Competing Bids Up Significantly

In contrast to a gradually improving overall M&A market, the number of competing M&A bids for publicly-traded US and Canadian middle market companies are up significantly over 5 and 10-year averages. During most of 2010, an index of trailing 12-month M&A competing bids has been roughly 100% higher than the 2009 market lows, and remarkably, 50% higher than the very active 2006/2007 market.

In our opinion this reflects some clear passive/aggressive deal-making behavior. Intrinsic value is higher than public market value. Corporate and PE investors are both cash-rich and risk-adverse. Sellers are hesitant to initiate M&A processes, but are receptive to in-bound proposals: According to M&A database provider Dealogic LLC, in 2/3 of competing bids, the initial attitude of the target board has been characterized as friendly. Over the past few years, public company M&A legal agreements have also trended towards allowing superior bids to come forward post-announcement.

Clearly, the increase in competing bids reflects a willingness of buyers to hold back initially, and then go bare-knuckles if they decide a target company is a strategic priority. That aggressiveness is clearly a reflection of those buyers’ views that there is good value in the M&A market – and they are willing to fight for it – if they see what they think is a low bid on an attractive asset.

Our opinion is that buyers and sellers views on future operating performance, valuation and structure will start to converge again over 2010-2011, but until that happens, expect more headlines involving competing corporate suitors.