Market upheaval in the wake of the recent recession has created a wider range of opinions between buyers and sellers in the mergers and acquisitions market.
The discrepancies come in part because some companies have fallen under shareholder pressure to grow, even as companies’ shares trade at depressed levels. The situation has resulted in an uptick in hostile takeover deals, which inevitably translates into more business for law firms.
“Hostile deals are much more complicated than normal M&As,” said Michael Hedge, a partner at the Irvine office of Pittsburg-based K&L Gates LLP. “There are many more issues to consider, and they’re much more expensive from a company’s point of view. From a lawyer’s perspective, that’s our job—for both the ‘buy’ and ‘sell’ sides. The trend is we’re seeing more of it now.”
Disappearing Stigma
Hostile efforts have long had a stigma attached to them.
“In years past, there was always a view that you couldn’t really do a hostile bid—especially with a technology company—because so much of the company’s assets and values are in the personnel, not a warehouse of lumber,” said Steven Tonsfeldt, a Silicon Valley-based partner and mergers and acquisition chair at O’Melveny & Myers LLP of Los Angeles.
Tonsfeldt helped oversee Aliso Viejo-based Microsemi Corp.’s recent hostile acquisition of Canada’s Zarlink Semiconductor Inc.
“The concern was if you came in as the unwanted buyer, many people would quit,” he said. “So the value you bought would evaporate. That for years, for decades even, was the prevailing wisdom. But I think a lot of that stigma has gone away.”
It’s not just the tech industry that’s attracting more of these deals.
“The places you see the most of these activities…are the biotechnology, pharmaceuticals, lifesciences sectors. Those seem to have been the place where the most hostile activities happened in the last few years,” Tonsfeldt said.
Deals Aplenty
Orange County has seen its share of those deals.
The ongoing back-and-forth between Irvine-based Ista Pharmaceuticals Inc. and Canada-based Valeant Pharmaceuticals International Inc. is the latest example of a hostile bid involving local companies.
Canada’s largest drug maker announced its $327 million bid for Ista on Dec. 16. That was a $6.50-per-share offer at a 68% premium.
Valeant had made a couple of offers prior to the December announcement.
Ista is an eye drug maker that expects to tally up about $160 million in revenue for 2011. The company projected its 2012 profit to be between $11.6 million and $14.9 million.
Its stock price has climbed since Valeant first disclosed the bid, to about $7.27.
“The hope of the bidding party is that by making it public, the [seller’s] shareholders will be put under pressure,” O’Melveny’s Tonsfeldt said. “That has an effect of bringing the selling board to the table. Sometimes it doesn’t.”
It hasn’t swayed Ista yet.
Valeant recently boosted its bid for Ista by a dollar, offering $7.50 per share. This comes after Valeant had put in a negotiation deadline for Jan. 31, after which the company said it will walk if no deal is reached.
“One thing the public offer certainly does—what will end up happening in this Ista case—is that if other bidders want to come out of the woodwork, it’s sort of open season for the target company,” K&L’s Hedge said. “Anyone who’s interested in that company is going to step up to the plate and possibly put an offer in.”
Zarlink Deal
Microsemi’s acquisition of Zarlink is another recent example.
The local chipmaker had been making offers to acquire Zarlink since January 2011, before it took the $548.7 million cash bid public in July. Microsemi eventually upped its offer, and the deal closed in October for $633 million.
Attorneys recognize that it is not only the lifting of the long-standing stigma against hostile takeovers, but “the economic reality of the market,” Hedge said.
“You’re seeing the big consolidators who need to grow the company to justify the stock price,” he added. “But they’re having trouble or growing slowly organically. That’s forcing them to grow through acquisition. Some companies might feel they are undervalued right now, and that sets up an environment where hostile deals will become a bit more prevalent than before.”
Cash Surpluses
Another driver behind the hostile push is that “big buyers have a tremendous stockpile of cash,” Tonsfeldt said. “You might find yourself in a situation where you’re pressured by shareholders, and going hostile is one avenue.”
The companies are pressed to “deploy those cash reserves to justify the price-to-earnings multiple, whether by hostile or friendly means,” Hedge said.
“I don’t know if there will be an onslaught of hostile deals in the market—hostile deals won’t become the norm—but in 2012, we’ll see generally more active mergers and acquisitions,” he said. n
