NYT - The Deal Professor : The Consequences of Saying No to a Hostile Takeover B

The Consequences of Saying No to a Hostile Takeover Bid (see IIS Note attached)

Does saying “no” pay off in the long run when it comes to hostile bids?

A hostile takeover often goes, well, rather hostile. A company is usually put on the spot for resisting what is usually an unwanted, yet temptingly high, buyout offer.

The shareholders of the Botox maker Allergan may be wondering whether management’s vigorous opposition to a long-running hostile offer from Valeant Pharmaceuticals, which has teamed up with the hedge fund Pershing Square Capital Management, is worth it. A new report from the proxy advisory firm Institutional Shareholder Services tries to answer that question.

Allergan’s resistance has been stiff. Allergan has tried to prevent its suitors from nominating directors to replace the Allergan board, and sued the two bidders in federal court in California.

Allergan’s justification for resistance is that the Valeant and Pershing Square offer “grossly undervalues” it and seeks to buy the company on the cheap. If Allergan’s investors stick with management in saying no, the company says, shareholders will reap much more financial gains in the long term. On Monday, Allergan’s management got some support after it reported third-quarter earnings that beat expectations.

Over the coming weeks, Allergan shareholders will probably get a formal say in this contest, if a friendly deal is not reached before a special meeting scheduled for Dec. 18. The question is whether saying no will pay off over the long term.

In a report issued last week, I.S.S., which advises large shareholders like mutual funds and pension funds on how to cast their shareholder votes, tried to give an answer. I.S.S. examined all hostile takeovers in the last five years in which shareholders actually got to vote on some or all of the target’s directors.

I.S.S. found only seven hostile bids that went to a vote by shareholders through a proxy contest. That’s not a lot. Even in this small sample, however, was one good sign for Allergan: Only one of the companies was acquired by its hostile bidder.

That was Terra Industries, in which shareholders granted three board seats to CF Industries, a fertilizer company that spent months in pursuit of a deal. That only came after a long dance in which Terra agreed to be acquired by a Norwegian company, Yara International, leading CF to submit a higher bid that won approval. (The M.&A. game never ends; CF Industries was recently in merger talks with Yara, but those talks seem to have ended.)

In the other six cases, the companies stayed independent. I.S.S. then examined the returns of those six. Though a small sample, anecdotally at least, it could show whether the companies were able to deliver on their promise to give more value to shareholders than the hostile offer could.

I.S.S. found that on an absolute return basis, the six companies returned, on average, 50.4 percent from the time of the vote rejecting each company’s hostile bid through Oct. 20.

But when compared to what shareholders could have earned had they taken their money and invested it elsewhere, the “no” companies performed poorly. These companies lagged the Standard & Poor’s 500-stock index by 25 percentage points and their peers by an even greater 78.4 percentage points from the time of the vote through Oct. 20.

Two companies did do well. The “home run” of the group was Illumina, which rejected Roche’s $6.7 billion offer in 2012 and went on to beat its peers by 247 percentage points in the study’s time frame.

Another winner was Airgas, which resisted a $5.8 billion advance from Air Products & Chemicals. Airgas lagged the S.&P. 500 by 5.2 percentage points, but beat its peers by 20.8 percentage points and Air Products by even more. This was a mea culpa moment for I.S.S., because it had endorsed Air Products’ hostile offer. But this report acknowledged that the Air Products bid had “no meaningful premium for the change of control.”

I.S.S. attributed the success of these two companies to their dominance in their corners of their markets. In the case of Illumina, its DNA gene sequencing business was “closer to viability” than Roche acknowledged, and its proprietary products gave it a “scarce asset” to outperform the market. I.S.S. asserted that Airgas also held control of a “scarce asset” because it was one of the few players in the “U.S. packaged gas market.”

I.S.S. argued that the other companies that stayed independent relied on less successful “self-help” strategies. The independent strategy didn’t work for Pulse Electronics, Casey’s General Stores, NRG Energy or Onvia, all of which have lagged the market significantly. For those counting, that means that four out of the six companies should have accepted their takeover offers.

