What looked like a surge in takeovers has gone sharply into a reverse: suddenly more bids are being withdrawn than launched. It seems the boardroom appetite for expansion has turned out to be greater than the balance sheet can stomach.
In quick succession the Spanish consortium bidding for National Express has walked away and mining group Xstrata has called off its bid for rival Anglo American, just as BHP Billiton abandoned its attempt to merge with Rio Tinto. Kraft’s tentative approach for Cadbury could yet fall on the floor before it is even placed on the table.
The surge in bids looked like a sign the recovery was over with opportunists pouncing on rivals ahead of the economic upswing. They may have missed the bottom of the market but they assumed there was still enough upside to justify bidding now.
So what has gone wrong? Perhaps the rapid rise in stock markets means the vultures have left it too late; perhaps the shares of the intended victims have risen faster than the paper the bidders proposed offering. Maybe bank finance is still not as available as would-be buyers believe. And possibly due-diligence has discovered that despite recovery coming, recession has left more damage than was immediately evident: Lloyds’ merger with HBoS is a warning of that problem.
But perhaps the upside is not as great as the bidders initially assumed. Economies are emerging from recession and shares are off their nadirs, but future trading in any regime will be affected by high taxation, public spending cuts and consumption curtailed by credit curbs and job worries. Whether it is a W-shaped recession or simply a slow recovery, the future profits needed to justify paying a premium price for a competitor are not necessarily there.
And bidders are discovering the paradox of pricing takeovers. They choose a company because its shares are low, possibly because it is negotiating with bankers or landlords or facing closure costs or even risking bankruptcy. But as soon as a strong potential parent emerges, creditors have no reason to negotiate and the shares soar. Bidders can thus no longer buy cheaply — the main reason they bid.
Indeed, the target firms’ directors and shareholders suddenly demand a premium over the fair price. Sometimes macho bidders keep upping their offers and overpay, but if the revenue growth or synergies are not there, the right thing to do is walk away — and that is what would-be bidders have been doing recently.
With so many bargains still available from administrators, private-equity houses and troubled firms that are forced sellers, small acquisitions are still possible without the need to bid for public companies. It is tempting for boards to bring out the bid lists they drew up before the crash but the game has changed: macho M&A must be replaced by considered expansion and being able to say no is now as important as saying yes.
