There was a very interesting article in the Wall Street Journal last week about the trend towards acquisition predators becoming targets, in a process referred to as “a bid for a bidder.” For shareholders of the “winning” bidder, it is the opinion of The Merger Verger that this kind of transaction has “BEWARE” written all over it.
Let’s look at what happens and why it makes the old Verger nervous.
As everyone knows, you do not want to examine the process of making sausage too closely, so with a contrarian view, let’s start there. Sausage maker Hilllshire Brands Co. recently agreed to buy processed food company Pinnacle Foods Inc. That prompted a poultry company, Pilgrim’s Pride Corp., to look at Hillshire … and bid for them. That then led meat producer Tyson Foods to bid for Hillside also. Tyson got Hillside but the Pinnacle deal (Remember Pinnacle? They were the original target here.) was called off.
So what’s wrong with all that?
First, if Pilgrim’s Pride and Tyson were so interested in Hillshire, why hadn’t they bid before the Pinnacle deal was announced? Certainly Tyson – an experienced acquirer – knew beforehand basically what they were bidding for in Hillside but the whole process smells more of playing competitive defense than strategic offense. In situations like this, strategic rationale and thorough due diligence can go quickly out the window. And both of these deal attributes are cornerstones of a successful integration. You lose your focus on them or weaken their role in the deal process and your shareholders will pay. And pay.
Speaking of paying, is there any research on M&A that doesn’t point out how hubris and paying too much are key failure drivers over and over and over? And when is someone going to overpay most readily? When they think they are behind a competitive 8-ball or when the bidding is taken through several rounds. Sadly, there is no hero status for the guy who says, “Screw it; it’s gotten too pricey.”
There should be.
Which brings me to … The Verger’s Law:
The probability of deal failure increases by the square of the percentage change in price from the initial bid.