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Here’s analysis from Chris Cernich, Head of ISS’ M&A and Proxy Contest Research drawn from ISS’ “M&A Edge Note“:

Statistically speaking, one of the worst strategies for buying a company is to push your hostile bid all the way to a vote of your target’s shareholders. In the past five years, only one hostile bidder which has gone all the way to a shareholder vote – CF Industries – walked away with the prize. In each of the other six contests – including the other one where, like CF, the bidder’s nominees were elected by shareholders – the target remained independent. But this much is already widely known. What is less well-known is how all this has worked out for the potential sellers – not the executives and directors who lead the “Just Say No” defense, but the shareholders themselves who, in five of these six cases, voted to continue saying No.

Measured on an absolute basis, the median cumulative Total Shareholder Return (TSR) for targets which remained independent through Oct. 20, 2014, following an M&A proxy contest was 50.4 percent. But absolute return is a naive view of the issue: the real question is what return shareholders might have had by redeploying their capital into the next best alternative to keeping the target standalone. Relative to those next best alternatives, it turns out, the median return to shareholders of saying No is profoundly negative.

Had shareholders in these six firms sold at the closing price the day before the contested meeting and reinvested in:

– the broader market, as through an S&P 500 Index fund, they would have earned at the median an additional 25.0 percentage points through Oct. 20, 2014; and
– the sector, through a group of close peers, they would have realized at the median an additional 78.4 percentage points through the same date.

In the case of all six of these targets, the underperformance relative to investors’ next-best alternatives began immediately after the show-me moment of the M&A proxy contest, and was generally sustained throughout the first one, three, six, and 12 months after the contested election. At the median, the six firms underperformed the broader market by 2.0, 7.1, 21.5, and 10.6 percentage points over these periods, respectively. Despite mitigating measures like post-contest buybacks, moreover, these firms generally posted negative absolute performance over most of those four measurement periods. Only a small amount of this underperformance appears to have been due to the sector in which they operated. The six targets underperformed the median of their peers, over the same four time periods, by 0.5, 8.4. 14.9, and 13.6 percentage points, respectively.

For the full period from the contested election through Oct. 20, 2014 (which ranged from 2.4 to 5.3 years), three of the six eventually recovered some ground versus the broader market performance. Only two of them – Illumina and AirGas – reversed the negative trend relative to the median of their peers.

What Differentiates Good Bets from Bad?
The conventional wisdom is that giving additional time to a board facing a hostile bid improves the outcome for shareholders. This makes some intuitive sense, if the board uses that time to better inform the market about sources of hidden value: ideally, the target board convincingly demonstrates higher intrinsic value to investors, or wins a more compelling offer after initially saying No, or both, without ever going to a contested vote. For those which do go all the way to a vote yet remain independent, however, the abysmal subsequent returns relative to shareholders’ next best alternatives suggest something in the process has gone awry.

The real question for shareholders looking at this data – or considering their voting strategies in upcoming M&A contests, such as the expected Dec. 18 special meeting at Allergan – is what differentiates the good bets from the bad?

Verifiable Scarcity Value Matters
In only one of the six cases was leaving the company standalone a clear homerun – though in the heat of the contested election, that may not have been so obvious from outside the boardroom. In 2012, Illumina, a leading equipment maker in the nascent DNA sequencing market, faced a hostile tender offer from Roche Holding. Approximately one-third of Illumina’s revenues came from the National Institutes of Health, but in the wake of the 2011 government shutdown, the ongoing uncertainty about the nature and extent of forthcoming federal budget cuts drove a steep decline in Illumina’s stock price. At the point of the shareholder vote, the $51.00 in cash per share which the hostile bidder was offering represented an 88 percent premium to the undisturbed price from six months earlier. It also appeared to represent significant premium when measured by traditional M&A metrics, such as LTM EV/EBTIDA multiples.

Illumina argued, however, that its true value was intimately tied to the development of the broader genetic sequencing market, which it contended was much closer to viability than Roche had argued. As much as the stand-alone strategy held risk for Illumina shareholders, moreover, the risk for Roche of not having Illumina – a market leader already on its way to ubiquity in the first sequencing market, and with all the beneficial network effects that implies – was likely still larger, and should thus drive a much headier valuation. Completely aside from its stand-alone prospects and valuation, Illumina argued, it had significant scarcity value for a strategic bidder–and for this bidder in particular.

The arguments about the potential addressable market, and particularly about the scarcity value of the asset, resonated with shareholders, who overwhelmingly rejected the bidder’s nominees. And though Illumina’s shares did not begin to outperform the next best alternatives – the S&P 500 and the median of its peers – for as much as a year, both arguments have since been borne out in the company’s operating results. As a consequence, saying No–and remaining invested in Illumina as a standalone entity over the subsequent two-and-a-half years – has delivered TSR of 304 percent, significantly outperforming the next best alternatives of the broader market (by 257 percentage points) and sector peers (by 247 percentage points).

Credibility on Business Dynamics Maters
Two years before Illumina, the board at AirGas, the largest U.S. distributor of industrial, medical, and specialty packaged gases, made a similar argument about scarcity value…