Dealmaking is about to get hostile.
The proxy battle waged recently by billionaire activist investor Bill Ackman against retailer Target, as well as the raid that Carl Icahn has mounted against movie studio Lionsgate, appear to represent the start of what mergers-and-acquisitions experts predict will be a steady stream of contentious deals defined by aggressive buyers going after companies trying to fend off those advances.
It’s the result of what the M&A dealmakers describe as a perfect storm of circumstances, including frozen credit markets, low equity values and cash-rich balance sheets.
“Despite a depressed M&A market overall, hostile activity continues to be significant,” said Stefan Selig, global head of M&A at Bank of America.
“Depressed stock prices and weakened potential competing bidders are creating the ideal conditions for hostile raids.”
Sources said conditions for hostile offers are particularly ripe in the media, healthcare, and financial-services industries, which have been rocked in the financial crisis.
To be sure, even with an increase in hostile offers, sources said the M&A market is a long way from the heady days of leveraged buyouts.
During the first quarter, global M&A volume totaled just $561 billion, down 32 percent from the year-earlier period and 11 percent from the fourth quarter of 2008, according to research firm Dealogic. More troubling, the $561 billion was the lowest quarterly volume for M&A since the third quarter of 2004.
Still, a recent survey by Brunswick Group of 59 M&A bankers and lawyers found that 88 percent think that the decline in stock prices for US companies will spark a jump in unsolicited takeover offers.
So far this year there have been 14 unsolicited or hostile offers for US-based companies, according to Dealogic. Last year, there were 59 unsolicited attempts — the highest level in five years.
The hostility is driven in large part by frozen credit markets that have sidelined private-equity and hedge funds from raising debt to finance acquisitions. The result is that cash-rich companies, like cable operator Comcast, for instance, have the advantage to take a run at a company.
At the same time, buyout targets are cheap, thanks to historically low stock prices, and many are reluctant to strike friendly deals because the price tags are often seen as being too low. That sets the stage for a buyer with a strong balance sheet to be more aggressive in snapping up a target.
Then there are the activist investors like Icahn and Ackman.
“Their presence makes it difficult for targeted companies to just say no,” said Kirkland & Ellis M&A attorney Steven Fraidin.