Lady or the tiger? Betting on takeovers 'a dangerous game'

Lawson Software Inc.'s agreement to sell itself for about $1.9 billion wiped out $175 million for investors who had speculated a higher offer was on the way. Lawson, which counts billionaire Carl Icahn as one of its biggest shareholders, agreed to be acquired by Golden Gate Capital and Infor for $11.25 a share yesterday, 10 percent below the nine-year high reached this month after the parties had disclosed they were in talks, according to data compiled by Bloomberg. While Lawson said it searched for better offers and found none, bets on a superior bid had left the stock trading at $12.13 the day before the deal was announced. With companies from Tenet Healthcare Corp. to Cephalon Inc. and NYSE Euronext trading a combined $947 million above their takeover prices after the pace of worldwide deals climbed 22 percent this year, some speculators projecting sweetened bids may be disappointed. Equinox Minerals Ltd. already lost C$229 million ($241 million) in value yesterday after investors incorrectly bet that China's Minmetals Resources Ltd. would counter Barrick Gold Corp.'s $7.6 billion takeover. “It's a dangerous game,” said Peter Lobravico, New York- based vice president of merger arbitrage trading and sales at Wall Street Access. “You're not always going to get another bidder to step in. It is healthy for the arb community to have some reminder that there is risk in risk arbitrage.” Terry Blake, a spokesman for St. Paul, Minnesota-based Lawson, declined to comment. Lawson, Oracle Private-equity firm Golden Gate and Alpharetta, Georgia- based Infor, which makes software used by manufacturers and distributors, are paying almost $1.9 billion, excluding net cash, to acquire Lawson's health-care software, data compiled by Bloomberg show. Lawson's stock was driven higher in the last month by speculation Oracle Corp. may be interested in a takeover after Lawson disclosed March 11 that it was in talks with San Francisco-based Golden Gate and Infor about an unsolicited $11.25-a-share proposal. Oracle not bidding may signal the second-largest seller of business applications software is exploring a bigger deal, said Richard Williams, an analyst at Cross Research in Livingston, New Jersey. Deborah Hellinger, a spokeswoman for Redwood City, California-based Oracle, didn't return a call seeking comment. Lawson sought bids from a number of potential acquirers well before the March 11 disclosure, said a person with knowledge of the matter, who declined to be identified because the process was private. No one submitted a rival offer, the person said. Icahn's Stake Lawson shares fell 8.8 percent to $11.06 yesterday after the agreement with Golden Gate and Infor was announced. The drop erased $175 million in market capitalization, data compiled by Bloomberg show. Icahn, who controlled 8.7 percent of the stock as of March 14, said yesterday he continues to support the company's strategic plan and that the deal underscores the benefits of management being open to strategic alternatives. He hadn't made any trades in Lawson stock since January, according to the March filing. Icahn, 75, said the deal is worth 70 percent more than when he first bought the shares for $6.63 each in April 2010, according to yesterday's filing. Minmetals, the copper and aluminum producer controlled by state-owned China Minmetals Group, dropped its April 3, C$6.04 billion bid for Equinox this week after Toronto-based Barrick trumped it with a competing offer of C$7.34 billion. ‘Optimistic Assessment' Equinox, the copper producer based in Perth, Australia, with mines in Zambia and Saudi Arabia, closed 2.7 percent above Barrick's C$8.15-a-share deal when it was made public April 25 as investors speculated Minmetals would come back with a higher bid. Hong Kong-based Minmetals withdrew its unsolicited C$7-a- share proposal the next day because Barrick's takeover price was higher than its “most optimistic assessment of value.” Traders “overestimated Minmetals coming in,” said Sachin Shah, a special situations and merger arbitrage strategist at Capstone Global Markets LLC in New York. “Just because you don't have shareholder support and the deal might not go through on the current terms, that doesn't mean somebody else is going to come in and make a higher offer.” The market for takeovers was revived as the Standard & Poor's 500 Index rallied to the highest level since June 2008. Buyers sitting on more than $3 trillion of cash globally were undeterred by rebellions in the Middle East, oil's climb above $100 a barrel and Japan's nuclear crisis. ‘Very Much Intact' The 7,834 mergers and acquisitions