After the 2008 financial crisis, hostile corporate takeovers fell out of favor. The high debt loads associated with them simply turned companies off.
But after several years of the Fed’s zero-interest-rate policies and strengthening corporate balance sheets, investors are starting to see hostile activity ratchet up significantly.
Now, once a company starts aggressively pursuing another, investors often pile into the target company’s stock. It’s a way to force the acquirer to raise its bid.
Plus, some target companies actively fight back against what they believe to be inferior bids.
Here’s how one such showdown played out on Tuesday…
Simon’s offer included a total enterprise value (TEV) of $22 billion. But Macerich didn’t bite, sending its shares down by more than 3.4%.
Macerich’s board said the unsolicited offer from Simon to acquire the company for $91 per share in cash and stock substantially undervalues Macerich. Therefore, the deal isn’t in its shareholders’ best interests.
MAC also expressed concern with Simon’s plan to sell significant assets to mall operator General Growth Properties (GGP), the nation’s second-largest mall operator, since this would likely raise potential anti-trust concerns.
To top it off, Macerich announced approval of two corporate governance changes to help it fight any coercive takeover attempts.
Defense #1: New Board Structure. The first change adopts a classified board structure in which company directors will be assigned to one of three classes, each serving three-year terms. The company said it would re-evaluate the need to maintain this structure in 2016.
Defense #2: Poison Pill. The company also adopted a limited-duration stockholder rights plan, commonly known as a poison pill. It authorizes a dividend distribution of one preferred share-purchase right on each outstanding share of Macerich’s common stock.
If not redeemed or otherwise exchanged, the rights plan will expire on the date of the company’s annual meeting next year.
Deal or No Deal?
A Macerich-Simon deal could significantly increase shareholder value for both companies.
The Simon Group is ahead of Macerich in several key indicators – such as sales per square foot ($619 vs. $587) and occupancy rates. But, the merger would provide the Simon Group access to Macerich’s global luxury brands.
And because real estate investment trusts (REITs) are highly sensitive to economies of scale, a combined company would bring significant savings and increased bargaining power with anchor tenants, as well as smaller retailers.
Furthermore, it’s likely that both companies’ shareholders could agree on such a merger, as long as the REIT character and tax benefits of the entity are preserved.
However, performing diluted funds from operations (FFO) calculations show that Simon’s offer values Macerich at a price that fails to adequately assess the company’s assets. So Simon will need a better offer if it has any real hope of consummating the deal.
With Macerich’s already-defensive posture, expect to see MAC push hard to get a price at least 12% to 14% higher than Tuesday’s $91 price.
That would most likely force Macerich’s board to give up its fight.