As the M&A market continues to cool, the number of companies subjected to related activist demands globally has fallen by 8% so far this year.

According to DMI data, 86 companies were targeted with M&A demands in the first nine months of this year, with 93 recorded in the same period last year.

However, as investors prepare for the deal market to revive, valuation remains the central concern with merger proposals proving to be the source of some of the most divisive activist battles over the last year.

“Investor opposition to proposed acquisitions often comes down to two different perspectives; a) does the acquisition make sense at face value and could it be a way to acquire new shareholders and then b) does this board and management team have the capacity to actually realize that value,” David Hunker, principal and Americas shareholder activism defense leader at Ernst & Young (EY) told DMI.

Securing the stamp of approval

In March, Ritchie Bros. Auctioneers (RBA) secured approval for its controversial $7.3-billion merger with salvage vehicle auction company IAA after a four-month campaign that agitated investors from both sides. RBA shareholder Luxor Capital Group was one of many vocal opponents throughout the campaign arguing that IAA was a “distinctly inferior” business, while dissent was also evident among the IAA investor base with Discerene Group arguing the tie-up lacked “compelling” strategic rationale.

A bidding war for Israeli 3D printing company Stratasys has also pitted investor groups against each other. In September, Stratasys was forced to abandon its $1.8-billion all-stock agreement with Desktop Metal after failing to muster sufficient support from shareholders. The Donerail Group and Nano Dimensions had vehemently opposed the transaction, pushing the company to pursue more ‘‘viable, attractive alternatives” such as that offered by rival suitor 3D Systems. Nano had earlier seen its own takeover offer rejected and abandoned the pursuit.

As investor groups decide on whether a tie-up is the right long-term strategy for the business, the individual terms of the deal are closely scrutinized.

“Acquisitions with a stock component are going to involve questions about what the prospects of the combined company are and what assumptions the board is making in terms of synergies and market dynamics,” Spotlight Advisors Managing Partner Juan Bonifacino told DMI.

Dealing with rejection

The 2023 proxy season has seen many bids rejected by investors with Liontrust Asset Management’s tender offer for British asset manager GAM Holding also failing to attract sufficient share capital after facing criticism from a group of investors led by French tycoon Xavier Niel and wealth manager Bruellan.

However, in order to respond to such knock-backs, companies need to carefully examine feedback from shareholders, as Hunker explains. “If there is a delta in a couple of different bids, and that delta is not so wide, then selling-shareholders may want to just take the cash today versus holding on for a more risky deal. If you’re a selling shareholder, you don’t want to be the only one that doesn’t have a chair when the music stops.”

Finding the best alternative for shareholders will also inevitably include a consideration of what the company’s operations look like on a standalone basis and whether, as Bonifacino explains, there are any other potential opportunities that could lead to superior outcomes.

However, even despite volatile market conditions and uncertainty regarding interest rates, the fundamentals of what investors look for in a proposed acquisition are unlikely to change. “Issuers are looking for combinations that make strategic sense and that add value to their business model and operating model. I think that the fundamentals of valuation are always at play,” Bonifacino observed.