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The M&A Lesson CEOs Forget at Their Peril

(Bloomberg Opinion) -- CEOs’ animal spirits are being doused by shareholders once again. The ruckus over a $600 million European chemicals acquisition should resonate more widely than the talc industry.

For those who missed it, Elementis Plc shares fell 15 percent after the coatings company agreed to pay private equity firm Advent International Plc a punchy price for Mondo Minerals BV in June. A month later, the buyer took the unusual step of admitting that major shareholders were concerned and the board was “exploring its options.”

The M&A Lesson CEOs Forget at Their Peril

It’s one sign that institutional investors are increasingly intervening in U.K. M&A. Earlier this year, Hammerson Plc shareholders objected to the commercial property group’s planned takeover of rival Intu Properties Plc. The board got the message and changed its advice that shareholders vote in favor of the deal — a strange case of directors following the recommendation of shareholders rather than the other way round.

Passive funds that held shares of GKN Plc helped Melrose Industries Plc secure the 50 percent acceptances it needed to secure its takeover of the British industrial giant. Index trackers aren’t meant to be kingmakers in M&A.

This isn’t an entirely new phenomenon — shareholders fruitlessly egged on Severn Trent Plc and AstraZeneca Plc to engage with unwanted bidders in 2013 and 2014. But it appears to be happening with growing regularity.

The M&A Lesson CEOs Forget at Their Peril

If the Elementis board really wants Mondo, it will need to make a convincing case that it’s not overpaying. The price is a heady 16.6 times last year’s Ebitda. The purchaser says the multiple is only 13 times, but you have to annualize Mondo’s January-to-May performance and add some synergies to get there. The acquirer itself trades on a multiple of 11 times. Analysts at Credit Suisse reckon $500 million would be a more sensible price to pay.

Renegotiation looks tough. Advent would risk a reputation for being a pushover. That leaves paying the $18 million break fee and moving on. The most plausible outcome is humiliation and wasted time and money. Despite the reasonable chance the deal won’t now happen, Elementis stock is still below its level before the row.

There’s no easy way out of this mess. Unfortunately, it’s best to avoid getting in it in the first place.

Sure, a bidder who is putting a transaction to its own shareholders can always change its mind and tell them not to vote for it. But that’s not so easy if the target’s shares are primarily traded in the U.K., as Intu’s are. British takeover rules demand that a bidder be absolutely sure it can implement an offer before it makes one. A recommendation cannot be withdrawn lightly.

U.K. companies can’t do big deals without shareholder support. Acquisitive bosses need to be prepared for a fight — and have killer arguments to win it.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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