Premium Offered in Acquisition Deal Is a Modest 9.1%

The paltry takeover premium Medtronic Inc. is paying for MiniMed Inc. is the exception rather than the rule in the merger arena this year.

Under the $48-a-share merger proposal unveiled by Medtronic on Wednesday, MiniMed shareholders would receive a mere 9.1% premium over the company’s Tuesday closing stock price.

In contrast, corporate acquirers have paid an average premium of 54% this year, up from 49.2% last year, according to Mergerstat, a Los Angeles-based research firm.

Mergerstat’s figures calculate the premium based on a target’s stock price five business days before it publicly announces a takeover offer. By that measure, Medtronic is paying an even smaller premium of 7.3%: Five days ago MiniMed was at $44.74 a share.

Bloomberg News reported Wednesday that at least two shareholders immediately sued MiniMed in Delaware courts, saying the company’s board failed to get the best price from Medtronic.

But deals with low premiums often involve companies whose shares have surged in advance of the merger announcement. And indeed, MiniMed’s shares had jumped 68% since early April, far outpacing the performance of broad market averages.

“Many times when it looks like a small premium, if you look at the two or three weeks prior to the announcement, you see the stock has already run up,� said CharlesLaLoggia, editor of the Superstock Investor newsletter, which follows takeovers.

Hedge funds and other investors bid up a share price on the expectation that a buyout is in the works. In some cases, word of the deal leaks out, causing a stock to spike in heavy trading in the days immediately preceding a deal.

While Mergerstat’s data show the average takeover premium this year is 54% based on target stock prices five days before deal announcements, Thomson Financial calculates that the average premium is 35.6% based on target prices just one day before announcements. The difference suggests some investors are moving into target stocks just before deals are announced.

Overall, takeover premiums have risen in part because share prices of many companies have fallen severely over the last year. A high premium can make it look as though an acquirer is paying a lofty price, when the buyer actually is shelling out far less than it would have had to pay early last year, when the bull market was in full force.

Acquirers are “paying a much lower price than they would have paid a year ago,� said Lindsey Alley, a senior vice president in mergers and acquisitions at Los Angeles-based Houlihan Lokey Howard & Zukin.

Still, average merger premiums were rising even amid the great bull market of the late 1990s.

The average premium rose from 35.7% in 1997 to 43.3% in 1999, according to Mergerstat.

Premiums were pushed up by the merger frenzy that gripped the market in recent years, as well as by high demand among so-called private equity firms looking to acquire companies, Alley said.

In part because merger activity overall has declined over the last year, Alley expects average premiums in the next few years to ease back to 30% to 35%.

Linda Varoli, an analyst at Merger Insight in New York, said premiums also may appear high this year because of a scarcity factor: Many desirable companies have been bought out in recent years, meaning that would-be acquirers often have to pay up for the firms that are available.

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Takeover Premiums on the Rise

The average takeover premium has surged over the last year, as the general plunge in share prices has allowed acquiring companies to offer decent premiums without feeling as if they are overpaying. Annual data charted here show the average premium offered in takeovers compared with the target’s stock price five days before the offer.

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Average takeover premium per year

2001: 53.99% through Tuesday

Source: Mergerstat (www.mergerstat.com)