Tuesday, May 15, 2007
On Monday, an analyst at Prudential Equity Group, John Tumazos, sketched out the benefits of a reverse takeover by Alcan of Alcoa. Alcoa has commenced an unsolicited offer to acquire Alcan in a transaction valued at $33 billion. A reverse takeover, known as the pacman defense, whereby a target turns the tables on an acquirer and offers to acquire it instead, has not been used in the United States since the 1980s (most notably in the Bendix/Martin Marietta wars) [correction: a reader pointed out that in 2000 Chesapeake Corp. employed a successful pacman defense against Shorewood Corp.; details of that transaction are here). As reported by DealBook, the analyst highlighted the political benefits of a reverse-takeover; it will increase business by relocating the combined company outside the United States thereby stemming anti-American sentiment against Alcoa in other countries and be more politically palatable to the Quebec authorities where Alcan is headquartered and based. And so it goes . . . .
The analyst may have been a bit too hasty in his calculus as to the balance of local politics. Aloca is organized under the laws of the state of Pennsylvania. Pennsylvania has the strictest anti-takeover laws in the country, including a constituency statute, business combination statute, control share acquisition statute, fair price statute, and employee severance statute. For a good description of the Pennsylvania law and each of these provisions, see the article by William G. Lawlor, Peter D. Cripps and Ian A. Hartmann of Dechert LLP, Doing Public Deals in Pennsylvania: Minesweeper Required. Alcoa had the option to opt-out of these anti-takeover provisions when they were first enacted in 1990, but chose not to. The company also has in its Certificate of Incorporation an anti-greenmail provision. Although Alcoa doesn't currently have a poison pill, it could adopt one if Alcan made an offer. Pennsylvania courts, unlike courts in Delaware and New York, have allowed targets to utilize no-hand provision in these pills. The Pennsylvania courts also haven't yet considered the validity of a dead hand provision. Any pill adopted by Alcoa to fend off an Alcan bid would therefore also likely contain these powerful anti-takeover devices. Moreover, the Pennsylvania state legislature has been more than willing to change its laws to help a Pennsylvania organized company fight off an unwanted suitor when its current laws appeared insufficiently protective (most recently it acted to protect Sovereign Bancorp).
The effect of all of this would be to permit Alcoa to effectively undertake a "Just Say No" defense to any Alcan pacman bid. And while shareholder pressure may, if Alcan's bid goes high enough, force the Alcoa board to accept an offer this will likely take time and more consideration than Alcan, which is slightly smaller than Alcoa, can offer. And Alcoa, also has a staggered board making a proxy contest a multi-year affair (and still facing the problem of Pennsylvania's antitakeover laws making any proxy contest win moot). Compare this with Quebec law which permits Alcan to keep its poison pill for only a short period of time and has similar time limitations on other explicit anti-takeover maneuvers (see my previous blog post on this here). In light of the comparative advantage of Alcoa, a pacman would have a small chance of succeeding against any protracted resistance by Alcoa and before Alcoa could complete its offer for Alcan.
Addendum: Shares of Pennsylvania companies which have not opted out of the Pennsylvania anti-takeover statutes have been found to trade at a discount to their market comparables. For more on this point, see P.R. Chandy et al., The Shareholder Wealth Effects of the Pennsylvania Fourth Generation Anti-takeover Law, 32 Am. Bus. L. J. 399 (1995).