December 13, 2005
In a move seldom seen in Canada, Vincor International convinced its shareholders last week to reject a hostile takeover bid by Constellation Brands, which offered C$33 a share.
Vincor's emerging independent from the hostile bid was unusual, says Phil Brown. "Once a hostile bid starts, either the bidder or a white knight usually gets the target," says Phil. Therefore, attempting to fend off an uninvited suitor by persuading shareholders that the company is better off independent "is a Hail Mary."
Without a friendly suitor, there are only a couple of options left to a target company. One is to negotiate to squeeze a few more pennies out of the hostile bidder, and the other is to gamble with the "just say no" defence, as Vincor did.
In the latter option, the difficulty is in persuading shareholders to forgo the easy money. According to one investment bank's figures on transactions since 1998, the average share-price gain has been 47 percent for Canadian companies sold after being put in play by a hostile bidder. That may be the reason that only 19 Canadian target companies walked away independent out of 74 hostile bids in that time.
The key to making the "just say no" defence work is determining who owns the target's shares, determining whether they will support the hostile bid and lobbying against it. That job falls to the target's investment bankers, whose work is complicated by the share turnover that often occurs during a hostile bid. While long-term shareholders sell to lock in gains when a target company's stock spikes, merger-arbitrageurs and hedge-fund operators look for short-term profits and will push for an auction to find a higher bidder or demand some other profitable outcome, such as a special dividend.
A target's investor base can be heavily weighed by these shareolders. To keep them on side, the target company has to offer a sweetener. After the Constellation bid ended, Vincor instituted a quarterly dividend and said it would buy back 10 percent of its shares.
Companies like Vincor who go it alone face various outcomes, including a rise in share price or a drop in share price. Another outcome is to find itself being bid upon later on, in which case "just say no" means "just say not now."