There are issues with I.S.S.’s report. It looked at only seven deals, which is hardly a good universe from which to judge. Yet, if you look back over time, you can find even greater disasters such as Time Inc.‘s rejection of Paramount’s bid at $200 a share bid in 1989. (It took Time almost a decade to make it back to that level in market value.)

The report also includes two smaller companies, Onvia and Pulse, which are more thinly traded and not as widely followed. The law firm Wachtell Lipton Rosen & Katz, which represents Allergan in its defense, attacked I.S.S.’s report for these deficits, saying they “completely undermine” the study’s “conclusions.”

But the law firm misses the point. Even if we took its criticism into account and eliminated the two contentious analyses, the fact is that saying “no” carries consequences.

For shareholders, trying to figure out when a board is right to say no is an inherently difficult task. The I.S.S. report says perhaps we are better off looking at the plan that a would-be buyer has when evaluating hostile deals.

Either way, outperforming the market is almost impossible in the long term. When a buyer is offering top dollar in a hostile offer, it is going to be exceedingly hard for a company’s management to contend that it could do better unless it has a unique product that no one else can replicate.

So what does this mean for Allergan? Allergan is offering a two-pronged defense. The first is to assert that Valeant lacks the business plan and the management to run Allergan effectively. The second is to argue that more money will be made if Allergan’s current plans are put in place, such as its plan of management “efficiencies,” which includes a 13 percent reduction in the work force. The company has also set a goal of reaching $12 billion in revenue by 2019, and it recently raised its earnings outlook. To reach that, Allergan would have to have five years of double-digit revenue growth, which would probably require it to make an acquisition itself.

It’s not surprising that Valeant challenges Allergan’s plans and has asserted that its offer is higher on a “stand-alone basis.”

In the weeks before the special shareholder meeting, Valeant may again raise its offer. A number of analysts put Allergan’s value above $200 a share, or higher than Valeant’s latest informal bid made on Monday.

This is where shareholders should look, rather than at the highly charged war of words and ensuing legal battles. The question for shareholders is: Who will create the most value, and how can it be created? The I.S.S. report is simply stating that if you are expecting value to be created in the future by existing management and choose that over an immediate cash offer by a hostile bidder, you may be sorely disappointed.

NYT - Mexico’s State-Owned Oil Giant, Pemex, Is in Uncharted Waters

LA MURALLA IV, Gulf of Mexico — The computer screens lining the bubblelike control room on this giant floating platform monitor pressure levels in a narrow shaft cut through bedrock to a reservoir of valuable natural gas three miles below sea level.

For six months, an international team hired by a contractor for Petróleos Mexicanos, Mexico’s state-owned oil monopoly, has been drilling an exploratory well here. Now, the work is nearly done. Drill pipes are stacked like sentries. An underwater robot has been pulled back up from the deep seafloor. A wireline sensor is gathering data to determine how much oil and gas lie below.

An operation like this would attract little attention in the northern part of the gulf, where dozens of deepwater platforms are part of the mosaic fueling America’s energy boom. On the Mexican side, though, the search is just beginning.
Pemex is counting on a future in deepwater production. But after eight years of exploratory drilling, it is still years away from producing the first barrel of oil in deep waters. Before it can, Pemex must shed its past as a lumbering state monopoly and remake itself as a streamlined company ready to compete or ally with the world’s biggest firms.

“The real large fields, the material opportunities for Pemex, lie in deep water,” Emilio Lozoya Austin, the chief executive of Pemex, said in an interview in Mexico City. “This is where our biggest learning curve lies.”

Mr. Lozoya’s ambitious plans are part of a sweeping overhaul of Mexico’s energy sector intended to increase flagging oil and gas production. By ending Pemex’s monopoly, the government hopes to attract serious outside investment for the first time since Mexico kicked out foreign oil companies in 1938.

