September 2008 Archive
Hostile takeovers have never been common in the high-tech industry, but they’ve become more frequent since Oracle was able to roll up PeopleSoft in 2005.
The semiconductor business now is witnessing two hostile takeover bids. You may have seen that Samsung Electronics is targeting SanDisk; more on the other one below.
As others have noted, hostile takeovers in technology are uncommon because so much of the business is dependent on the human talent, which can vote with its feet at any time. You can buy a company and possess its physical assets, such as office buildings and wafer fabrication facilities, but your chip design engineers are free agents who can pick up and leave for greener pastures, along with any executives and middle managers without employment contracts. In the US, most employment is “at will” and can be terminated by the employer or the employee whenever they choose.
This year has seen a couple of unsolicited acquisition bids flame out for various reasons. Microsoft was unable to come to terms with Yahoo!, even after increasing its offer. Electronic Arts this month finally gave up on pursuing Take-Two Interactive Software. Elsewhere, United Technologies officially still has an offer out there to buy Diebold, but UTC chairman George David recently told analysts that his company is less likely to purchase the ATM maker, a prospect Diebold rejected.
Samsung Electronics hasn’t previously pursued a hostile takeover of an American company; it rarely makes any acquisitions, period. The memory chip giant, which also provides a variety of consumer electronics products and home appliances, was in talks for more than three months on a possible combination with SanDisk, which makes portable data storage drives, music/video players, and other products based on flash memory devices. The two companies were also wrapped up in negotiations over patent licensing that have dragged on for more than a year.
Samsung’s cash offer to buy SanDisk, worth nearly $6B, sounds like a lot of money, but SanDisk would have commanded a much bigger price in 2006 and 2007, or even four months ago. In rejecting Samsung’s bid, SanDisk suggested that Samsung’s acquisition offer is just a negotiating ploy in the licensing talks.
Toshiba may emerge as SanDisk’s white knight in this drama. The electronics behemoth enjoys a close manufacturing partnership with SanDisk (the companies share production of flash memories from four wafer fabs in Japan, and they plan to build a fifth fab together), and Toshiba Semiconductor is the world’s second largest supplier of NAND flash memory, the chips that store data in MP3 players, wireless phones, and other popular electronics products. (Samsung is number one in that market.)
Seagate Technology is also being mentioned as another potential savior, possibly because the combination of SanDisk with Samsung or Toshiba could set off antitrust alarms around the world, but CEO Bill Watkins said he wasn’t interested in buying SanDisk.
Meanwhile, there’s another hostile bid going on in the semiconductor industry that’s getting a lot less attention in the blogosphere and the mainstream media. Vishay Intertechnology wants to buy International Rectifier (IR) for almost $2B. Who? What? These two companies, while decidedly obscure to consumers, make electronic components that likely are in any electronics you own. They are big suppliers of passive electronic devices, which regulate electrical power, store electricity, and perform other important electronic system functions in cars, computers, phones, and many other products.
Vishay made its bid for IR shortly after TDK agreed to buy EPCOS, the world’s second largest manufacturer of passive electronic components. TDK may be famous for blank cassette tapes and computer disks (all of which are actually marketed by Imation now), but its sales are dominated by electronic materials and components, and Vishay doesn’t want to get left in the dust by the EPCOS-TDK combination and their mutual competitor, Murata Manufacturing.
No one can accurately predict how these bids will unfold, so stay tuned.
Markets are still reeling from Bank of America’s takeover of Merrill Lynch, the government bailout of AIG, and the bankruptcy of Lehman Brothers (and subsequent sale of its North American investment banking and capital markets business to Barclays). Wall Street investors, analysts, and wags, meanwhile, are speculating about which multibillion-dollar company might be the next to go — and about what the government might try to do about it.
For those of you keeping score at home, the US government put up $85 billion to rescue AIG, provided about $200 billion to shore up Fannie Mae and Freddie Mac (plus up to $69 billion to purchase discount notes), and, with other central banks, made $180 billion available to provide liquidity to financial markets. It also banned short-selling on nearly 800 financial stocks. Russia and China have also intervened in their countries’ financial markets.
After the demise of Merrill and Lehman, only Goldman Sachs and Morgan Stanley are left standing as independent bulge-bracket investment banks. How much longer that is true remains to be seen. (A side note: Merrill Lynch isn’t disappearing completely. Bank of America plans to maintain it as a subsidiary and bank on the name and reputation of the firm known as “The Bull.”)
Morgan Stanley, which somewhat surprisingly announced a third-quarter profit, said that it was approached by Wachovia (which is having troubles of its own) regarding a hook-up, but apparently rebuffed the offer. For its part, Goldman Sachs saw its earnings drop for the quarter, but CEO Lloyd Blankfein deemed the results “solid,” and the company seems committed to flying solo.
A retail banking company that may not be independent much longer is Washington Mutual. The largest savings and loan in the US grew along with the housing boom of the late 1990s and early 2000s but has been laid low by the credit crisis. TPG Capital, which led a group that invested $7 billion in the company earlier this year, has said that it would not stand in the way of an acquisition of WaMu, which has no shortage of suitors. The names of Wells Fargo, JPMorgan Chase, HSBC USA, Citigroup, and even Bank of America have been whispered as potential acquirers.
US banks aren’t the only ones facing extinction. Across the Atlantic, Lloyds TSB announced a $20 billion-plus deal to rescue HBOS, which is heavily invested in residential mortgages. Giant Swiss banks UBS and Credit Suisse have also been rumored to be in merger discussions.
