Mergers and buyouts are part and parcel of the investing experience. While a buyout bid can give a nice return to a short-term investor, longer-term investors often fret that a bid may entice management to sell a company for less than its true long-term value. What is also true, though, is that sometimes managers are unreasonably and unproductively stubborn - refusing to hand over the reins (and their large executive salaries) and allow shareholders to book a profit or own shares in a larger enterprise. (For related reading, take a look at Mergers: The Sign Of Economic Recovery?)
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With news swirling around 3Par's (NYSE:PAR) willingness to sell to either Dell (Nasdaq:DELL) or Hewlett-Packard (NYSE:HPQ), there is the sharp contrast of Genzyme's (Nasdaq:GENZ) resistance to a bid from Sanofi-aventis. Let us take a look at examples where shareholders really would have been better-served if their managers had signed on the dotted line and taken the deal. (Find out how you can cash in, read Trade Takeover Stocks With Merger Arbitrage.)
1. Yahoo! And Microsoft
In early 2008, Microsoft (Nasdaq:MSFT) offered to buy Yahoo! (Nasdaq:YHOO) for $31 a share in either cash or Microsoft stock. Yahoo! refused the deal and instead managed to negotiate a search technology agreement with the software giant. Unfortunately for Yahoo! shareholders, the stock's price today is under $14 - less than half of what Microsoft was willing to pay in cash. Even if the deal had been all stock, Yahoo! shareholders would still have fared better, as Microsoft has outperformed Yahoo! by about 15% since the deal.
Roughly around the same time, Electronic Arts (Nasdaq:ERTS) offered $26 per share in an all-cash bid for Take-Two (Nasdaq:TTWO). Take-Two management sniffed about the deal being opportunistic and unfair and the deal fell apart. As it turns out, the unfair part was Take-Two shareholders being denied an opportunity to sell their shares at the price ERTS was willing to pay. The shares of Take-Two now stand at less than $10, making this another expensive refusal.
3. Too Bold By Far
Another entry in the Class of Early 2008 is the bid that United Technologies (NYSE:UTX) made for Diebold (NYSE:DBD). Diebold had been languishing for some time and UTX's all-cash bid of $40 per share offered a pretty appealing premium at the time. Apparently it was not appealing enough to Diebold management, though, and the deal never happened. These shares now trade at about $28, and the stock has lagged the S&P 500 for virtually the entire time since the company rejected UTX's bid.
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4. The Plus Did Not Include A Deal
Closing out our foursome of bad decisions is the refusal of Cost Plus (Nasdaq:CPWM) (the operator of World Market) to take Pier 1 Imports' (NYSE:PIR) merger offer in mid-2008. Pier 1 had offered 0.6 shares of Pier 1 for each share of Cost Plus. Since then, Pier 1 shares are up about 37%, while Cost Plus shares have risen less than 14%. Along the way, Cost Plus has finally started to see some rebound in its same-store sales, but against the backdrop of pretty easy comparisons.
To be fair, this was not so clearly a great deal at the time - Pier 1 had been struggling for years and the decline in Pier 1's stock on the announcement of the bid would have meant only a meager premium for Cost Plus shareholders. Still, considering how the two companies have done since the time of the attempted buyout, Cost Plus shareholders have to be at least a bit wistful while Pier 1 shareholders may well think that Cost Plus management inadvertently did them a favor.
The Bottom Line
This is certainly a selective list of refused deals that went badly for the company that decided not to sell. Fairness demands, then, that mention be made of examples like Facet's refusal to sell to Biogen Idec (Nasdaq:BIIB) only to get a significantly higher bid from Abbott Labs (NYSE:ABT). Likewise, there are dozens of successful stocks in the technology and healthcare space that would have never come to be if the companies had taken low-ball buyout offers while they were still in the venture capital stage. In other words, not all refusals are bad decisions.
What investors should remember, though, is that turnarounds are not easy. Past management performance is usually a very good indicator of future performance, and shareholders should not expect managers who were incapable of generating good returns on capital and building shareholder wealth to suddenly discover the secret recipe. If a long-suffering company gets a bid with a real premium, and particularly if that bid is all in cash, investors should hold management to account and make sure that their rights and interests are being respected. (For related reading, check out Trademarks Of A Takeover Target.)
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