Within a year, Mexico’s regulator, the National Hydrocarbons Commission, will hold the country’s first open auctions for oil and gas fields, including deepwater regions in the Gulf of Mexico. And Pemex will have to compete in the bidding just like any other company, either alone or with partners.

“Pemex will not have any special privileges at all,” said Juan Carlos Zepeda, the president of the hydrocarbons commission. “We have two main mandates. One is transparency and the other is competition.”

The change will not be easy for Pemex, long run as an arm of the government. For decades, the company’s task has been to pump oil and provide cash for the Mexican government, a job made possible by generous discoveries in the shallow waters of the southern gulf in the 1970s. The result was that Pemex racked up losses and never invested for the future — when the easy oil would run out. Closed off from the global industry, it fell further and further behind the energy giants.

Now, Pemex is venturing into uncharted territory, as its traditional fields decline. Since the peak in 2004, Mexican crude oil production has fallen by about a million barrels a day to an expected 2.35 million barrels a day this year.

“The tendency was for the government to look for the quick win and not have a very diversified portfolio of investment that would give you the short-term barrels, the medium-term barrels and the long-term barrels,” Mr. Lozoya said. “Obviously, the short-term barrels have been declining very quickly.”

Continue reading the main storyContinue reading the main storyContinue reading the main story
As Mexico’s energy overhaul kicks into high gear, Pemex has neither the financial capital nor the expertise to produce oil and gas from its complex deepwater reserves. That includes the deepwater oil that the company has discovered in the Perdido Fold Belt, a deposit that extends across American and Mexican waters, or these natural gas fields further south, where the Mexican contractor Grupo R has been drilling exploratory wells with Pemex.

Similarly, Mexico has watched the shale gas boom in Texas from the sidelines. Its own deposits from the same Eagle Ford geological formation, called Agua Nueva in Spanish, are dormant because the small exploration companies working just miles across the border were excluded from Mexico by Pemex’s monopoly.

Mr. Lozoya’s priority for deep water next year is to attract partners to begin production at two fields, Trion and Maximino. He acknowledged that the companies that had developed deepwater fields on the American side of the gulf were “clear candidates.” Among those are major corporations like Exxon Mobil, Chevron and Shell.

Mr. Lozoya is also seeking partners for other types of deposits, including mature fields or extra-heavy offshore crude. That would allow Pemex to increase production quickly as it focuses on its deepwater strategy.

Private investment in oil and gas production is forecast to rise steadily each year to reach about $27 billion by 2020. “The potential in Mexico is still huge,” said Luis Miguel Labardini, an oil consultant at Marcos y Asociados in Mexico City. “There are going to be findings where Pemex can’t do the work.”

The government has granted Pemex a comfortable cushion of reserves, enough to produce at its current level for two more decades. But it must get to work fast in deep water, because the laws return any new field to the state if commercial production does not begin within five years.

“Now you have a credible threat,” Mr. Zepeda said of the hydrocarbons commission. “Before the reform, if Pemex was not performing, I could not take the area and give it to someone else.”

Mr. Lozoya, 39, who has a background in corporate turnarounds and was appointed in December 2012, is in a hurry. “I think it’s something that can definitely be achieved in less than a decade,” he said of Pemex’s transformation.

But he faces serious challenges. Pemex has had chief executives from the private sector in the past who tried and failed to thin the thicket of interests that allows contractors, union leaders and managers to get rich off the enormous wealth the company generates.

Pemex’s reputation for corruption is one of investors’ main concerns, said Deborah Byers, a managing partner at EY consulting in Houston. “The No. 1 issue that everybody has said we need is complete transparency.”

Mexican prosecutors are investigating one of Pemex’s largest contractors, the politically connected marine services company Oceanografía, over accusations of a $400 million bank fraud scheme involving fake Pemex invoices. Pemex has not explained why it gave so many contracts to Oceanografía, a financially shaky company with no experience outside Mexico.

