Maybe Their Offer Wouldn't Be So Hostile If You'd Called Them Back When You Said You Would, Ever Think Of That?


You should probably go read Steven Davidoff's column in DealBook today about yesterday's hostile bid by Martin Marietta to take over Vulcan Materials. It's an amazing list of all the reasons that this will not end up actually being done as a hostile deal, including:

(1) a New Jersey "constituency statute" designed to, essentially, keep the Mitt Romneys out of New Jersey, that might also work to prevent an all-stock merger of equals with a US public company;

(2) a nondisclosure agreement that Martin Marietta signed which, though it doesn't actually prevent MLM from launching a hostile bid for VMC, does cleverly prevent it from making the disclosures required by the SEC to do so (though it apparently made them anyway); and

(3) a typo, really, in the VMC charter that may prevent MLM from doing even a fully priced deal if it's not approved by current directors.

But you should even more read MLM's exchange offer document, particularly the "Background of the Offer," which is a weirdly human story about two rich dudes who each ran a company and harbored a deep desire to be each other's boss. Vulcan CEO Donald James had met with Martin Marietta CEO Ward Nye and his predecessor to discussing merging off and on since 2002. Here's an account of their last conversation:

On May 26, 2011, Mr. Nye and Mr. James met in Atlanta. Mr. James told Mr. Nye that Vulcan would only be interested in a business combination with Martin Marietta at the market exchange rate without any premium to Martin Marietta, in which Mr. James would be chairman of the board of directors and chief executive officer, with a majority of senior management positions held by Vulcan personnel for a transition period. Mr. James also stated that he did not believe that the cost synergies to be achieved in a combination would be greater than $50 million, and that he believed that potential tax leakage and the ability to divest overlap businesses were significant impediments to a transaction. Mr. Nye responded that he did not share Mr. James’ views with respect to cost synergies and impediments to the transaction. Mr. Nye also told Mr. James that the terms presented by Mr. James with respect to corporate governance and the relative values of the two companies were not acceptable to Martin Marietta. Mr. Nye asked Mr. James if the position stated by Mr. James was Vulcan’s final position with respect to a combination with Martin Marietta. Mr. James indicated that he would call Mr. Nye to discuss the matter further.

And then he never called. You can imagine how embarrassed Nye was to have to tell his friends that he couldn't get James to call him back. Or, don't imagine it, there it is:

In August 2011, at a meeting of the Martin Marietta board of directors, Mr. Nye updated the board on the status of discussions between Mr. Nye and Mr. James, including the last conversation between Mr. Nye and Mr. James on May 26, 2011, the positions taken by Mr. James during such discussions, and the fact that Mr. James had not called to further discuss the potential transaction as Mr. James indicated he would.

Snubbed, Nye had no choice but to launch yesterday's hostile bid. If you're a VMC shareholder and you believe that James was holding out for the best possible deal for you - a no-premium deal where VMC acquired the smaller MLM at an exchange ratio based on current market prices - then this deal is unambiguously better, since it has VMC receiving a 9% to 18%-ish premium, depending on how you count. And in fact VMC shares were up 15% yesterday. So if James wanted an even exchange ratio, and got a better-than-even exchange ratio, of course he'll agree, right? Well, not yet, anyway. One reason why could be - just a guess here - that, instead of James's proposal of making himself chairman and CEO, Nye's proposal includes "a senior management team that would consist of me as President and Chief Executive Officer and other senior leaders from each organization based on a 'best athlete' approach." (Awkwardly, James would be chairman of the board.)

This is a funny hostile deal because, despite the obvious hostility involved in launching an exchange offer, proxy fight, and two lawsuits in one day, along with that sulky, unilaterally drafted background section, it doesn't at all contemplate being done as a hostile deal. It's clear to Martin Marietta that the obstacles Davidoff points out are overwhelming, which is why the conditions to the exchange offer include "we've signed a merger agreement with the Vulcan Board," and why MLM has served up a draft merger agreement that looks on quick inspection like a standard (albeit buyer-friendly) public company friendly transaction agreement. Real men do their hostile takeovers without reps, warranties, break-up fees or due diligence. Right Jonny Cameron?

Given that there's so little real possibility of a hostile deal being done, all the clanging on that Martin Marietta is doing can only be part of a public shaming process designed to get Vulcan to come to the table on a friendly deal. This process next goes on to Vulcan talking a good game about the offer being inadequate, and then some face-saving concessions from Martin Marietta that include slightly nicer-sounding protections for Vulcan management and employees and a bit of a higher price. I guess that will happen, though Vulcan seems to have quite a bit of legal leverage to say no if they're not happy with wherever Martin Marietta ends up.

Since the goal is shaming Vulcan's management in front of its shareholders, the Martin Marietta proposal is intended to show all the benefits to Vulcan shareholders - a (smallish) premium, big synergies in the combined company (MLM claims $200 to $250mm annually, which at MLM's 13ish EV/EBITDA multiple and a 58% ownership by VMC shareholders, I get being worth $1.5bn to VMC shareholders, or like $12 a share, if you believe each step of that, which, don't), higher dividends and other goodies - and create just a hint of why Vulcan might be saying no. I took the hint above: the MLM exchange offer prospectus hints that they think Vulcan's CEO is all about hanging on to the top job, and screw the shareholders. That's why it devotes almost equal time to strategic rationale and synergies (important) and management issues (maybe less important). Now, that is maybe unfair. I have no idea. In fact, if you were looking to nitpick, you might notice that the deal is structured to allow Martin Marietta's executives to get golden parachutes and enhanced pensions even though they're the acquiring company.

But as a PR strategy it's not bad - and a standard move in hostile M&A, claiming that the board that says no is really looking to its self-interest rather than the interests of shareholders (who are, of course, always happy to tender for pretty much any price above the pre-merger price). You can question the synergy numbers, claim that regulatory approval will be challenging, or propose that Vulcan can create more value for shareholders on its own, but Martin Marietta has put the focus on embarrassing nonsense: a confidentiality agreement that would, if enforced literally, require MLM to break the law; a constituencies statute designed to let Vulcan reject a deal that would require huge layoffs but that may be harder to invoke when Vulcan is claiming that MLM's cost synergy numbers are exaggerated; and, again, really, a typo in Vulcan's own charter. If Vulcan's board and management end up keeping their independence based on technicalities like that, rather than by persuading shareholders that they've got a better plan for the company than Martin Marietta does, then they'll be playing right into the entrenched board narrative. And that rarely ends well.

The Obstacles in the Hostile Bid for Vulcan [DealBook]

Martin Marietta Form S-4 [EDGAR]