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Martin Marietta's Hostile Bid For Vulcan Came 3 Years Too Early

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Like many of you, probably, I read Barbarians at the Gate at an impressionable age, and was fascinated by the idea of M&A as a dramatic clash of swashbuckling personalities. Among the highlights of my brief time in the M&A business was the time we kept two competing bidders on different floors, unbeknownst to each other, and ran back and forth between them to negotiate a deal. I was all "hey this is like that book!"

Occasionally you can watch a deal from afar that tickles some of the same fancies. The Vulcan / Martin Marietta fight, though it's early yet, is pretty fun. You've got the long negotiation process that seems to have bogged down over who got to be the boss, and ended in tears and recriminations after the Vulcan CEO never called back his Martin Marietta counterpart. You've got the pretty fake "hostile" exchange offer - if it's contingent on the target board approving, it's not really hostile - alongside the real hostility of two court cases, a brewing proxy fight, and a public war of words.

Now there's Vulcan's reply to one of those lawsuits, which is predictably feisty and paranoid, as well as the WSJ Deal Journal's claim that "Vulcan may be even more unhappy that Martin Marietta launched its hostile bid in December. (Some lawyer’s holiday trip was ruined, perhaps?)" Which I thought was kind of BS; having worked for Vulcan's law firm here, I can tell you that they pretty much plan their holiday trips around having them ruined and are bitterly disappointed if they have to spend Christmas break skiing or whatever rather than dictating 425s from Chamonix. But then I read the filing:

Martin Marietta has also demanded by Order to Show Cause a break-neck schedule involving expedited discovery from Vulcan in the last two weeks of December and into early January, followed by a sequence of briefing and court activity - all in the service of a complaint that cannot possibly survive a preliminary pleadings challenge and an "exchange offer" that cannot possibly be closed any time in the foreseeable future. ... [T]here is no cause for expedition here. Martin Marietta has set a May expiration date for its exchange offer - so even on Martin Marietta's view, the earliest any claim would need to be resolved is nearly six months away.

Note the exquisite air quotes around "exchange offer." Note also how many bank and law firm associates would love to be able to say to their boss "wait, this deal is supposed to sign in May, and you want me to work on it over Christmas? WTF?" The lawyer who got to actually write that to a judge must have been pretty jazzed.

Meanwhile, Stanford GSB professor Dirk Jenter and Tuck professor Katharina Lewellen published an amusing/disquieting paper this month (posted on NBER today, SSRN a few weeks ago) that produces some results that you'd probably have predicted if someone asked you but not quite as starkly as this:

Mergers frequently force target CEOs to retire early, and CEOs’ private merger costs are the forgone benefits of staying employed until the planned retirement date. Using retirement age as an instrument for CEOs’ private merger costs, we find strong evidence that target CEO preferences affect merger patterns. The likelihood of receiving a takeover bid increases sharply when target CEOs reach age 65. The probability of a bid is close to 4% per year for target CEOs below age 65 but increases to 6% for the retirement-age group, a 50% increase in the odds of receiving a bid. This increase in takeover activity appears discretely at the age-65 threshold, with no gradual increase as CEOs approach retirement age. Moreover, observed takeover premiums and target announcement returns are significantly lower when target CEOs are older than 65, reinforcing the conclusion that retirement-age CEOs are more willing to accept takeover offers.

The takeover premium effect is ~10 percentage points, versus a 32% average premium in their sample. The bright-line cutoff at 65 is so psychologically weird that it's hard to credit - public company CEOs really feel compelled to keep working exactly until social security kicks in? - but the paper is fascinating and careful. In particular, it carefully rejects some counter-narratives of efficiency - like "maybe firms with older CEOs have succession problems and/ore are dominated by one cantankerous old coot who is not working in the shareholders' interests" - and leaves you with a conclusion along the lines of "CEOs hold on to their fiefdoms with an iron fist until they reach retirement age, then sell out to the first handsome devil who comes along, and bidders and bankers know that so they prefer to bid for companies with 65+ CEOs." For whatever it's worth, Martin Marietta CEO Ward Nye is 48; Vulcan's Donald James is 62.

The paper is a rigorous quantification of one aspect of what you probably already knew - that the M&A market as it is actually practiced, more than most areas of the financial world, is at least as much about human relations and CEO whims as it is about cash-flow models and synergies. And while it's certainly possible be too cynical about executives who for the most part are trying to do the best they can for shareholders, it's worth keeping these results in mind when VMC's board goes around calling MLM's offer inadequate and opportunistic, or when MLM says that its CEO has to run the combined company "undefinedn order to assure that synergies are achieved." Couldn't have anything to do with the fact that he's in his prime earning years and multibillion-dollar public company CEO slots are somewhat uncommon. He's just gotta be there to keep an eye on the synergies.

CEO Preferences and Acquisitions [NBER, free version here]

Vulcan: Martin Marietta Was ‘Covertly Plotting’ a Hostile Takeover [Deal Journal]

Vulcan Prepares Fight Against Martin Marietta Bid [DealBook]