Whenever a cash takeover offer for a company comes along, we almost invariably recommend to clients that they sell their shares into the market at or near the takeout price as soon as possible. It may seem like obvious advice to take the money and run, but sometimes advisors can be tempted to hold out for more.
The first question is always whether a higher offer may emerge, potentially followed by a counter offer. While sell-side research is often biased, analysts tend to provide unvarnished opinions about cash takeovers that can be used to assess the likelihood of better offers.
The caveat is that this holds true only when the acquirer is unrelated to the target company. When the offer comes from an existing major shareholder, valuations might not be reliable because of conflicts.
Analysts will apply their industry knowledge to identify specific potential bidders with the right financial capacity and fit, as well as evaluating the specific deal metrics. Advisors can also assess whether the price is fair based on the takeout premium offered and whether it is a hostile or friendly deal (with the latter having the added approval of the board).
Holding out for a better offer can be risky since one might not materialize; the deal could fall apart and the shares decline. In October 2018, Husky Energy offered to buy MEG Energy for cash and equity. The shares jumped 38% to match the offer price, but MEG’s board rejected the offer and the stock traded down to the pre-offer price over the next few months.
Husky pulled the bid and the shares collapsed to less than 50% of the takeover price. While volatile energy prices essentially killed the deal, advisors had a chance to exit high from a position that’s now still well under the offer price.
Another issue that can hold back advisors from hitting the sell button is when they are faced with booking a loss on the position. This is a psychological barrier that advisors need to break through.
In 2019, the controlling private shareholder of Canfor Corporation offered to buy the rest of the company at a cash premium of 82%. The deal was approved by the independent board committee, and the shares traded up to the offer price. Nevertheless, a majority of the minority shareholders simply would not sell at the offer price, knowing that the shares had traded higher in the prior 12 months — and by twice that amount in the past two years.
Advisors reading conditions on the ground might have predicted the collapse of these deals, but sometimes a black swan event can scuttle a deal. In 2008, the Ontario Teachers’ Pension Plan was staged to take BCE Inc. private in what would have been the largest-ever leveraged buyout. But with the financial crisis in full swing, the deal looked increasingly rich the closer it got to closing. When an arcane audit requirement needed for the deal wasn’t rubber-stamped, investors holding out to the end saw the share value fall 40%.
Another risk is when a tender offer, as opposed to a sale of shares in the open market, results in receiving shares in the acquiring company. This means taking equity in an unknown entity. That risk is generally weighed against the downside of triggering a capital gain in taxable accounts, rather than opting for a tax-free rollover if the shares were exchanged. However, the risk of holding the shares might outweigh the tax benefit.
There are clear pitfalls to not selling into the market soon after a cash takeover is announced. After a quick check of a deal’s merits, advisors who take the cash early rarely leave much money on the table. Redeploying funds to another position with equal or better upside and none of the attendant deal risks may be more beneficial.
Al and Mark Rosen run Accountability Research Corp., providing independent equity research to investment advisors across Canada. Dr. Al Rosen is FCA, FCMA, FCPA, CFE, CIP, and Mark Rosen is MBA, CFA, CFE.