February 1, 2006

Hostile Deals in Europe for a Change

Below is a nice explanation of why so many hostile deals are taking place in Europe, courtesy of this article from BreakingViews:

What is it about 2006 that makes executives so hostile? A handful of big, bold unsolicited cross-border takeovers have been launched in the first few weeks of the year. This comes after a year in which hostile bids actually fell. There were just 85 deals announced in 2005 worth $192bn (E158bn), down from 109 worth $251bn. The value of hostile offers in January is already twice what it was this time last year.

But it’s the audacity of some recent bids that surprises most. Take Mittal Steel’s E19bn bid for Arcelor. Not only is the Netherlands-based steelmaker funding the deal largely with debt, it’s taking a stab at a company many in France consider a homegrown champion.

Linde’s bid for Britian’s BOC, worth nearly £8bn (E12bn) , is another humdinger. Even before news of the offer hiked BOC’s shares, Linde was nearly a third smaller in size. That’s audacious. So, too, was the unsolicited attempt by chemicals group BASF to acquire Engelhard of the US. Given Engelhard’s staggered board and the ease of use of poison pills in the US, BASF’s endeavour borders on foolhardy.

What’s driving this? For one, credit conditions remain historically easy. Companies may be taking advantage of this before the cycle inevitably turns. And executives are feeling confident as their share prices have blossomed. Linde is up almost 50% in the past year; BASF a third. Moreover, investors are egging them on. Mittal shares surged on its ballsy bid Friday. Linde’s have also rallied since its BOC bid was made public. BASF stock has held up despite daunting challenges to its Englehard bid.

None of this means a boom in hostiles will necessarily arrive, however. To succeed, companies must have an edge before going hostile. Mittal, for example, has timing on its side. Arcelor became vulnerable to a deal by overpaying for Dofasco and going hostile itself for the Canadian steel group. Linde, in the meantime, may be playing on the fact that BOC is the only one in the industrial gases industry that regulators may allow.

As for BASF, its edge is less clear as it kicked Engelhard into a competitive auction. Its only advantage may be in its possible willingness to overpay. Once that becomes apparent, managers considering hostile takeovers of their own may adopt restraint – or face the wrath of suddenly less supportive shareholders.