Why So Many Mergers Are Failing (WMI, RSG, AW, VSH, IRF, DBD, UTX, SNDK)

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Back in normal economic times and back when private equity was king, Mondays were often referred to as "Merger Monday" because mergers would be announced at the start of the week.  If you monitor mergers and possible buyout targets in the manner we do at 247 Wall St., then today might feel like it should be named De-Merger Monday.  There are three very large mergers which have been scrapped today and this brings up issues in another pending giant technology merger.

Waste Management Inc. (NYSE: WMI) withdrew a $6.7 billion offer to acquireRepublic Services Inc. (NYSE: RSG).  Waste Management shares are up more than 10% and Republic Services shares are up about 6% on the news.  Thereason cited was the current turmoil in the financial markets.  WasteManagement had even raised its offer, but is now unwilling to risk itsfinancial strength to go after a hostile merger that would be for terms that are now way out of the money.  This now leaves AlliedWaste Industries Inc. (NYSE: AW) as a potential target again ofRepublic Services.  Bill Gates has been a serial acquirer of RepublicServices’ shares, and he’d be sitting on about a 50% gain from today’s pricesif that merger was accepted.  Imagine a software pioneer gone garbageman.

Vishay Intertechnology Inc. (NYSE: VSH) threw out its proposed offer toacquire International Rectifier Corp. (NYSE: IRF).  That $23.00 bid had essentially become a hostile merger, and in today’s climate payingup for a company that doesn’t really want to sell is a riskyventure when the capital markets are closed or illiquid.  InternationalRectifier shareholders rejected the nomination of three oppositioncandidates for its board of directors just last week.  That merger wasalso raised from its initial level and it would have been a $1.7billion deal.

Diebold Inc. (NYSE: DBD) has beenfending off a buyout offer from United Technologies Corp. (NYSE: UTX).This offer was a $2.63 billion buyout that would have valued Diebold at$40.00 per share.  Management of Diebold had refused requests to speakand was not allowing the internal due diligence to make any formal dealclose.  That was more than a 60% premium from the price at the time ofthe offer, but it was also more than 20% down from its trailing 52-weekhighs at the time the offer was made.

This merger has had no updates today, but there is also this pending"troubled" acqusition of SanDisk Corp. (NASDAQ: SNDK).  Samsung in Korea has sent a$5.8 billion offer to management at SanDisk which would value it at$26.00 per share.  Again management of SanDisk is fighting this andeven cited its 52-week high as part of the reason it won’t allow thedue diligence and negotiations to proceed.  Shares of SanDisk aretrading under $17.00 today, which would net more than a 50% return ifit somehow went through.  Of course that will also destroy many holdersas the 52-week high is north of $50.00. 

What is very interesting here is that companies are wanting more andmore to be acquired and they are  acting to not sell their companiesfor what a "mark to market" merger of today would be worth.  Going backin time and picking all-time highs or 52-week highs is not really howthe market values companies.  The market price is the vote of today forwhat a company is worth.  But when managers only want to sell at whatcompanies were once worth at the peak, then it can get in the way ofthe shareholder agendas of today.

It is important to remember one thing about merger investing.  You canfrequently pick that actual target of a buyout.  But he thing youcannot accurately do is predict the reaction to the offer.  Some public companies run by founders or run by strong managers do not wantto sell at all.  Some only want to sell at prices that are notreflective of the realities of today’s prices.

The buyers can only buy companies which they either deem as cheap orbolt-on companies that give a lock over an industry or give a bettercompetitive advantage.  In either case, the price often makes thatdetermination.

None of these mergers being broken todayhave anything to do with the woes in private equity.  These issues hereare essentially either management of the target company not wanting tosell or it is an issue of the cost not making sense.  In a world wherecompanies have to hoard cash and run lean to protect their debt ratingsand to protect their ability to raise cash, it might be an easy call tosay that mergers with wildly high premiums are probably not going to beseen for a while.

Jon C. Ogg
October 13, 2008