Embracing an acquisition trend: The bear hug

"Bear hug" acquisitions--unsolicited, publicly announced offers to buy a company--have been turning up recently in communications-related industries. The past month and a half alone brought at least three attempts.

Comcast has offered more than $40 billion in stock for AT&T's cable business. Satellite TV provider EchoStar dangled a $30 billion bid for Hughes Electronics, the owner of EchoStar rival DirecTV. And telecom company Alltel is wooing CenturyTel shareholders with a $9 billion deal.

General Motors, the parent of Hughes, is willing to talk to EchoStar, but it didn't take long for AT&T and CenturyTel to reject the initial bids from their suitors. No one should be surprised, said Paul Hammer, vice president in charge of the technology, media and telecommunications group of Houlihan, Lokey, Howard, Zuckin, an investment bank in Washington, D.C.

Companies sometimes resort to bear hugs after being rejected through traditional channels out of the public eye, Hammer said. Even if the private offer includes a significant premium to a company's current stock price, top executives and directors may turn it down if they believe the stock market itself is putting an unduly cheap price on the shares.

That could be one reason why CenturyTel spurned Alltel, despite the potential of a 40 percent profit above CenturyTel's current market price. "You're less willing to accept a takeover," Hammer said. "The feelings are that it's an undervalued deal."

Or it could be just a matter of wanting to stay independent. Little Rock, Ark.-based Alltel and Monroe, La.-based CenturyTel are regional rivals, said Stephens analyst Charles W. Pluckhahn, group head of telecom research for his company. "I didn't get the sense that price was really the issue," Pluckhahn said. "I think it's pride, rather than price...It's understandable."

Either way, going public with a bear hug is a "great strategy" for acquiring a target whose management isn't inclined to sell, Hammer said. A CEO can easily turn down an offer made in private, but a bear hug forces a corporate board to consider any reasonable bid because directors have a responsibility to provide shareholders with the best financial returns.

"The problem (with a private, traditional approach) is that you don't know if the CEO is taking you seriously," Hammer said. "You try to widen the net, if you will, of people who hear what you have to offer. It's not hostile, but it steps up the pressure...It's a very, very effective way to get parties to the table who otherwise wouldn't talk to each other."

Most U.S. companies have adopted hostile takeover defenses since the takeover wars of the 1980s, so the only way to get past unwilling board members is to use public pressure, analysts said. The founder of CenturyTel, Clarke Williams, controls the board so tightly that it's impossible to win a proxy fight for control of the company, said Pluckhahn, whose employer, Stephens, is not only headquartered in Alltel's hometown, but is also an adviser to Alltel in the proceedings. And the corporate holdings of the Stephens family, which owns the investment bank of the same name, include a large portion of Alltel stock.

CenturyTel has been shopping around its wireless unit, but Alltel wants the whole company because the rural fixed-wire business is highly profitable, and having a ready customer base makes CenturyTel's wireless business more valuable, Pluckhahn said. "But CenturyTel has to agree voluntarily to do this," he said.

Which means Alltel and its advisers have to convince large shareholders of CenturyTel to pressure the board. Bear hug acquisitions require massive public relations offensives directed at institutional shareholders and other board members besides the chairman and CEO, Hammer said.

"It's PR directed toward people whose decision making matters," Hammer said.

Assuming you really want to buy the company. Some bear hug announcements are mainly designed to be disruptive to rivals, Hammer said.

While Alltel and Comcast clearly want to buy their targets, EchoStar's bid for Hughes only came after Australian broadcast magnate Rupert Murdoch had been negotiating with Hughes for months. Hammer believes EchoStar, which could face intense antitrust scrutiny if it acquires its chief rival, wants to cast doubt on DirecTV's resellers and subscribers.

"It's a classic case of confusing the market," Hammer said. "It'll go down in history as a case study."

More where that came from
That all these bear hugs are happening in communications or related markets simply reflects the fact that the communications industry has been ravaged over the past year, leaving its companies vulnerable to mergers and acquisitions, Hammer said. "There's more real M&A in telecom," he said. "A bear hug is only one tool."

The troubles facing competitive local exchange carriers and other telecom providers has been widely reported, as many observers believe there are too many companies chasing the same customers. Many communications service companies overbuilt, leaving themselves stuck with unused networks.

So the industry is ripe for consolidation, said Pluckhahn, who believes wireless services companies will be among the first to merge or buy each other. And bear hugs will be just a small part of that as companies give in to the inevitable consolidation wave, he said.

"You're only seeing the public announcements," he said. "What you're not seeing are all the sales memoranda around Wall Street...I think it would be mostly friendly. I don't think Alltel-CenturyTel bear hugs will the norm."