Billionaire Pays the Price for His General Electric Ambush
(Bloomberg Opinion) -- For activist hedge funds like Elliott Management Corp, wading into a takeover situation and compelling the buyer to pay more is bread-and-butter stuff. The controversial tactic even has a silly name: “bumpitrage” (translation: buying a stake in a bid target to bump up the deal price — get it?).
It’s especially common in Germany, where minority shareholder rights are sacrosanct. Often the outfit making the acquisition agrees to pay a bit more to make the hedge funds go away, as was the case when Elliott intervened in Bain Capital and Cinven’s acquisition of drugmaker Stada Arzneimittel AG.
Of course, it’s right that low-balling buyers are forced to cough up more money. But bumpitrage sometimes feels like plain old rent-seeking. So Elliott’s many sparring partners will naturally feel a little schadenfreude about its roughly 100 million-euro ($114 million) paper loss on a German takeover ambush that went seriously wrong.
To recap, in 2016 Elliott butted into General Electric Co.’s attempt to buy a 3-D printing company called SLM Solutions Group AG. Paul Singer’s hedge fund amassed about one-fifth of SLM’s share capital and declared that GE’s proposal — valuing the target’s equity at about 680 million euros — was “not in the best interests of SLM shareholders.” Elliott didn’t say that it was holding out for a higher bid, but given its track record it’s hard to imagine this wasn’t part of the motivation.
GE decided that its offer of a 37 percent premium was ample for a company with promising technology but comparatively little revenue or profit. It gave up on the deal and opted to buy Concept Laser GmbH, SLM’s German competitor, instead.
For a while, SLM’s shares more than made back the lost ground, helped by Chinese orders and hopes of another buyer emerging. That at least gave shareholders miffed about losing out on GE’s offer a chance to get out. But last year the stock was among the worst performers in Germany, when weak growth and a string of profit warnings wiped 80 percent off the market value.
It turns out that Elliott was unwise to scupper GE’s plan, as my colleague Brooke Sutherland warned at the time. Not only did the U.S. engineering giant have other possible targets, it was also an important SLM customer. After its rejection, investors surmised that GE wouldn’t place as many orders and that SLM now had a better-funded rival to contend with.
SLM’s predicament isn’t entirely Elliott’s fault, however. The company is poor at forecasting sales and has lacked a permanent CEO since Markus Rechlin left abruptly in January 2017. The board hired Lazard in 2017 to consider a possible sale to someone else, but that only served to sow customer uncertainty. (Large industrial companies don’t like buying equipment from someone if that supplier might end up owned by a rival.)
An alternative to the GE bid never materialized. Later, the founder and chairman Hans-Joachim Ihde sold a big chunk of shares, which didn’t improve confidence. Sales growth has slowed and SLM is consuming cash because of working capital requirements. A convertible bond due in 2022 is trading well below par.
Considering its fearsome reputation, Elliott’s approach up till now has been unusually hands-off. With the share price in the gutter, Singer’s fund has a responsibility and financial incentive to put things right. A good start would be helping to find a CEO; Elliott might want to think about asking for a seat on SLM’s board too.
Perhaps it won’t stop there. Elliott has had plenty of chances to sell its stake and hasn’t done so — lifting its holding as recently as November. That suggests it still believes in SLM’s future: The company does have leading technology in metal-based additive manufacturing and promising Asian clients.
It’s conceivable, then, that the fund might double-down and propose buying the rest of the company. Commerzbank analyst Adrian Pehl thinks that’s a strong possibility. Acquiring the rest of SLM could cost Elliott a comparatively modest 165 million euros (assuming a typical 30 percent premium) and it wouldn’t be a huge departure. The hedge fund has shown more interest lately in buying entire companies such as Athenahealth Inc., Travelport Worldwide Ltd and Waterstones Booksellers Ltd.
To be sure, a takeover wouldn’t necessarily ease customer fears about SLM being sold later to one of their industrial rivals. But the fund knows a bit about the German machinery sector and plenty about value creation. Clarity about SLM’s ownership might ease pressure from customers for discounts and a de-listing would end the distraction of a plunging share price.
Of course, if a takeover offer did materialize — from Elliott or elsewhere — it would probably be much lower than GE’s 2016 bid, a bitter outcome for any SLM investors who accepted that deal but didn’t sell out after it died. For the ones who followed Elliott, it would put a useful marker on the price of a bungled bumpitrage.
I've assumed conservatively that Elliott paid roughly the 38 euros per share offer price, and thus spent at least 137 million euros to acquire a 20 percent stake in SLM. Today its slightly larger stake is worth about 35 million euros. It's possible Elliott hedged its exposure, though. Elliott's SLM holdings have also fluctuated since 2016. Elliott did succeed in getting GE to pay more its shares ins another 3-D printing company, Sweden's Arcam AB.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.
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