Last week, French pharmaceutical company sanofi-aventis (NYSE: SNY) wrote me to offer $69 for each of my shares of Genzyme (Nasdaq: GENZ), in an attempt at a hostile takeover. Whether your shares are ever solicited in a hostile bid, it can pay to know how these takeovers work, and how they might help or hurt companies that interest you.
Most acquisitions and mergers are consensual; witness Sirius XM Radio (Nasdaq: SIRI), the product of a 2008 merger between Sirius and XM. The merger made sense operationally, since the new entity would enjoy economies of scale. Even with the two companies' cooperation, it still wasn't smooth sailing, as concerns about competition and a Federal Communications Commission inquiry delayed the union.
Tender offers and proxy fights
But sometimes, the target doesn't want to get bought out -- at least, not at the suggested price. In that case, a would-be acquirer may try to buy it anyway. If it can entice enough individual shareholders to sell it their stakes -- what's known as a tender offer -- the purchaser can acquire a controlling share of the target company.
In this case, Sanofi is offering $69 per share … but Genzyme shares have recently traded around $72. Obviously, I'm not going to take $69 when I can get $72 by selling my shares. But when Sanofi first offered $69 to Genzyme directly, it was more than 30% higher than Genzyme's average share price during the prior month.
Sometimes, takeovers take the form of proxy fights, in which activists urge shareholders to vote (via proxy materials) for new management that will approve the takeover. This battle can start from within when a board member turns activist, as Carl Icahn has frequently and famously done. He happens to be on Genzyme's board, where some expect a proxy fight to ensue. Icahn has already been involved in a proxy fight with Biogen Idec (Nasdaq: BIIB), looking to sell the company. Earlier this year, he launched a hostile bid for Lions Gate Entertainment (NYSE: LGF).
Combating the bids
There many ways that companies can counter hostile bids, before and after they happen. First, a targeted company might try to convince shareholders that the would-be buyer's bid is insufficient. Genzyme, for example, has announced that it expects its earnings next year to be far higher than this year, and that based on these projections, sanofi-aventis's bid should be closer to $89 per share.
Companies also try to prevent takeovers by employing all kinds of strategies. A "poison pill" permits company shareholders to buy additional shares at a deep discount in the event of a hostile bid, thus foiling the would-be acquirer and diluting the value of the company's stock.
In another common anti-takeover provision, some companies' fine print will offer all employees certain benefits and/or job security in the event of a buyout. These can make companies less attractive to would-be acquirers.
Risky for shareholders
Many companies that you and I consider for our portfolios have poison pills or other strategies in place, which are not necessarily good for investors. Irish pharmaceutical concern Elan (NYSE: ELN) gave partner Biogen Idec an option to purchase Elan's share of their Tysabri multiple-sclerosis drug partnership if a third party tries to acquire Elan. Elan gave Johnson & Johnson (NYSE: JNJ) a similar deal in their partnership on a promising Alzheimer's drug. Those clauses could potentially block a takeover bid. Such plans can be clever if they prevent bad acquisitions from happening, but they can also thwart good deals that might ultimately benefit shareholders.
Hostile takeover bids can be ugly and protracted. As an investor, you should focus on how much sense a proposed merger makes, and whether the price of the deal will benefit you. In the case of Genzyme, sanofi-aventis is eager to grab its pipeline in the hope of boosting slowing sales and replacing drugs due to lose their patent protection. Sanofi may further increase its offer, or simply walk away ... in which case Genzyme's shares could drop to pre-offer levels. Shareholders like me might want to consider taking the money and running -- or waiting for Genzyme to prove its value over time.
