A Return To Hostility?

In 2002, a group of buyout pros drove out to the Hamptons. In their trunk was the body of Gordon Gekko, and every available copy of Barbarians at the Gate. They buried Gekko, burned the books and returned to Manhattan. They then told everyone that buyout firms now do deals in partnership with company management, and that hostile bids were from a bygone era. Kinder and gentler LBOs.

That’s all well and good when credit is flowing, because friendly offers usually come at inflated valuations. But things change on the cusp of a recession, when companies opt to wait out the deflated buying season until their valuation again equals underlying assets plus optimistic upside.

It’s that latter situation we’re in today, and some buyout pros say to expect a flurry of hostile bids. They’ll technically be called unsolicited bids, but that’s really just the semantic difference between junk bonds and high-yield bonds.

One of the first such attempts came today, when TPG and Sumitomo offered to buy Axcelis Technologies, which makes ion implantation devices for chip makers. The $544 million bid values Axcelis at $5.20 per share, which is a 29% premium to Friday’s closing price, but still about 10% shy of its average closing price over the past year. In other words, TPG and Sumitomo are bargain shopping, and Axcelis’ initial response did not seem too appreciative.

No one deal is determinative of another, but we’ll keep an eye on Axcelis to see what happens. Private equity firms will ultimately choose ROI over PR if put in a corner, which means that it might be time to dig up the past.