Two prominent buyout shops have participated in hostile bids so far this year, unusual in an industry that has strived to distance itself from its bare-knuckled past.
Although Wall Street shouldn’t expect the galloping return of the corporate raider, the combination of buyout shops’ huge storehouse of dry powder and sagging stock prices could usher in a smattering of contested deals.
Late last month,
After rebranding its bid for Kellwood as a tender offer, Sun Capital succeeded in its effort to acquire the company late last month for about $767 million; this success came after the firm was twice rebuffed by management in September and November. Furniture Brands International rejected Sun Capital’s offer on Feb. 21, with management saying its own restructuring process is creating shareholder value.
Sun Capital declined to comment. A source close to the firm said the deals are atypical, insomuch as 90 percent of Sun Capital’s targets are privately held. Still, this source said Sun Capital views itself as a “white knight” in the deals, and the unsolicited bids weren’t prompted by current market conditions.
Axcelis’s board has so far declined Sumitomo’s overture, suggesting its offering price of $544 million, or $5.20 per share, undervalues the company.
Boards of companies such as Axcelis are turning down buyout shops because they don’t want to sell at a time when the corporations might not fetch what they think they’re worth, said Marshall Sonenshine, co-founder of Sonenshine Partners, a mergers and acquisitions advisory boutique in New York. Meanwhile, buyout shops are hunting for discounts on companies with depressed stock prices.
On the whole, buyout firms aren’t going hostile—not yet, at least—but they are getting “pushy,” Sonenshine said.
By pushy, Sonenshine meant that some sponsors are sending private letters to apprehensive members of company boards, as opposed to publicizing their “bear hug” letters à la Steve Ballmer of Microsoft with his dispatch to Yahoo’s board. Firms are also directing their bankers to call board members to ask them, in effect, What’s the problem, and why won’t you negotiate?
“I don’t know whether they’re the tip of the iceberg,” Sonenshine said of the three deals so far this year. “I think most [buyout shops] want to be seen as friendly.”
That said, firms may be tempted to depart from convention because they sense an arbitrage opportunity and because they need to deploy equity. “You’ve got a lot of capital looking for deals and much fewer deals, and corporations with dropping share prices and boards who don’t want to sell,” Sonenshine said
But don’t expect these conditions to lead to a wave of hostile bids from blue-chip buyout firms, said Doug Warner, partner at law firm Weil Gotshal & Manges. Limited partner agreements restrict many buyout firms from engaging in hostile bids because LPs—not to mention many buyout firm managers—don’t want anything to do with cutthroat tactics, Warner said. LPs also insist on eliminating hostile bids because they would often find themselves, as significant public equities investors, on both sides of deals.
Further, it’s much easier for buyout pros to conduct thorough due diligence on a target with management’s cooperation, Warner and Sonenshine both noted. And one of the founding premises of many firms, including The
Still, the approach TPG is taking by backing a strategic bidder for Axcelis could prove more palatable because the bid removes the buyout shop by one degree from the firing line, Warner said.
TPG declined to comment. But a source close to the firm said current conditions have nothing to do with the situation, because Sumitomo, with TPG’s support, has been working on the bid for Axcelis for well over a year, long before the credit crisis took hold. “So none of this had anything to do with the absence of deals or the credit crunch,” our source said. “All that’s happened is this company has tried for a year and a half to get management to sit down and discuss a possible combination.” Frustrated, the buyers took their plight directly to Axcelis shareholders.