To tighten control over Pemex’s $40 billion contract operations, Mr. Lozoya has centralized them in one department. He predicts this move will save the company $1 billion this year.

And Pemex has trouble managing its sprawling industrial properties — from refineries to the franchises that operate its signature green and white gasoline stations — that bleed money and attention from the company’s exploration and production division. The company has lost $1.15 billion this year to criminals’ tapping into its pipelines, a longtime problem.

Mr. Lozoya argues that Pemex has taken the most important step in a turnaround. “We have stopped talking about barrels,” he said. “We only talk about U.S. dollars and pesos now. It’s not about volumes. It’s about value.”

>>> NUMERICABLE : ANNOUNCES HIGHLY DILUTIVE CAPITAL INCREASE OF €4.7B

NUMERICABLE : ANNOUNCES HIGHLY DILUTIVE CAPITAL INCREASE OF €4.7B... as strike will be Eu17.82 with 15 New shares for 7 held. Cap increase will be held from October 31st to November 12.
-> Massive discount 35% - way more than we had expected (20%). there will be
263m shares created vs. our 172m expectation. Clearly positive for ALTICE that will subscribe to 75% of the capital increase... Stock should suffer. We should some TP adjustement by around 20%.

(BFW) *ALTICE HIRED LAZARD TO SELL OUTREMER TELECOM: DENOYER

BN 10/29 08:28 *ALTICE HIRED LAZARD TO SELL OUTREMER TELECOM: DENOYER
BN 10/29 08:28 *ALTICE WANTS TO SELL OUTREMER TELECOM 'VERY FAST': DENOYER
BN 10/29 08:28 *NUMERICABLE CEO SAYS FRENCH PRICES STABILIZING
BN 10/29 08:27 *NUMERICABLE CEO SAYS FRENCH PRICE WARS ARE ENDING
*ALTICE HIRED LAZARD TO SELL OUTREMER TELECOM: DENOYER
2014-10-29 08:28:48.362 GMT

--GAURAV PANCHAL

-0- Oct/29/2014 08:28 GMT

FT : Europe’s banks are too feeble to spur growth

One doubts whether the capital in eurozone institutions is enough to drive the economy forward

Will the asset quality review and stress tests conducted by the European Central Bank and the European Banking Authority mark a turning point in the eurozone’s crisis? Up to a point. They are an improvement on what has gone before. But they are not a complete fix for the banking sector, still less for the economy’s wider problems.
The optimistic assessment is that the ECB has at least done enough to mend the banking system. There are two things to be said for this judgment: first, the ECB has taken a close look at the quality of assets in the system; and, second, the “stresses” imposed in the tests are tough. They seem comparable to those imposed by the Federal Reserve on US banks. The ECB concluded that 25 institutions, nine of them Italian, would need to add a total of €25bn in capital. This number has already fallen to €13bn because of capital-raising undertaken this year.
Perhaps the most important possibility omitted by this assessment is that of sovereign default. This bears on a fundamental concern: risk-weighted capital requirements, on which the analysis is based, involve making judgments about the safety of different types of assets. This is especially problematic in the eurozone, where the lack of a unified fiscal backstop for banks means that national governments are responsible for rescuing troubled institutions. Moreover, the solvency of the eurozone’s highly indebted members is more doubtful than that of countries with their own currencies. Since a banking crisis would be even harder to deal with in the eurozone than elsewhere, it would be wise for its banks to have bigger capital buffers that stand a better chance of preventing one. This is particularly important when actual leverage is so much higher than the risk-weighted capital ratios suggest.

Fortunately, banks with the smallest amount of equity relative to actual assets are located in relatively solvent countries, such as the Netherlands, France and Germany. Nonetheless, leverage is 20 to 1 in Spain and Italy; 25 to 1 in Germany and France; and 30 to 1 in the Netherlands. It is question­able whether this is enough loss-absorbing capital.
High leverage also impairs the ability of banks to finance growth. A responsibly managed yet highly leveraged institution would seek to make heavily collateralised loans, against property, for example; or to hold highly rated assets. This is likely to militate against the productive investment the eurozone needs.
For these reasons, one must doubt whether the capital in eurozone banks is enough to drive the economy forward. But this is just one part of a still bigger problem: the dramatic weakness of aggregate demand and the slow slide into ultra-low inflation and, quite possibly, deflation. Sounder banks do not necessarily generate faster growth in demand. Indeed, causality goes far more in the opposite direction.


