M&A activity has been picking up steam during 2014, and is on track to be the biggest year since 2007. Over $2.5 trillion in deals were announced in the first nine months of 2014, with U.S. deal volume leading the way, up 65 percent this year.1 Europe and the Asia-Pacific region are also experiencing increased deal volume, up 27 percent and 24 percent, respectively, from last year.2 An improving economy, large cash balances and cheap debt are the primary drivers fueling this uptick in M&A activity.
Mega deals contributed to the increase in overall deal volume, signaling growing confidence by boards to undertake large, strategic and transformative deals, with the majority coming from the pharmaceuticals, life sciences, telecom and technology industries.3 The inversion trend, where a U.S. company merges with a foreign company in a country with a lower corporate tax rate, also added to M&A activity, accounting for four of the top 10 largest deals in 2014.4 This trend will likely cool in 2015, however, due to new rules announced by the U.S. Treasury Department and the Internal Revenue Service that make inversion transactions more difficult and less rewarding for companies.
Strategic buyers have also returned to the market, seeking growth and expansion opportunities before competitors beat them to the punch. The stock market has generally rewarded such acquisitions by boosting a buyer’s stock after the announcement. In the first half of 2014, nearly 70 percent of announcements of U.S. acquisitions worth $1 billion or more were followed by gains in the stock prices, compared with a seven-year average of 55 percent.5
The flip side of increasing M&A activity is that many companies will find themselves at risk of becoming targets of unwanted suitors. Hostile takeovers have made a comeback in 2014, amounting to around 19 percent of the value of all M&A activity in 2014, the most in any year since 2000.6Pfizer’s attempt to acquire AstraZeneca, Valeant Pharmaceuticals’ and Pershing Square’s attempt to acquire Allergan, and Charter Communications’ attempt to acquire Time Warner Cable, are just a few of the unsolicited offers making headlines this past year. Directors need to carefully assess the adequacy of their company’s takeover defenses, particularly since many companies have acceded to shareholder demands to destagger boards, eliminate existing poison pills and give shareholders the right to call special meetings and vote by written consent. These efforts to become more shareholder friendly have left companies increasingly vulnerable.
Although the use of poison pills as a takeover defense has been falling out of favor for several years, boards would be wise to have a poison pill “on the shelf,” which is ready for adoption on short notice in response to a potential threat. Taking this “on the shelf” approach gives the board more time for a thoughtful and effective evaluation of the poison pill in the absence of a pending threat and enables the board to act quickly in response to an actual threat. Further, there are no public disclosure requirements for merely having a poison pill “on the shelf,” so the board is not pressured to include shareholder-friendly provisions recommended by ISS, but instead can ensure the poison pill is sufficiently potent to adequately protect the company.
This post was excerpted from our annual Top 10 Topics for Directors in 2015 alert. To read the full alert, please click here.
1Maureen Farrell, “M&A: Still Booming,” The Wall Street Journal (Oct. 1, 2014).
3 “The Return of the Mega Deal,” Financier Worldwide (July 2014).
4 Farrell, supra.
5Soyoung Kim and Greg Roumeliotis, “Global M&A at Seven-Year High as Big Corporate Deals Return,” Reuters (June 30, 2014).
6Arash Massandi and Ed Hammond, “Hostile Takeovers Rise to 14-Year High in M&A as Confidence Grows,” Financial Times (June 8, 2014).