Few predictions seem safe, except maybe this one: This week won’t be dull.
The FDA, seeking to build up its reputation for protecting the public, is asserting greater authority over drug imports, and the target this time is Indian pharmaceutical firm Ranbaxy.
India’s top drugmaker has made headlines several times this year. In June, it agreed to sell a majority of its shares to Japanese firm Daiichi Sankyo. The following month brought the news that the Department of Justice is investigating the possibility that Ranbaxy sold substandard drugs in the US and other markets.
This week’s announcement that the FDA has banned some 30 generic products manufactured at two of Ranbaxy’s facilities in India casts an even wider shroud over the company’s recent success in the generic drug industry. According to the FDA, the Ranbaxy plants have failed to meet good manufacturing standards during inspections. And although none of the drugs recently sourced to the plant have come up contaminated, the FDA intends to ban imports from those facilities until the company meets standards.
Ranbaxy is understandably displeased that its name is being raked through the mud, and it has even hired former New York Mayor Rudy Giuliani’s consulting firm to help it resolve the FDA’s issues. The company seems to think it was already addressing the FDA’s concerns, but the FDA started warning Ranbaxy in 2006 and obviously felt that the changes it requested were not being made quickly enough.
Recent concerns over contaminated imports require response, both to solve the problem and to reassure American consumers that the FDA is on the job. Ranbaxy appears to be the perfect target, with its growing size and recent allegations of substandard products.
It may be that the regulatory agency is looking to make an example of Ranbaxy, or it may be that Ranbaxy is truly the most heinous offender –- either way, the case should spur other drug importers to improve their processes or face losing US revenues.
The rivalry between the nation’s two leading drugstore chains –- Walgreen and CVS –- is heating up as they battle for one of the last big prizes in the chain drugstore industry: Longs Drug Stores.
With some 520 stores in Hawaii, California, Nevada, and Arizona, Longs Drug Stores is indeed desirable.
Last month CVS bid $71.50 per share (about $2.9 billion) to acquire the chain, citing its valuable store locations in fast-growing markets. Indeed, in its press release CVS noted that it had “conservatively valued the store locations alone at more than $1 billion,” adding that Longs’ stores were situated in markets where “commercial real estate values are among the highest in the country.”
So it should come as no surprise that after boasting about Longs’ real estate riches, CVS met with rejection from Longs’ shareholders on the basis that its offer undervalues the chain’s property assets. Advisory Research Inc., which holds about 9% of Longs’ stock, has said it will not tender its shares to CVS at the $71.50-per-share price. The New York hedge fund Pershing Square Capital Management, led by the activist shareholder William Ackman, also rejected the CVS offer as too low and called for a competitive sale.
Enter Walgreen, which on Friday made an unsolicited bid of $75 per share for Longs. Yesterday, Longs rejected Walgreen’s sweeter offer and said its board continues to recommend the CVS deal to shareholders. (CVS has extended the expiration date for the tender offer to October 15 from September 15.) CEO Tom Ryan has said CVS is “not moving” on its price.
It’s hard to imagine that Walgreen will walk away or that Longs’ investors will settle for less than $75 per share. (Earlier this week Longs’ shares topped $76 per share, an all-time high.) Walgreen has said it’s prepared to take its offer directly to Longs’ shareholders, and it has offered to pay the $115 million termination fee if the Longs/CVS deal falls through.
While Walgreen has historically steered clear of big acquisitions, preferring to build its own stores, Longs is too luscious to let slip away. Longs’ presence in key West Coast markets, plus the fact that if CVS prevails its store count will surpass Walgreen’s, make winning Longs’ hand imperative.
Walgreen has deep pockets, possibly deeper than CVS’s following its $26.5 billion purchase of pharmacy benefits manager Caremark just last year. Longs’ savvy shareholders are itching for a bidding war and have raised the possibility of other potential bidders, including real estate players and retail giant Wal-Mart Stores. My guess is that ultimately CVS will have to raise its $71.50 offer to have a chance of landing Longs.
Bank of America has barely had a chance to swallow Countrywide Financial, and now it has agreed to buy Merrill Lynch.
Is Bayer HealthCare (the maker of Alka-Seltzer) next?
Obviously, Kenneth Lewis is a bargain hunter. When you’ve always wanted an investment bank of your very own, and now you can get one cheap, Merrill Lynch would be irresistible. The all-stock deal is valued at $50 billion. But just because you can get something cheap doesn’t mean that it’s a bargain or even that you can afford it. Lewis is doing shoe math.
(What — you don’t know shoe math? That’s when you can get the Manolos at half off for $650, leaving you with another $650 to buy the Steve Maddens and have enough left over for a latte. )
The deal was pushed through with the greatest of speed too, denoting Merrill’s desperation and BofA’s eagerness — or was it the other way around? I just can’t get over the feeling that maybe BofA made an impulse buy in the equivalent of an old city marketplace where you are supposed to haggle. Lewis didn’t haggle! He even said BofA could have gotten a better price for Merrill and elected instead to pay around a 70% premium.
A lot has to happen before stockholders approve the deal. I wouldn’t be surprised if BofA shareholders said no way (but what have we learned about my predictions?). Still, I have a very bad feeling about this.
Bank of America now has expanded its exposure to the subprime mortgage market, directly through Countrywide and indirectly through Merrill’s bad bets. Could be a recipe for indigestion.