Two former ECB officials have expressed sharply different views about how policy makers should respond. Otmar Issing, the bank’s former chief economist, argues that monetary policy is already too loose from a German point of view and that it would be a mistake for Berlin to loosen fiscal policy, too. Lorenzo Bini Smaghi, a former member of the executive board, argues that stronger demand is needed in Germany to prevent the European economy from falling into deflation. The vital point is that the eurozone has a single monetary authority, which should take a view of the entire eurozone economy.
Between the first quarter of 2008 and the second quarter of this year, eurozone nominal demand rose by a mere 2.5 per cent (see chart). Nominal gross domestic product grew by 5 per cent over that period. Now assume trend real growth was a mere 1 per cent and inflation 2 per cent (in line with ECB targets). In that case, nominal GDP should have been growing at 3 per cent a year. By the second quarter of 2014, nominal GDP was 13 per cent below this objective. Under Mr Issing, the ECB looked at monetary aggregates as well. In the six years to September 30 2014, broad money (M3) increased by 9.6 per cent, a compound annual rate of 1.5 per cent. On both measures, the ECB has failed.


The same goes for inflation. Suppose the ECB intends to hit its inflation target of close to, but below, 2 per cent. When a number of important member countries need to improve their competitiveness, their inflation should be well below German levels. If that is to happen while the average remains close to 2 per cent, core inflation needs to exceed 3 per cent in Germany (and other surplus countries). In fact, it is just 1.2 per cent in Germany. This suggests domestic demand is far too weak in the eurozone as a whole, including in the surplus countries, the most important of which is of course Germany.
The question, however, is how to achieve higher demand growth in the eurozone and creditor countries. Experience in the US and UK suggests that unconventional monetary policy might work. But the ECB is hampered by the constraints (perceived and actual) on purchases of government debt. If Germany is opposed to such purchases, then its opposition to active fiscal policy as well, even when it is able to borrow at close to zero real interest rates over 30 years, ensures continued eurozone stagnation. That just cannot make sense.


It is essential not to make too much of these stress tests and asset quality review. Yes, they are real improvements. But they do not mean that eurozone banks will now drive growth. They still have too little capital for that. More important, the eurozone lacks a credible strategy for reigniting demand. If much of the German policy elite continues to deny this is even a problem, the crisis of the eurozone must remain unresolved. That is a disaster.

>>> What to look at today - 29th of October 2014 - FOMC DAY

US Closed higher with S&P climbing 1,2% and Russell 2,9%,US Indexes are niw uo on the year, FOMCtomorrow and the belief that the Federal Reserve will not rush to hike the fed funds rate after asset purchases under the Quantitative Easing program end, most sectors are up but we sw some weakness in apparel with COH -5,95% & KSS -6,6%...TWTR -9,8%, FB was flat ahead of earnings, volume were in line with average @ 779mil shares....VIX @ 14,39 -10,3%...US After Hours : X +10.4%, MAR +4.1%, INVN -24.5%, FB -9.3%, GILD -3.6%, PNRA -2.8% following earnings/guidance...Japan Cabinet Office raises its assessment of Industrial Production for the first time after Sept sequential growth rose at the highest rate since January...S&P warned the plan to raise its sales tax next year may not be positive for the nation's credit rating if it snuffs out any chance of economic recovery. This could potentially disarm the argument that global investors' trust would be hurt if consumption tax is not lifted again as expressed by Fin Min Aso last week...World Bank warned that China growth slowdown could be structural rather than cyclical, but that there is room for stimulus if growth slows sharply. World Bank estimated reform to increase growth by as much as 3.5% over a five year
period...Nikkei +1.46%...Hang Seng +1.22%...Shanghai +1.5%

