Thomson Reuters — the purchase prices look like bargains relative to previous stock market values.

Take for example the purchase of Bowne & Co, a U.S. printer of financial documents like IPO prospectuses and merger proxies, by larger rival RR Donnelley & Sons. On Feb. 23, Donnelley plunked down $11.50 a share for the company — 65 percent more than investors thought Bowne was worth before the deal was announced.

That sounds like an outrageous mark-up. But for several years prior to the late 2008 collapse of Lehman Brothers, a big Bowne client, the company’s shares traded at or above $12 or so. In that historical context, Donnelley is arguably getting away with a take-under of sorts.

Another example is the $3.5 billion hostile tender offer that Japan’s Astellas Pharma kicked off this week for OSI Pharmaceuticals of the United States. The $52 a share offer came at a whopping 53 percent premium to OSI’s three-month average stock price. But OSI stock has traded above $50 more than once in the last couple of years.

Unlike Bowne’s owners, OSI’s shareholders are holding out for more — the stock is trading nearly 10 percent above the bid price.

The relative performance of acquirers and targets is also a factor in the latest flurry of high-premium M&A activity.

Consider Air Products’  $5 billion-plus unsolicited offer for rival Airgas. During the post-crisis year of 2009, the predator’s share price surged more than 60 percent. But the stock of Airgas — which in prior years had consistently outperformed its larger rival’s — failed to rebound so smartly. In 2009, Airgas shares rose by only about a quarter, one argument the company is using to justify its rejection of Air Products’ advances.

To be sure, executives on the hunt for acquisitions can be tempted to pony up too much in the way of premiums. And for Air Products to snag Airgas, it will need to pay more than is justified by the capitalized value of expected future cost savings. But that’s not always the story. Especially after a steep stock market slide and rapid recovery, historical context can matter at least as much as the headline premium.

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