It's called a "shareholder's rights" plan, but more often than not, it results in entrenched management. Auto-parts retailer CSK Auto (NYSE: CAO) became the latest company to adopt a so-called "poison pill" defense, following the announcement of a hostile bid by rival O'Reilly Automotive (Nasdaq: ORLY).
CSK adopted the plan after O'Reilly bid $8 a share for the retailer, which had seen its stock plummet some 70% over the past six months as sluggish sales, increased costs, and higher rent caused it to post a $5.8 million loss in December. O'Reilly's bid amounted to a 34% premium to CSK's price when the offer was made public. Yet looking at CSK's stock over the past month, the bid would amount to a 60% premium.
The poison pill calls for shareholders to buy $90 worth of shares for just $45 if any entity tries to buy 10% or more of CSK's stock. The company adopted the plan to try and thwart a takeover by O'Reilly as it considers other strategic alternatives. According to CSK, some 20 different parties have executed to either confidentiality or standstill agreements, though O'Reilly is not one of them. For its part, O'Reilly says it made its offer public after failing to work with CSK's board, and that it feels the bid offers shareholders a measure of security they don't currently have.
Poison pills are often viewed as anti-shareholder in nature, because they can keep current management in place. That, along with staggered board elections, can thwart shareholders from shaking up a moribund company, preventing an acquirer from replacing enough of the board to remove the pill.
While that's the case with most plans, it doesn't seem to be so with CSK. For one, this particular arrangement expires in one year, unless shareholders approve an extension. That's a positive sign, suggesting that management is truly concerned with maximizing shareholder value in any deal it ultimately works out. This particular poison pill gives management the time and flexibility needed to consider any offers.
Yet CSK also needs to be careful not to spurn O'Reilly too much. The credit markets are a much different place than they were last March, when O'Reilly first approached the retailer. While JPMorgan Chase (NYSE: JPM) has been brought in to sort through its alternatives, public or private equity may no longer have the ready capital it would need to make a sweeter or more viable offer than O'Reilly's.
Over the past year, auto parts retailers have been having a rough go of it. Although CSK may be one of the worst performers, Pep Boys (NYSE: PBY) and Auto Nation (NYSE: AN) have done only slightly better. Even the shares of the nation's biggest parts retailer, AutoZone (NYSE: AZO), remain below where they were last year, though on a number of metrics it is perhaps the best value of any of the bunch.
Still, O'Reilly boasts a strong balance sheet, holding $110 million in cash. Only Genuine Parts (NYSE: GPC) has more, with $330 million. Genuine Parts has previously indicated that it's interested in making acquisitions, but it's looking more on the industrial side to better deploy its cash.
Merger and acquisition activity is hardly dead, but it's not quite as vital as it once was, either. A growing number of private equity groups have recently backed out of deals as their target's fortunes changed. In this climate, CSK's weakening financials may not be enough to attract a buyer. Shareholders may then not have an option to exercise any rights -- friendly or otherwise.
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