Are Companies Smart to Reject Takeover Offers?

Are companies stupid for turning down takeover offers at hefty premiums to their market prices? It's a phenomenon I am seeing more and more of.

Undoubtedly, the buyout market has slowed down substantially, both in pace and in takeout multiples. But I still think there are deals to be done by private equity firms with funds they must invest, by corporations paying in cash and stock (avoiding the debt market), and by foreign firms taking advantage of the weak dollar. My guess is that most of the buyouts will be in the mid and small cap space, such as Hellman & Friedman's $2.4 billion acquisition of Getty Images (GYI).

One might think that with the market chaos we have been seeing, companies would be quite happy to receive an offer to be acquired. In some cases though, we are seeing offers being spurned. You all know about Microsoft and Yahoo!, so here are a couple of other examples:

"Transmeta Corp (TMTA) has rejected an offer by key shareholder Riley Investment Management to buy the microchip designer for $15.50 per share, saying it undervalued its assets and prospects." (Reuters) TMTA closed yesterday at $12.37.

"Hypercom Corp. (HYC) said Thursday it [was] . . . effectively rejecting a takeover bid by Ingenico SA. Last week, French payment technology company Ingenico offered to buy Hypercom for $6.25 per share." (Associated Press) HYC closed yesterday at $3.64.

As a shareholder, it's nice to receive the short term pop that comes with a premium buyout offer. On the other hand, if a company truly has promising long term potential, selling out for a 10% or even a 60% premium could mean leaving lots of money on the table. Nobody offers a 60% premium to market unless they think there's plenty of upside left for themselves.

So is turning down a buyout at a fat premium wise or not? The boring but right answer is that it depends. In some cases, boards should take the money and run. (Unfortunately, job security and illusory perceptions of corporate promise can stand in the way shareholder value.) In other cases, especially today with so many stocks having faced steep declines, market price remains a poor reflection of true value, so a markup to a valuation decided primarily by fear and volatility can still be insufficient, if, as Transmeta put it, it undervalues the company's assets and prospects.

In a prior post I argued that a company's buyout potential can be an attractive part of an investment thesis, but should not be the sole leg on which the investment case rests. I'll add to the pot that having corporate leadership trustworthy and wise enough to decide how best to respond to a buyout offer is another important ingredient.

Comments

[maguro_01]

Suggesting that the Reily attempted takeover of Transmeta is offering a premium is not correct. Transmeta recently won a $250 million settlement from Intel in a patent suit. $150 million was payable immediately and $20 million/yr for the remainder. Reily proposes to buy Transmeta with its cash on hand and shut it down immediately. The offer values the next payments near zero, the patents that got $250 million out of Intel at zero, the business from Longrun2 royalties now started (from NEC) at zero, and Transmeta's large loss carry forward from its failed processor business at zero.

At first glance Reilly's offer is just a pirate raid. Transmeta management did fail to have a plan to spend most of it immediately. A small company can no more have that much cash than you or I could walk through a tough section of a city with a tray of $100 bills. So that way Reilly gets a payday but no one else does.

One even less appetizing possibility remains. Reilly said they represented "affiliated companies". Who might that be? Is it possible that the Intel settlement is to be undone and it all ends up at Intel for much less than the total amount of the award or a normal purchase price? Transmeta's Longrun2 patents, now licensed by Intel as part of the settlement, may be necessary for the 32nm generation of integrated circuits. In fact Intel recently hired Ditzel, one of Transmeta's founders. If this complete conjecture were true then small company patents would be nearly worthless if a big company covets them. Transmeta is not a patent troll, but the actual patenting operating company. Such a series of events would be well beyond playing hardball.

[numericalexample,com]

Getty images also got an offer when it was really bottomming in January, just before the current offer, of about 1.5 billion. I don't know whether they have refused it, I think it did not go for other reasons. But really, that offer was so low that they should have refused it.