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Engelhard's Change of Heart

By Rich Duprey – Updated Nov 15, 2016 at 5:24PM

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Investors could have seen the buyout coming by reading the SEC filings.

After months of posturing, specialty chemicals manufacturer Engelhard (NYSE:EC) relented in its opposition and agreed to be acquired by BASF (NYSE:BF) in a $5.6 billion deal. As fellow Foolish contributor Stephen Simpson pointed out yesterday, the apparent tipping point was a simple $1-per-share enhancement to the offer.

For those who have been watching the drama unfold since January, it was never really a question of if, but rather when, a deal would be consummated. Despite Engelhard's management protesting that BASF was being a cheap scallywag, executives were preparing all along to hand over the reins just as long as they got their price.

As the original tender offer was being publicly unveiled, Engelhard was rushing into place a "change in control agreement" amendment to protect its management and make sure the execs got their just due. According to the new agreements, severance benefits totaling $63.5 million would be paid to all officers, including $59.9 million paid to executive officers. Moreover, in a follow-up amendment, 50 other unnamed executives who are not covered by change in control agreements would receive "stay bonuses" valued at more than $3.5 million in the event of a takeover, and they stayed with the company.

I've maintained that whenever a company suddenly expands the scope of the number of people covered by such agreements, it's only a matter of time before the "For Sale" sign is hung on the front door. It's happened time and again. Last year, Tom Taulli noted that executives at regional bank Amegy had signed new, lucrative change-in-control agreements several months ahead of its announcement merger with Zions (NASDAQ:ZION). And Stephen Simpson correctly predicted that Hughes Supply might not be around much longer after it enacted changes to its agreements. It wasn't long after that that it was acquired by Home Depot (NYSE:HD).

Investors who saw the Engelhard filing could have been reasonably assured that even if the original offer was not going to be accepted, the company would be shopping itself around. Members of management even admitted as much, saying that although they were rejecting the proposed $37-per-share bid, if a richer one came along, even from BASF, they would consider it -- hence the need to update the change-in-control agreements and expand who is covered.

With the deal accepted, the showdown between a slate of Engelhard directors and BASF directors at the upcoming annual meeting has lost much of its drama. In fact, the meeting was rescheduled to the end of the month, when it will become a formality. Engelhard also said that it will withdraw its share buyback offer it had announced in an attempt to sway shareholders not to back BASF's offer. That was a $45-per-share deal for up to 26 million shares that management said was a superior alternative to the buyout offer.

Though often filled with tedious, sometimes arcane details, a company's SEC filings (and, in particular, the footnotes to those filings) are an important resource for investors to scour. Regularly reading the reports can many times tip you off to a company's true motives, whether it's a change of heart or a change in control.

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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.

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