Eur$1.2741 S&P -0.08% EuroStoxx+0.33% FTSE +0.43% DAX +0.35% SMI +0.27%

Macro
- Zambia President Is Dead, Family Sources Confirm, BBC Reports
- FLMC today

Keep an eye on :
- AF FP : Air France 3Q Operating Profit EU247m vs Est. EU330.5m
- ATL IM : Atlantia hires Goldman Sachs to handle AdR 40% stake sale - Il Sole 24 Ore
- BBVA SM : BBVA 3Q Net EU601M, Misses EU715.8M Analyst Estimate
- BNP FP : BNP Paribas Fortis to Review Remuneration Policy, L'Echo Reports
- COK GY : released numbers, see significant rise in sales, big beat stock indicated 8% higher pre market
- DLG GY : Dialog Semi Sees 4Q Sales Above Ests. as 3Q Profit Beats
- DSV DC : DSV 3Q Net Beats Ests.; Raises Lower End of Outlook Range
- GSZ FP : GDF Suez Says Madrid Office of Cofely Searched by Police
- MB IM : Mediobanca to sell stakes in Telecom Italia and RCS by June 2015 - Il Sole 24 Ore
- NUM FP : Numericable to Begin EU4.7b Rights Issue on Oct. 31,ALtice to fully subscribe (74.59%), Right issue guaranteed by Bamnk syndicate
- REE SM : Red Electrica 9m Net Income EU414.8m; EU389.4m 9m 2013
- RXL FP : Rexel Says 3Q Sales Growth Solid, Confirms FY 2014 Targets
- RB/ LN : Unilever, P&G, Reckitt Checking U.K. Accounting: Telegraph
- REP SM : Santander Wants Sacyr to Sell 3% of Repsol, Confidencial Says
- SAN FP : Sanofi Board Said to Meet Today Amid Speculation Over CEO
- SAN FP : Sanofi's Viehbacher Likely to Be Ousted Today, Le Monde Says
- SPM IM : Saipem CFO Says Not Changing Medium-Term Guidance
- STB NO : Storebrand 3Q Pretax Profit Beats Est., Builds Reserves
- STL NO : Statoil's Saetre Says Dividend Policy `Is Very Firm'
- SU FP : Schneider Electric 3Q Sales EU6.285b, Est. EU6.23b
- SEV FP : Suez Environnement Will Challenge Lille Contract Decision: CEO
- STM FP : STMicro Forecasts 4Q Revenue Decline Amid Soft Demand
- TOM2 NA : TomTom 3Q Net Falls 49%; Beats Ests; Revenue Forecast Raised
- FP FP : Total 3Q Adj. Net $3.6b vs Est. $3.3b; Div. EU0.61/Share
- UNA NA : Unilever, P&G, Reckitt Checking U.K. Accounting: Telegraph
- UNIB SS : Unibet 3Q Ebitda Beats Est.
- VONN SW : Vontobel AUM Rises 6% in 3Q; Net New Money Exceeds CHF2b
- ZAL GY : Zalando Declined to Exercise ’Green Shoe’ Over Allotment

>>> Brokers Upgrades & Downgrades - 29th of October 2014

>>> Up
*KUONI RAISED TO OUTPERFORM VS NEUTRAL AT CREDIT SUISSE
*ROLLS-ROYCE RAISED TO MARKETPERFORM VS UNDERPERFORM: BERNSTEIN

>>> Down
*SAIPEM CUT TO SELL VS HOLD AT SOCGEN
*SANOFI CUT TO HOLD VS BUY AT DEUTSCHE BANK
*SANOFI CUT TO HOLD VS BUY AT JEFFRIES
*STANDARD CHARTERED CUT TO NEUTRAL VS BUY AT NOMURA

>>> PT Changes


>>> Initiation


>>> Call