Viable Deal Format In a Hot Market: Intensifying Competition and Pricey Deals Boost the Use of Tender Offers

The increasingly competitive and hostile m&a environment in 1997 drove the use of the tender offer, a deal format that can speed up deal completions while allowing unsolicited bidders to go directly to stockholders of unwilling targets. The surge in tender offer numbers and dollar value last year also reflects the high levels of the stock market and increased competition for choice targets. Acquirers shelled out $111.4 billion for 208 transactions last year, the highest level of activity since 208 tenders worth $156.1 were completed in 1989. (That was the year of the $24.7 billion Kohlberg Kravis Roberts & Co. buyout of RJR Nabisco Inc.) Statistically, the tender offer continued its historic role as a relatively small proportion of the broad deals market. Tenders accounted for only 2.7% of the 7,834 deals completed in 1997. The reason tenders represent only a tiny sliver of m&a activity is that they apply only to public targets, which make up only about 10% of all target companies. However, since tenders are usually high-priced deals, they generally snare a larger portion of the total dollar value of all m&a transactions. Last year tenders garnered 14% of the $791.3 dollar value recorded for all m&a deals. The dollar value of tenders paid in a combination of cash and stock soared 105%, from $30.4 billion in 1996 to $62.4 billion in 1997. Tender offers made with stock, or a combination of cash and stock, have been done infrequently, because, historically, it has been easier to complete such deals through all-cash bids. Several factors have led to the more frequent use of stock in the last few years as an acquisition currency in tender offers, including the high levels of the stock market, which have made acquirers’ stock more attractive to target shareholders, and the increasingly expensive price tags in tender offers which have made it harder for acquirers to make all-cash bids in these high-priced types of deals. Tender offer bid premiums inched up slightly in 1997, although most premiums continued to hover in the 25.1% to 50% range (generous though not overblown premiums), suggesting relative stability in pric-ing. Although premiums of 100% or more fell from 3.9% of all premiums in 1996 to 2.9% in 1997, premiums in the 75.1% to 99.9% range rose from 3.9% in 1996 to 6.3% in 1997, and in the 25.1% to 50% range increased from 20.1% in 1996 to 29.8% in 1997 – a 20% increase. The year’s biggest tender offer, the joint purchase of Philadelphia-based Conrail Inc. by Norfolk Southern Corp. and CSX Corp., weighed in at $10.4 billion and came after a bitter bidding war by the two competitors. The bidders ended their intense battle for Conrail in a unique agreement under which they divvied up the railroad assets.