Is offence the best form of defence? Some takeover targets seem to think so. Yahoo Inc. inked a search deal with Google Inc. last week that acts as a poison pill for its unwanted suitor Microsoft Corp.Anheuser-Busch Companies Inc. looks like it’s planning a similar tactic to ward off a takeover by Belgian brewer InBev by trying to acquire Mexico’s Modelo. Both may be hoping these moves give them negotiating leverage by creating competitive tension. But frustrating merger manoeuvres can also sting shareholders.
Consider Yahoo’s deal. The firm plans to outsource search advertising sales to rival Google and get a cut of the revenue in return, which may bring in $800 million (Rs3,435 crore) in extra sales for Yahoo a year. But shareholders view it as a poor alternative to the $33-a-share offer from Microsoft which Yahoo rejected. Yahoo’s shares have fallen to around $22. Worse still, under the terms of its agreement with Google, Yahoo would need to pay a break fee to Google of some $250 million to end the partnership.
Anheuser’s suggested deal with Modelo is potentially more hazardous to shareholders’ interests. It wants to acquire the 50% of Modelo it doesn’t already own. Strategically, that makes little sense. While Anheuser would get to book 100% of Modelo’s earnings, there would be next to no real value creation. That would make it tough to justify paying the premium Modelo’s controlling family trust would almost certainly want.
What’s worse, acquiring Modelo could act as a poison pill. InBev is already stretching the financing for its $55 billion all-cash offer for Anheuser. While its financing banks have agreed to lend $40 billion, they may not be thrilled about pledging a further $10 billion or more. Anheuser shareholders could be left holding an overpriced investment in Modelo—and little chance of a takeover premium of their own.
Frustrating action isn’t always a bad move. Look at luxury brand Gucci. When French tycoon Bernard Arnault crept into Gucci’s capital structure in the 1990s, the fashion house’s board triggered a poison pill, issuing a slab of shares to dilute Arnault and invited in his arch-rival, Francois Pinault. That triggered a bidding war that saw Gucci shareholders eventually bought out at a premium to Arnault’s initial offer.
Gucci may have been lucky, and Anheuser shouldn’t necessarily follow Gucci’s lead. If the Belgians fear Anheuser’s close-knit board will jump into an irrational defensive deal, it might jolt them into sweetening the offer. But a spoiler often works better as a threat than a remedy. If pushes too far, InBev just may walk away—as Yahoo has done with Microsoft. Frustrating actions can be a useful tactic—so long as it’s not the target’s shareholders who end up most frustrated.