If You Can’t Bag an M&A Bargain, Go for a Trophy

(Bloomberg Opinion) -- A crisis should be an opportune time for M&A bargain hunters. In reality, buyers probably won't be getting deals done on the cheap. It's not just that markets are rallying. Even companies whose fallen shares aren't recovering may not make easy targets for lowball takeovers. Bidders should think about pricey deals becoming available rather than available deals becoming cheap.

Dealmakers at JPMorgan Chase & Co. recently looked into the dynamics of 17 significant deals done during the crisis of 2008-2009. One conclusion was that the takeover target's 52-week share-price high was a stubborn benchmark for the acceptable price of a deal. Boards and investors were wary of taking low cash offers that crystallized the value of the company at a sunken level — never mind that there might have been valid reasons for the shares taking a dive.

The study found that the fixation with historic share-price highs does wane over time. Investors get used to markets being at lower levels. For example, Schering-Plough agreed to be bought by pharmaceutical peer Merck & Co. Inc. when the financial crisis was well advanced in March 2009. The price represented a conventional one-third takeover premium (the top-up required to win support for a deal). At that point, this was in line with its 12-month high, but well below its pre-crisis peak.

All the same, it can take many months for the managers and shareholders of bid targets to lower their expectations. Until that happens, bidders may just have to be generous to get deals done.

What if the buyer offers to pay in its own stock? That way the target company's shareholders might be persuaded they are getting remunerated in a currency with some recovery potential. The tactic might work if both sides' share prices fell in tandem as the crisis took hold. But for the buyer, paying in depressed stock means issuing more shares than it would otherwise need to do. That means giving away more value to the target's stockholders. Again, the chance of a bargain evaporates.

No wonder that only in about half of the deals looked at by JPMorgan was the bidder's share price outperforming the market a year later.

It's not entirely discouraging. Where buyers are willing to pay up, they should find the boards of the targets are less able to rebuff a takeover approach. A bid made at a historic high in a crisis will likely contain a much bigger premium to the current share price than it would have just a few months earlier. Imagine a bid for a stock made at its 12-month high of $100 per share. If the stock was $85 in mid-February, just before markets woke up to the impending pandemic, the premium at that time would have been about 18%. Assume the stock is now 20% lower, and the premium approaches 50% against the current share price. That's very hard to reject.

True, it's always easier for a bidder and its advisers to get a deal done by simply overpaying. Nevertheless, the implication is clear. You can rarely get a good asset on the cheap. But you may be able to get a good asset without a big fight.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.