Potash And Genzyme: When M&A Reaches It Limits

Some of the recent acquisitions by one public company or another have given shareholders huge windfalls.

3Par was sold at an extraordinary valuation after a bidding war between Dell (NASDAQ: DELL) and Hewlett-Packard (NYSE: HPQ). Intel (NASDAQ: INTC) bought McAfee for a large premium. Experts say that these deals are “strategic” and therefore necessary even at high prices. But, the transactions are so expensive that they may hurt the buyer’s financials and, as is true of many acquisitions, may not work out at all.

Two of the largest proposed buyouts proposed in the last quarter have stalled. The first is the $39 billion offer the BHP Billiton (NYSE: BHP) has made for Potash (NYSE: POT). BHP says its offer is fair and will not be raised despite strong Potash earnings. Canadian authorities and pension funds which own Potash shares have been cool to the BHP offer which pushed Potash shares from $108 to $153. It is a great risk that Potash shares will get that high on their own any time soon, and if a BHP offer is withdrawn, Potash is likely to move back toward $100.

The dynamics of the Sanofi-Aventis offer to buy Genzyme (NASDAQ: GENZ) are similar. Genzyme’s 52-week low is $43. After the buyout offer, shares rose to $73.  Sanofi-Aventis recently raised its earnings forecasts for the year and said that its offer for Genzyme would not rise.

Genzyme’s argument that it is worth more than the offer on the table has fallen on deaf ears. The same is true for Potash.

The fact that two very large companies will stick to their current offers for firms which they consider important to their futures is telling. The rash of M&A transactions which are often done at high valuations may have taught other companies something. First, premium offers on their own are not enough to sustain a stock’s valuation. The second is that, even through large companies can raise money at low interest rates, there is risk in deals since the global recession may not be over.

M&A deals may have reached high water market recently, at least if companies are not willing to bid up prices indefinitely to get the targets that they want.

Douglas A. McIntyre