;)
It’s just one example—but a very telling one—of why recent increases in hostile takeover bids speak directly to the crisis in shareholder confidence that now confronts corporate boards. When Martin Marietta Materials recently launched a hostile takeover of Vulcan Materials Co., it first broke off friendly talks and took its offer directly to shareholders without Vulcan board approval. The offer included a 15 percent premium to shareholders.
Kathleen M. Wailes
The subsequent stock rise at both companies suggests the perception of value creation for both Vulcan investors and investors in the reconstituted company. In fact, Martin Marietta estimates cost savings of as much as $250 million and various other benefits that justify the relatively high premium in a depressed industry.
Yet this proposed deal is just the tip of a very interesting iceberg.
Bloomberg reports that 31 percent of publicly disclosed hostile or unsolicited bids for U.S. companies were completed between 2000 and 2010. Hostiles certainly have their advantages, including lower acquisition premiums and reduced transaction costs. But one real allure of hostiles is that acquirers can also circumvent the board. They likewise do not often provide retention agreements for existing management.
Current data underscore the resurgent popularity of hostile takeovers, confirming a 19.8 percent increase in 2011, to $80.45 billion. (The number of such deals was also up from 55 to 58 over the prior year.) The current environment augurs further increases in 2012 because U.S. companies hold record amounts of cash—$2.12 trillion as of the third quarter— even as stock prices are depressed. Private equity firms, hedge funds and activist shareholders will all get in on the game, with pharmaceutical and mining companies especially in play.
Meanwhile, traditional takeover defenses, such as staggered boards and poison pills, have declined significantly. In fact, the number of staggered or classified boards among the S&P 500 has fallen to 25 percent since 2002, down from 62 percent. The number of poison pills over the same period closely tracks that decline. Efforts to shield directors from removal and avoid special meetings called by acquirers are likewise less frequent these days.
We see here the impact of a movement fired by institutional investors to avoid entrenched boards that purportedly do not always represent the best interests of the shareholder. Statistics show that companies that become hostile targets often have a higher number of outside directors with lower ownership stakes and fewer additional outside directorships.
What does all of this mean for the boards themselves? It is a prolonged wakeup call, a clear message that they must begin to view value creation through the eyes of their investors, and measure the company’s performance accordingly.
The more boards listen to the opinions of their shareholders, the less vulnerable they are to surprise attacks. Similarly, they must pay more attention to changes in how the company’s stock is trading. There are proxy-solicitation firms that can advise the board on share movements without having to wait for SEC disclosure filings to reveal new positions.
It is also essential that boards and managers better articulate the value proposition of their companies and lay out a realistic strategy to build that value. They can set up working groups to fend off inadequate offers and determine what advance options they have. The decision to resist a takeover or to better serve shareholders by negotiating a friendly deal must be made dispassionately. Resistance, if that’s the choice, must be based on strong factual arguments and supported by credible third-party allies.
If investors are to be persuaded to stay the course in an age of resurgent hostiles, boards must take the most aggressive good-faith steps to retain their trust.
Kathleen M. Wailes is senior vice president at Levick Strategic Communications. She has also served as chief communications officer for a number of Fortune 500 companies.