Large-scale mergers often plague the “winning” bidder with what academics call the “Winner’s Curse.” The winner’s curse takes place when a bidder does indeed win the object for which he or she was bidding, but the value of that object turns out to be less than what was bid for it. What’s a recipe for a winner’s curse in an M&A situation? Take one part highly visible transaction for a highly motivated, deep-pocketed acquirer. Add a bit of reluctant bride (or outright naysaying bride) on the part of the target firm. Add a potential white knight, preferably one that is despised by the original bidder. Throw in a couple (or more) hard-charging CEOs who view the deal as crucial to their company’s good fortunes (or to their own reputations — either will do). Finally, entrust the whole mixture to a bunch of sophisticated deal packagers on Wall Street. Then, make it front-page news on the publications that “everybody” reads.
The announcement on Tuesday morning that chocolate maker Hershey (with a possible assist from Italy’s Ferrero) might make a counter-offer to the deal broached by Kraft Foods for the United Kingdom’s beloved Cadbury has exactly this flavor to it. According to the Wall Street Journal, Kraft Foods of Northfield, IL, formally offered to purchase Cadbury for about $16 billion on November 9, after publicly making its intentions known in September. Cadbury rejected the initial offer, reports the Journal, as “derisory.” But with no other bidders on the horizon at the time that Kraft was required by the UK to make its proposal official or to abandon the deal, it didn’t increase the bid, commenting that the offer is “fair and attractive.” If Hershey successfully figures out how to get in the game with a superior offer (and its bankers seem quite keen on enabling them to do that), a bidding war of attrition could well break out, as both sides seek to gain the upper hand. In such situations, emotions run high, spreadsheets are more often used to justify decisions than to inform them, and the individuals involved tend to get personal.
Something similar (with 3 bidders and a fourth who was enabling it) took place with Boston Scientific’s recent acquisition of Guidant, a merger that was dubbed by Fortune magazine to be the “second worst deal ever” right behind the AOL-Time Warner merger (which is being unwound even as I write this). The stage for that merger was set when Guidant, a spinoff from Eli Lilly, was entering its tenth year of major success. Without much of a succession plan and a failed attempt to lure a new CEO from GE, the company was a perfect target, with a market cap of about $20 billion. Johnson & Johnson, in 2004, offered to buy the company for $68/share and, much as Kraft was snubbed by Cadbury, was turned down. Eventually, J&J was persuaded to increase its offer to $76/share, or $25.4 billion. In March of 2005, a patient equipped with a Guidant pacemaker died and a public furor broke out when it was revealed that the company had known about the flaw in the pacemaker for three years, but had not informed doctors about it.
What happens? First, the stock tanks, dropping to the mid-$50 range by 2005, amid a recall of over 290,000 devices. J&J’s CEO Bill Weldon drops his offer by $6 billion to $58/share. Guidant rejects that offer. Weldon eventually goes a little higher, to $63/share, an offer which Guidant, seeing no other bidder, grudgingly accepts. In November of 2005, however, a new player emerges on the scene — Boston Scientific. They leverage a deal with a third party (Abbott Labs) to make a $72/share offer. Guidant, smelling opportunity, uses the presence of two eager bidders to ignite a bidding war. On January 11, 2006, J&J goes to $68/share — and even though it’s $4 under Boston’s bid, Guidant sticks with J&J. Provoked, Boston bids $73 on January 12. J&J comes back with $71. On January 17, Boston Scientific makes a “bid to end this” of $80/share, a total of $27 billion. To his credit, J&J’s Weldon says that they “won’t chase this deal to a price that doesn’t make sense for the company” and J&J makes no further offer.
The acquisition of Guidant is widely regarded as a winners’ curse situation for Boston Scientific; yes, they won the prize, but their stock has shown a steady downward trend since the time of the merger and they bought a host of quality and other problems along with the high-flying group.
Smells a bit like the Hershey-Cadbury-Ferrero-Kraft recipe, no? What do you think? Is this another war of attrition in the making? It certainly has all the necessary ingredients.