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Financial Times: Minority report

Published: April 16 2007 03:00 | Last updated: April 16 2007 03:00

When pension funds are stalking Canada’s telephone incumbent and Spain’s builders are playing God with its utilities, the idea that mergers and acquisitions destroy value seems heretic. Yet even sceptics generally like one type of activity: buying out minority interests. Such transactions represented only 3 per cent of deal volume last year, according to Dealogic, but have had a notably consistent presence, even during M&A’s nuclear winter of 2001-02.

Some such deals are hangovers from takeovers – for example Unicredit’s squeeze-out of the HVB minorities and Mittal’s bid for Arcelor Brazil. But often buy-outs are entirely discretionary decisions viewed as value-enhancing in their own right. Recent examples include Royal Dutch Shell’s $7bn offer for Shell Canada, and Allianz’s $13bn bid for minorities in French subsidiary AGF. In Japan, where 82 of the Topix index’s 500 constituents are subsidiaries, some predict a wave of activity.

Why is buying out minorities popular? Telecom Italia and Suez claimed big synergies from buying out TIM and Electrabel, respectively, but the idea that removing a layer of governance and reporting generates large cost savings is dubious. Any skilled finance director can extract cash from quoted subsidiaries using dividends and intercompany lending.

The real explanation is linked to the low prices paid: the average one-day premium in the five largest completed minority buy-outs since 1995 was 6 per cent. Parent companies proved crafty at selling overvalued minority stakes during the dotcom bubble. But they were also opportunistic at buying undervalued quoted minorities: Shell Canada shareholders received a one-day premium of 37 per cent but a six-month premium of about zero.

It is the privileged knowledge parent companies have about subsidiaries’ prospects that almost certainly explains why buying out minorities remains both uncontroversial and low-risk. The absence of the same depth of knowledge about other potential targets also explains why, in aggregate, almost all other forms of M&A activity have historically been bad news for the buyers.

Copyright The Financial Times Limited 2007

 

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