September 11, 2006

REITs Are Not Takeover Proof – Public Storage/Shurgard Case Study

From a recent Wachtell Lipton memo: “We have been saying for some time, most recently in our memo from last August, that REITs are not takeover proof, myth and legend notwithstanding. The closing yesterday of Public Storage’s successful takeover of Shurgard makes the case more eloquently – and decisively – and should finally put to rest any lingering misconceptions about whether it is possible to acquire a REIT on an unsolicited basis.

Public Storage had privately approached Shurgard several times to discuss a potential business combination and was repeatedly rebuffed. Most recently, in July 2005, Public Storage proposed a stock-for-stock combination at a significant premium to market prices. Although this proposal was also quickly rejected as inadequate by the Shurgard board, Public Storage did not back down. Public Storage made its proposal public, and pressed its case to the Shurgard shareholders through one-on-one meetings and through press releases and public statements. Ultimately, the resulting shareholder pressure and compelling logic of the combination led the Shurgard board to announce that it was exploring strategic alternatives. In the end, Shurgard’s exploration process culminated in a merger with Public Storage, which valued Shurgard at about $5.5 billion. The transaction provided Shurgard shareholders a 39% premium to Shurgard’s undisturbed stock price plus the opportunity to benefit from the upside potential of the combined company.

The Public Storage/Shurgard transaction is indicative of larger trends in the REIT market. The extraordinary liquidity in the real estate capital markets, combined with the differential between private and public market values and the low interest rate environment, among other factors, have brought an increase in the frequency and seriousness of unsolicited proposals, hedge fund activity, private equity club deals for large targets, and topping bids after announced deals. The attempts to derail the sale of Town & Country, even though unsuccessful, illustrated that even REITs that are committed to announced transactions are not immune to takeover attempts. REITs are increasingly being subjected to the same dynamics and pressures that exist in the broader market for corporate control.

REIT management and boards of directors are well advised to study the market environment in which they now operate, to engage in advance planning and takeover preparedness reviews in order to be able to respond rapidly and appropriately as circumstances may dictate, and to pay careful attention to deal protection measures in friendly transactions.”