Over the past several years, some activists have pursued a strategy of buying a potential acquirer’s stock after the announcement of a deal and initiating public campaigns designed to influence the deal’s terms – or even block it outright. This recent study takes a look at the strategy, how it affects the firms that are targeted, and the returns it generates for activists.
The study says that it’s buyers with a poor record of return on invested capital who are likely to find their deals targeted by activists. The type of transactions likely to attract acquirer arbitrage are stock deals in which the target has takeover defenses in place, and which have attracted competing bidders. These characteristics are associated with a heightened risk of overpaying, inefficiency, and lower returns for acquirers.
How successful is the acquirer arbitrage strategy? The study says the results are pretty impressive:
In 36% of all targeted deals, activist arbitrageurs manage to block the deals; in comparison, the matched sample without activist intervention has a 91% completion rate. In an additional 17% of the cases, activists are successful in pushing to make the terms more favorable to the acquirers, including lowering the bids. On average, activist arbitrageurs earn a risk-adjusted return that is 6.0 percentage points higher than the matched sample in the post-deal announcement time period. Presumably, the superior returns also accrue to the long-term shareholders of the acquirers. In fact, the market reacts positively to the disclosure of activist involvement: the average abnormal return measured over the 20-day window around the disclosure date amounts to 5.7%.
For more on M&A activism, check out our recent webcast – “How to Handle Post-Deal Activism.”
– John Jenkins