Two years ago Hertz (HTZ) and Avis (CAR) were so close to death that they looked ready to be stuffed in the trunk of a mobster's Lincoln. One year ago the two were feeling so much pluckier that they started a bidding war over competitor Dollar Thrifty (DTG). Dollar Thrifty rejected a $41 offer, all but ignored Avis' bid for $46 and maintained its independence. DTG was right to do so, as on Monday morning Hertz upped its bid to $72.
The rental car troika isn't alone in the takeover wars. ConAgra (CAG) is bidding for Ralcorp (RAH), Texas Instruments (TXN) bought National Semi (NSM) and the list goes on. So what in the name of RJR Nabisco is happening here?
We've only just begun, says Richard Jeanneret, vice chairman of transaction advisory services at Ernst & Young. Jeanneret, whose firm is involved in some of the above (which precluded him from talking specifics), says E&Y's April Capital Confidence Barometer survey, as well as anecdotal observations, suggest good reasons for optimism in the M&A set:
* U.S. Corporations are awash in cash and more optimistic about the next six months, a combination which has boards itching to do deals.
* Boards say they are looking to do deals sooner rather than later: 36 percent say they want to do a deal in the next six months, a greater than 50 percent increase over six months ago.
* Shareholders are increasingly confident, giving boards more latitude in terms of pursuing growth through acquisition.
A couple of somewhat ironic headwinds are facing the would-be wheelers and dealers in corporate America. For one thing, more-confident shareholders may want to do deals, but the target firms have more confident shareholders as well. Witness the above-mentioned Dollar Thrifty deal. Last September DTG shareholders officially rejected a $50 bid from Hertz; this is not unusual except for the fact that DTG was trading for $5 less than 18 months prior. Shareholders turning down a one-and-a-half-year ten-bagger are "confident," to say the least. In DTG's case the shareholders were right, but not every acquiring group is apt to keep bumping a bid to more than 40% higher than a rejected original offer as Hertz and Avis have done.
The price of deals overall is higher on a multiple basis this year than last. The current average take-out price is 13.8x earnings, a historically high level. Perhaps that's why the actual number of deals and dollar-value of same is alagging that of last year, despite the headlines. Regardless, Jeanneret says there remains pent-up demand for deals as U.S. firms vie for growth, particularly in emerging markets.
Add it up and investing based on hopes of a buyout probably isn't for everyone, particularly those who don't work for acquisitive Midwestern billionaires to whom they can pitch deals directly. Nonetheless, with both Ralcorp and Dollar Thrifty trading higher than published buyout offers, there are certainly traders placing bets that we're in a burgeoning buyout binge complete with some old-school competitive offers.
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- RJR Nabisco
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