The secret to a lucrative M&A strategy? Extend the deal as long as possible

July 3, 2013
July 3, 2013

When it comes to maximizing shareholder value in a sale of your company, the script calls for treating any and all bids as if they originate from a deranged brother-in-law who you avoid like the plague, continue in that manner for at least three bidding rounds, then fall into the arms of the highest overbidder, reassuring them that they were always your favorite, and that you never really meant all of those nasty, horrible things you said in the midst of the M&A chase.

The latest actor in this role is the top management at Onyx Pharmaceuticals, thought to be today’s object of desire of a half-dozen pharmaceuticals. Through artful, and some say lucky, deals, former cardiologist and ex-Merck executive Dr. N. Anthony Coles has in five short years developed Onyx into what the Wall Street Journal calls, a “possible prize for large drug companies seeking a cancer drug with attractive business prospects.

Last week, Onyx used standard dismissive language in turning up its nose at a $120-per-share bid from Amgen as “significantly undervalued.”

The communication subtleties of this seller’s dance is something that perhaps only career diplomats can ever hope to fully understand. If Onyx CEO Coles actually thought that Amgen’s bid was preposterously low, the script calls for veiled threats of possible lawsuits plus reference to poison pill tactics (which as the name sounds, calls for something disagreeable to occur if the deal is consummated), along with rather blunt suggestions that someone in the buying company is in league with Satan.

But behind the theatrical language is the ultimate objective of the value-maximizing seller: to extend the deal sequence as long as possible, while engaging as many eager suitors for as long as possible.

Generally thought of as unwritten sell-side tactics, the relationships between the total number of bids, the designation of the deal as hostile or not was studied in detail in 2001 by Andrade, Mitchell, and Stafford (“New Evidence and Perspectives on Mergers,” Journal of Economic Perspectives. 15:2, 103-120).

The figure below is developed by Andrade, Mitchell, and Stafford as examined in a chapter of Masterminding the Deal (August 2013):

1973-1979 1980-1989 1990-1998 1973-1998
Premium (Median) 47.2% 37.7% 34.5% 37.9%
Bids/Deal 1.6 1.6 1.2 1.4
All Cash 38.3% 45.3% 27.4% 35.4%
Own Industry 29.9% 40.1% 47.8% 42.1%
Hostile Bid* at any point 8.4% 14.3% 4.0% 8.3%
N 789 1,427 2,040 4,256

“Premium” in that exhibit refers to Acquisition Purchase Premium (APP), calculated here on the basis of the target company’s share price difference from 20 days prior to the first announcement of merger intent, compared to the price at the transaction’s close.

The above exhibit suggests that in order to extract the highest price, sellers should seek to both expand the total number of prospective bidders and also the number of times that each suitor submits a separate bid—the separate and identifiable “bid cycles” of today’s tactics.

Most conspicuously, designating the transaction as “hostile” appears to be particularly well-aligned with a higher price. (According to the researchers, “We define a bid as hostile if the target company publicly rejects it, or if the acquirer describes it as unsolicited and unfriendly.”)

Or frankly put, the more you insult your many suitors, the keener they become for the chase.

We welcome your comments at ideas@qz.com

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