Bay Street, Toronto.Reuters
Fortunately for Bay Street advisers, some things may never change. In an era of rapid financial evolution, sparked by the likes of fintech disruption and wild commodity price swings, this year proved one constant can still be relied on: the tired tactics of the hostile takeover game.
Canadians were mostly immune from these drawn-out battles over the past few years. The federal government, for one, put a chill on oil sands assets, ring-fencing what was once one of our most-coveted sectors from many foreign buyers. And the broad market had been so hot most share prices soared, making it hard for hostile bidders to convince a target's investors they could do better – the gold sector being one of the few notable exceptions.
Tanking commodity prices helped bring hostile takeovers back this year. The second half of 2015 alone saw three high-profile campaigns: Potash Corp. of Saskatchewan Inc.'s $8.7-billion (U.S.) bid for Germany's K+S, fuelled by fertilizer's supply glut; Suncor Energy Inc.'s $6.9-billion (Canadian) bid for Canadian Oil Sands Ltd., driven by tanking oil sands fortunes; and Canadian Pacific Railway Ltd.'s $28-billion (U.S.) bid for Norfolk Southern, at least partly inspired by weaker revenues from hauling oil by rail.
The playbooks for each are all too familiar.
Such habitual strategies make the battles rather boring to follow, because everyone accustomed to these wars of words knows even the most spirited slights are often rather hackneyed.
But there is an upside: At least the age-old campaign tactics are well-worn. In the face of what some call a market revolution, it is comforting to know the financial world isn't always that radically different from what management teams and investors have grown accustomed to.
The first rule of hostile bids: Do everything possible to make a mundane takeover premium seem special. Every merger and acquisition (M&A) adviser on Bay Street knows premiums are expected in every takeover, whether they are friendly or hostile, but for some reason hostile bidders make it seem as though they're offering a pot of gold by paying more than market value.
Hostile acquirers love to highlight the "sizable premium" they offer shareholders – sometimes they get really giddy and stress it is a "significant premium." (Can you see my eyes rolling?) Another common tactic: Slapping a dollar value on the synergies expected from combining the two companies. Anyone who fiddles with an Excel model for a few minutes can add or subtract a few hundred million by changing a few estimates.
The early defensive tactics are just as textbook. I'd love, just once, to see a company admit a purchase price looks appetizing – and then pan the proposed deal for other reasons. What we get instead are expostulations about bids being incredibly low or "grossly inadequate." In the same vein, such "low-ball" bids are scoffed at for being incredibly "opportunistic" because they are tabled when the target's share price is in a rut – happily ignoring that an existing management team has some control over market performance.
From here, the back and forth grows only more heated. The bidder announces, or leaks, that it is open to raising its offer price; the target announces, or leaks, it's had "multiple" conversations with rival acquirers, suggesting a white knight is waiting in the wings. What's conveniently left out: just how serious the talks were. There's a big difference between talking to the corporate development team of a potential bidder by phone and having a potential acquirer sign a non-disclosure agreement to enter a data room.
Sometimes the pas de deux is almost lyrical – at least in Bay Street terms. The bidder begs to meet with the rival's chief executive to engage in "constructive dialogue"; the target ripostes by arguing there is no need to talk about such an inadequate bid.
This year we got a real gem. The battle between CP and Norfolk Southern has grown so intense that the two have started commenting on comments made about comments. In December, Norfolk Southern "today commented on Canadian Pacific's response to the white paper" Norfolk Southern originally put out. It's all very beautiful, really.
As comforting as it is to know how to respond to the same old tricks, something very crucial can get lost in the mix: All these tactics are designed to win over shareholders, but do little to appease regulators. That isn't going to cut it in many high-profile deals.
Just ask Potash Corp., which had to abandon its bid for K+S after three months. Although its offer never touched a regulator's desk, K+S had good reason to bat it down because the regulatory burden in Germany seemed way too high.
The same is true for CP. Even though the Canadian railway raised its bid, Norfolk Southern keeps swatting it away, arguing that regulators would never come close to approving such a combination.
In an era rife with consolidation – global M&A topped $4-trillion (U.S.) this year, for only the second time since 1980 – competition is arguably weaker. Hostile bidders, then, ought to consider focusing more on appeasing regulators instead of relying on the same old rhetoric of "value propositions."