The Side Door To the M&A Market Reviewing Strategic Alternatives Can Mean “Make Me the Right Offer”

The stock market has not been an equal opportunity arena. While large-capitalization stocks have been engines of the unprecedented run-up in share prices in the last several years, many small-cap stocks have been hammered, and a number have concluded that the depressed prices have dried up their strategic options for remaining independent. A tip-off is the growing number of publicly traded small-cap firms that have announced the retention of investment bankers to “explore strategic alternatives.” To many m&a professionals, that is a euphemistic “for-sale sign” or a move to shop for the best price if a potential target already is in play. In its April 11 issue, M&A HotSheet, a former publication of NationsBanc Montgomery Securities, commented on Revlon Inc.’s retention of two investment banks to evaluate strategic alternatives. M&A HotSheet described the phrase as “Wall Street jargon for saying that all or part of a company is up for sale.” The cosmetics giant is an exception to the general trend since, according to M&A HotSheet, it had a value of $3 billion, including debt. Most of the companies ostensibly undergoing third-party reviews don’t sport values anywhere near the 10-figure level. A sampling of companies that have launched reassessments presumably of their own volition includes: Access Worldwide Communications Inc., sales, marketing, and medical education services; Benton Oil & Gas Co., oil and gas production; Checkpoint Systems Inc., retail security systems; Global Industrial Technologies Inc., industrial products for metals producers; Medical Resources Inc., diagnostic imaging centers; and Whittaker Corp., fluid control and fire safety systems. The market caps ranged from $62 million for Access Worldwide to $291 million for Checkpoint, based on figures reported by M&A HotSheet at the time each company announced its initiative. Many m&a professionals say such firms are really testing the market to see what acquirers will pay for them because their futures as publicly traded, stand-alone companies look stormy. Low stock prices curb their own plans to grow through acquisitions or obtain capital through equity sales, and many may fear that they can turn handsprings and still be shabbily treated by investors. Another group of reviews was triggered by firms that actually have received bids or expressions of interest from potential buyers, including: Binks Sames Corp., spray finishing and coating application equipment; Daniel Industries Inc., fluid measurement and analytical products for the oil and gas industries; Neff Corp., equipment rentals; and O’Sullivan Industries Holdings Inc., furniture. Market caps ranged from $46 million for Binks Sames to $208 million for O’Sullivan, which received a buyout offer from senior management. Daniel Industries, with a market cap of $199 million in March, sought “alternatives” after rejecting an offer from an unidentified company. These companies, according to m&a pros, are trying to smoke out higher bids or get a handle on their values in the merger marketplace. Daniel subsequently agreed to be acquired by Emerson Electric Co. for $460 million. Although most m&a market practitioners think that “exploration of strategic alternatives” is a cover for a target looking for buyer, the euphemism is an arty blend of linguistic skills and legal pressures. The announcement telegraphs that the firm can be had at the right price but stops well short of committing it to a deal. Acquisitions of Publicly Held Companies by Trading Market 1998 1997 No. of Value No. of Value Deals ($ bil) Deals ($ bil)New York Stock Exchange 174 $627.8 136 $282.2 American Stock Exchange 39 11.9 36 8.7Nasdaq 340 200.5 307 130.7 Over-the-Counter 101 10.8 106 18.0 Pink Sheets 4 0.4 5 0.2 Nasdaq Small-Cap 18 0.7 14 0.5Other Exchanges 183 55.1 111 31.3<\TBL>