Bidders lose their nerve
There is not only a dearth of takeovers at present, there is a trend to abandon bids that have already been announced. Are bidders’ eyes proving bigger than their stomachs or have predators lost their nerve?
The Xstatra (LON:XTA) mining group has abandoned its £40bn bid for rival Anglo American, just as BHP called off its planned takeover of Rio Tinto (LON:RIO). The Spanish consortium bidding for National Express followed by walking away from its long running takeover and now the British transport company has called off merger talks with rival Stagecoach.
With hindsight, March 2009 was a good time to bid for almost anything: share prices rose almost 50 per cent in the following six months. But having missed the bottom of the market, would-be bidders seem scared they will be overpaying now.
While their own paper has risen in value, so has that of the targets, and companies that were the most vulnerable have seen their shares rise furthest now the future seems secure. And the rash of rights issues has not filled war-chests to finance takeovers but filled the black holes in the accounts, saving companies from breaching banking covenants.
Further, with most companies working at below capacity, purchasing extra plant or outlets makes little sense and offers little scope for synergies unless they can be bought at an opportunistic price.
But the biggest dampener on deals seems to be due diligence and courage. Takeovers that are agreed in principle increasingly collapse as soon as the books are looked at in detail. And hostile bids do not even allow scrutiny of the target’s accounts.
Lloyds’ takeover of HBoS is a case study in the dangers of not doing diligence properly. Other companies are so wary of buying a pig in a poke they would rather buy nothing at all. Directors who were once eager to bid for anything seem to have lost their nerve. If they do not find dangers during the diligence process they worry that double-dip recession will produce external problems.
And with no prospects of supergrowth in the economy, the economic expansion is not there to justify paying a premium price in a bid.
In M&A, trends can turn over night as sentiment switches, but for the moment, corporate Britain sees more downside than upside in takeovers.
