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Fit -- and ready to fight

After a three-year drought, mergers are back. Don't expect all the handshakes to be friendly.

Good times seem to bring out the hostility in some CEOs.

In recent months several high-profile hostile transactions have been launched -- some consummated, some rejected, others pending. The most notable is giant software maker Oracle Corp.'s $7.25 billion unfriendly offer for competitor PeopleSoft, which continues to fight Oracle's advances (see table). Investment bankers and analysts expect 2004 to see much more hostile activity.

Hostile deals -- unsolicited offers to buy a company -- are on the upswing for the same reasons M&A in general has revived of late: Buoyant stock prices, a stabilizing economy and a rebound in corporate profits have made CEOs feel confident enough about their own businesses to consider acquisitions they avoided during less certain times -- particularly hostile deals, which can be more disruptive than friendly transactions.

"Hostile mergers and acquisitions activity is the ultimate statement of CEO confidence," says Donald Meltzer, the veteran global co-head of M&A at Credit Suisse First Boston, which is representing Oracle in its PeopleSoft bid. "It's a very strong statement that the CEO believes that they have the support of their board, institutional investors and that they can very effectively implement an acquisition," Meltzer explains.

That kind of bravado certainly was absent during the bear market that ended last year. Only 4 percent of mergers by dollar volume were hostile in 2003, down by half from 1999's 8 percent, according to New York research firm Dealogic.

Another factor that could underpin a surge in hostile deal making is the lower premiums paid in recent friendly deals. In 30 percent of U.S. mergers in 2002, for instance, acquirers paid a premium of at least 50 percent over their target's stock-market value on the day before the announcement, according to U.K. research firm Zephus. But last year only 28 percent of companies paid that high a premium, while 44 percent paid a premium of 25 percent or less. Low premiums in friendly deals tend to attract unsolicited bids from third parties that are willing to pay up a bit. That will "absolutely mean we could see more hostiles this year," says Edwin Mountifield, who heads research for Zephus.

Moreover, the stigma associated with junk-bond-wielding corporate raiders and their swashbuckling hostile takeovers has abated. Companies that once eschewed the tactic for fear of having it turned on themselves now see unsolicited offers as an acceptable path toward acquisitions that add value for shareholders.

"So many blue chips have done [hostile deals] that it has become part of the tool kit of an acquirer," notes CSFB's Meltzer. "CEOs are not worried about the impact to their reputation, and if it helps them achieve their objectives, they will consider it."

Still, unfriendly transactions involve greater risk and financial resources and should be used carefully, says Morton Pierce, head of the M&A group at New York law firm Dewey Ballantine. Among the issues he identifies: "Is the CEO willing to pay enough to attract the attention of the [target's] shareholders and put pressure on the board? Will he be in there for the long haul?" He adds, "It takes more commitment and involves being able to tolerate more risk."

Nevertheless, stock prices can probably continue to rise for some time without pricing acquirers out of the market. That's why Meltzer predicts a 10 percent rise in both hostile and overall M&A activity for 2004. Indeed, according to Dealogic, 18 U.S. hostile deals, valued at almost $11 billion, were pending in mid-January.

Renewing hostilities
Hostile takeovers are expected to break out all over in 2004, as the merger market booms. Below is a sampling of the hostile deals launched last year.
Date announcedAcquirerTargetValue ($ millions)
11/3/03 Intermagnetics General Corp. Invivo Corp. $ 98.0
10/9/03 EchoStar Communications Corp. Loral Space & Communications 1,850.0*
10/6/03 Mesa Air Group Atlantic Coast Airlines Holdings 523.0
9/3/03 Ferrari Investments Omega Protein Corp. 230.0
7/8/03 ArvinMeritor Dana Corp. 5,684.5*
6/16/03 Investor group (Slim family) Circuit City Stores 1,519.7**
6/6/03 Oracle Corp. PeopleSoft 7,250.9
4/23/03 High River LP (Carl Icahn) Hallwood Realty Partners 318.3
4/16/03 CPB CB Bancshares 273.3
4/3/03 Bradco Supply Corp. Wickes 105.9
* Subsequently withdrawn. ** Subsequently rejected.
Source: Dealogic.

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