M&A buyers get little benefit of the doubt

By Rob Cox
August 26, 2010

Conventional wisdom has it that bulging corporate cash balances will bring a spate of deal-making. Yet many companies announcing deals of late have gotten an old-fashioned ass-whupping from shareholders. That reflects a mood in which cash, caution and skepticism dominate, making expectations of an M&A boom look overdone.

Not that investors should be jumping for joy. Most of August’s big deals — from Intel’s $7.7 billion deal for security software group McAfee to BHP Billiton’s $39 billion hostile bid for Canadian fertilizer maker Potash Corp — are fraught with risk and don’t offer the cost-cutting opportunities investors usually prize.

Even so, some of the negative market reactions seem to have gone too far. Take Intel. The company is paying a premium of $2.75 billion over McAfee’s market value before the deal was announced. Yet Intel’s value, even after adjusting for the decline in Nasdaq stocks since then, is off some $3.3 billion. McAfee may be a strategic stretch for the chipmaker, but it’s hard to see how Intel’s value will suffer beyond what it is paying to gain control.

Hewlett-Packard is in a similar boat. The computer group outbid Dell for 3PAR, a data storage business, on Monday, sending its own shares tumbling. Dell has since offered more to keep its deal to buy 3PAR on track. But even accounting for the Nasdaq’s slide, HP is still worth about $1.7 billion less than before its now-fizzled bid for 3PAR — more than the value of the entire deal that it now probably won’t be doing.

Then there is BHP. The Anglo-Australian mining giant has seen its stock market value drop by around $15 billion since news of its bid for Potash emerged. Yet even if it sweetens its offer for the fertilizer group by 15 percent, to around $150 a share, BHP would only be paying a premium of around $11 billion over Potash’s pre-deal value.

Of course, investors may be thinking BHP will end up paying more still. But pricing in another $4 billion — theoretically covering a further wasted premium that could take the bid price as high as $180 a share — seems excessive.

There are, of course, exceptions. Dell’s stock, for example, remains about where it was when the company agreed its first offer for 3PAR. But at least anecdotally, the message seems pretty clear: Buyers beware.

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