announced globally this year have totaled $749 billion, a 22 percent gain from the $615.8 billion in the same period in 2010, according to data compiled by Bloomberg. The increase extended a 27 percent jump to $2.22 trillion last year, following the slowest 12 months for deals since 2003, the data show. “The M&A cycle is very much intact,” said Dan Veru, chief investment officer at Fort Lee, New Jersey-based Palisade Capital Management LLC, which oversees $3.8 billion. “While the capital markets are open, they are open to well-structured deals, not necessarily bidding wars.” The 18-day bidding war between Hewlett-Packard Co. and Dell Inc. of Round Rock, Texas, for Fremont, California-based 3Par Inc. last year spurred investors to drive the stock prices of takeover targets above their offers, especially in the technology industry, Wall Street Access's Lobravico said. ‘Juices Flowing' Hewlett-Packard in Palo Alto, California, spent $2.1 billion including net debt on data-storage company 3Par, or 325 times earnings before interest, taxes, depreciation and amortization, a record for any computer takeover greater than $500 million, data compiled by Bloomberg show. “Every time you see an event like that it gets the juices flowing,” said Keith Wirtz, who helps manage $18 billion as chief investment officer for Fifth Third Asset Management in Cincinnati. “Sometimes there may be a tendency to become more emotional than rational.” Not all acquisition targets trading above their deal prices will end up getting higher bids because companies are still conserving cash as the economy recovers, Wirtz said. “U.S. companies are looking for productive use of the balance sheet,” he said. “We just have not seen the expansion of competition for deals. Everyone's still feeling their way around the conditions of the U.S. and global economy.” Tenet Healthcare Traders are betting that Community Health Systems Inc.'s $6.6 billion bid, including net debt, for smaller rival Tenet Healthcare is the most likely deal in North America greater than $500 million to receive a sweetened bid or competing offer, data compiled by Bloomberg show. Tenet, which received an offer Dec. 9 from Franklin, Tennessee-based Community Health for $5 a share in cash and $1 share in stock, has traded as much as 27 percent above the bid, even as Community Health said April 18 it made the offer all cash. Dallas-based Tenet's stock closed 15 percent above the deal price yesterday, inflating the market capitalization by $437 million. Tenet Chief Executive Officer Trevor Fetter, 51, said in a statement last week that “Community Health's proposal continues to undervalue Tenet,” particularly as business trends and industry fundamentals have improved. Cephalon has traded as much as 6 percent higher than Valeant Pharmaceuticals International Inc.'s proposed $73-a- share offer since it was announced March 29, lifting the market capitalization $205 million above the bid as of yesterday. ‘Strong Track Record' Valeant said April 21 that it's prepared to “modestly” raise the bid if it's permitted to conduct due diligence. The offer is so low that Mississauga, Ontario-based Valeant could raise it by 15 percent to $84 and still pay less than any drug takeover in history, according to data compiled by Bloomberg. “The Cephalon board has a strong track record of acting in the best interests of our shareholders,” said Natalie de Vane, a spokeswoman for the Frazer, Pennsylvania-based company. “Our board is very aware of its fiduciary responsibility and is making every effort to maximize value for all of our shareholders.” Rival bids from Frankfurt-based Deutsche Boerse AG and Nasdaq OMX Group Inc. paired with IntercontinentalExchange Inc. drove NYSE Euronext's stock to its highest since October 2008 this month. Nasdaq OMX of New York and Atlanta-based ICE's joint offer of $42.91 a share is about 13 percent higher than Deutsche Boerse's bid for $38.11 a share, which NYSE Euronext has traded above on more than half of the days since the two agreed to merge two months ago. ‘You Don't See' NYSE Euronext closed at $39.29 yesterday, valuing it about $305 million more than the Deutsche Boerse offer. The companies are considering financial incentives to win support for the merger, four people with direct knowledge of the matter, who declined to be identified because the talks are private, said this month. Richard Adamonis, a spokesman for New York-based NYSE Euronext, declined to comment. Traders recently have assumed incorrectly that deals will lead to boosted offers or more bids, Capstone's Shah said. “In most instances, eight or nine out of 10 times, you don't see a counteroffer,” he said.