Into Hostile Territory

We have seen five hostile transactions in Canada since July. While hostile bids for US-based companies have not been a mainstay of our event-driven strategies, hostile Canadian bids have historically offered particularly attractive risk-adjusted returns. The primary reason for the difference between the two jurisdictions is the emergence of the “just say no” defense in the US, which allows the board of a target company to indefinitely reject a hostile overture by refusing to redeem the poison pill (a takeover defense developed in the 1980s which serves to dilute a bidder). A recent example of the “just say no” defense is the Delaware court’s February 2011 ruling which allowed Airgas Inc.’s directors to indefinitely reject a $5 billion hostile bid by Air Products. The bid was subsequently dropped.

The Canadian context is somewhat different. Canadian regulators, such as the Ontario Securities Commission, have taken the view that poison pills must only be used to serve the restricted purpose of allowing target companies limited time to seek out other buyers. After a period of 40-70 days, poison pills are typically struck down, granting shareholders a vote on the hostile bid. This creates a different risk/reward equation than in the US; it is unlikely (but not impossible) that a reasonable offer will be refused, limiting the downside to a shareholder. Knowing this, the target management and board are motivated to find a “white knight” acquirer, or at least another bid at a higher price (rather than focussing on takeover defenses to protect their entrenched position).

The five hostile transactions we have been involved in are Zarlink Semiconductor, Mosaid Technologies, Hathor Exploration, CANMARC REIT, and Ruggedcom. After running an extensive process to find another bidder, Zarlink was acquired in October by the initial bidder (Microsemi) at a 19% premium to their initial bid made 3.5 months earlier. Mosaid found a white knight, Sterling Partners, which bid $46 to trump an initial $38 bid made by Wi-Lan. Hathor also found a white knight, with Rio Tinto willing to pay 25% more than the initial bid made by Cameco. In late November, CANMARC received a hostile offer from Cominar REIT and has traded at a 5% premium to the initial $15.30 bid. Ruggedcom is the most recent situation, receiving a $22 bid from Belden Inc. in late December and currently trading 10% through the offer terms.

With three out of five Canadian hostiles resulting in significantly improved terms for shareholders (in the midst of market volatility), and the two remaining situations awaiting resolution, Canadian hostile deals are an important component of our event-driven strategies.

until next time. . .

@The Vertex Team

For information on this update or the funds we offer, please contact your local sales representative:

Noel Dattrino
(Western Canada)

Michael Lindblad
(GTA & Eastern Ontario)

James Wilson
(GTA & Western Ontario, Maritime Canada)