Earlier this week, Suncor Energy Inc. (Suncor) and Canadian Oil Sands Limited (COS) announced that they reached an agreement whereby COS agreed to support Suncor’s offer to acquire COS for $6.6 billion (including estimated debt of $2.4 billion), representing a 12% increase in the exchange ratio from the initial offer made by Suncor for COS in early October 2015. Initially, the COS board of directors adamantly opposed the hostile bid. However, after several bid extensions over the course of a truly hostile takeover battle lasting more than 100 days, the COS board agreed to support a sweetened offer, substantially increasing the likelihood that Suncor’s bid will be successful.
Competition by other Bidders and Target Board Support Influence Success of a Bid
Drawing on findings from our 2015 Hostile Take-Over Bid Study (Fasken Study), our previous blog post suggested that Suncor might have an uphill battle in the absence of the COS board’s support. In that regard, we have found that the Suncor bid for COS is progressing in a manner consistent with many of the findings in the Fasken Study. On the one hand, the data in the Fasken Study revealed that a first-mover bidder was successful in 2/3 of one-on-one battles where no competition emerged. As no competing offer emerged to challenge Suncor’s bid, this suggested that the odds were significantly in favour of Suncor to begin with; however, securing board support would appear to be even more significant. Over the study period, bidders who ultimately won the support of the target’s board were successful in all but one case, or 98% of the time; bidders succeeded only 22% of the time without the target board’s support. And results are even more dismal for bidders offering share consideration alone (as was the case with Suncor’s bid): if the bidder failed to secure the support of the target’s board, the odds of such a bid succeeding dropped to 5%.
Over the decade covered by the Fasken Study, there were a total of 34 hostile bids in which the bidder offered only share consideration. In 20 of those bids the support of the target’s board was not obtained and the hostile bidder acquired control of the target on only one occasion. In the 14 bids where the support of the target’s board was obtained, control of the target was acquired by the hostile bidder in every case.
Based on the results of the Fasken Study, one might have concluded that when no competing offers for COS emerged, Suncor was at an advantage; however, given that the Suncor offer was for share consideration, obtaining the support of the COS board was arguably of critical importance. Without the support of the COS board, Suncor was unable to generate enough support from COS shareholders to satisfy its minimum tender condition of two-thirds of the COS shares (it was reported that less than 50% of the COS shares were tendered to the bid). Now that the Suncor bid has the support of the COS board, we anticipate that the bid will be successful.
Given the current economic environment and increased volatility in commodity prices, we may see an increase in hostile takeover bids and M&A activity. However, companies subject to a hostile takeover bid should recognize the leverage afforded to them by the board’s recommendation while bidders would be unwise to dismiss it.