Tech's forgotten takeover attempts

28 April 2008

Marc Andreessen has a good dissection of the strategies that Yahoo could deploy to try to fend off a possible hostile takeover by Microsoft. However, most of it is of the form, "I wouldn't start from here if I were you". If Microsoft presses ahead, it seems likely that Microhoo is not far away. And, given the state of the markets, Yahoo's board may not be alone in looking over their collective shoulders.

Andreesen contends that Oracle-Peoplesoft was the first major hostile takeover in the tech sector: the argument being that tech companies depend far too much on soft assets, which are wont to leave even if the takeover goes through.

It should really be successful bids A number of attempts took place about ten years ago and a couple of years after the one that surprised everyone but which ended with an agreed deal: IBM's bid for Lotus Development.

The takeover spree of the late 1990s was fairly shortlived and, of close to ten big attempts, most of the bids were withdrawn. There was a lull and along came two more, away from the software business. At the time, financial analysts believed that a feeding frenzy was on the way and boards of directors queued up to put poison pills in place. Analog Devices only recently cancelled its - maybe it will start to reconsider its move. And yes, ADI's poison pill entered the company's byelaws in 1998. In the event, the feeding frenzy never took place.

However, the reasons as to why hostile takeovers are soon to be in fashion are similar: Andreessen is right to predict more of the same happening. And we already have interventionist investors trying to unseat boards - that is, doing takeovers the cheap way. Obrem Capital is continuing with its attempt to oust Ray Zinn and co from Micrel Semiconductor.

In the late 1990s, the big deal was AlliedSignal's takeover of connector maker AMP for close to $10bn (in 1998's money) - that's plenty major enough as Oracle picked up Peoplesoft for just over $10bn in 2005. It was a bitter campaign, as many of these things are, with the companies suing each other over poison pills and the like.

Why 1998? Basically, although the Internet revolution was picking up steam, the electronics companies were suffering from the hangover of the Asian crisis. Software companies had never had it so good. The people making the bits that went inside the computers they had to buy were facing dramatic slides in share price: making them juicy targets for anyone with a bit of spare cash. However, the slide was comparatively shortlived as electronics companies managed to get themselves back on the Internet bandwagon, at least for as long as it lasted.

In the end, in 1999, AMP was 'rescued', for the sum of $11bn, by Tyco International - yes, that Tyco. It all happened before Tyco boss, Dennis Koslowski, who liked to buy things - oh, he really liked buying things - was ejected from the company and ultimately tried for larceny.

When ADI cancelled its poison pill, I criticised the naming of them as "shareholder rights plans" as a misleading euphemism. They are surely there for the management. But there is an interesting paper that looks at the payoffs for companies that adopt them that concludes that poison pills can lead to bigger payoffs for shareholders.

AlliedSignal's move on AMP was mostly about money. The attempt by Mentor Graphics to take over Quickturn Design Systems was about putting an end to a bitter legal patent dispute - a fight that would lead to the boss of another company winding up with a long prison sentence for, among other things, trying to arrange the murder of a judge. Mentor was none too fussed if Quickturn people left, the aim was simply to stop the litigation.

Like AMP, Quickturn found a rescuing company: Cadence Design Systems. The patent war didn't end until the autumn of 2003, when Cadence and Mentor signed a deal, with Mentor paying $18m. It was more than ten times less than it wanted to pay for Quickturn, but also after a lot of legal fees had been paid.