Air Products' Hostile Bid for Airgas Could Be a Slugfest

With equity valuations still way off their highs from a few years ago, global companies have lots of opportunities to buy rivals as a way to boost revenues. It's also getting easier to raise financing, as seen when Kraft Foods (KFT) and Berkshire Hathaway (BRK.A) recently raised $17.5 billion in debt for acquisitions. This was the case even though the equity and debt markets were getting jitters over sovereign risk concerns.

But among the companies that are the target of these acquisitions, the sentiment is much more skeptical. Why sell at a discount? As a result, buyers may have no choice but to go hostile. This was the case with Kraft's $18.5 billion acquisition of Cadbury.So it's not surprising that another hostile deal was launched over the past week: Air Products (APD) has made an unsolicited $5.1 billion buyout offer for Airgas (ARG). In fact, the stock price of Airgas is already about a buck higher than the $60 offer. If anything, this could be a slugfest. Hey, both companies have already filed lawsuits.

Where to Find Growth?

With a market value of roughly $14.5 billion, Air Products focuses on manufacturing liquid bulk gases. These include things like oxygen, nitrogen and argon. Moreover, the company has a strong footprint in various growth markets like refinery hydrogen, flat-panel screens and natural gas liquefaction.

Air Products certainly has a highly lucrative business, which generated $864 million in operating income over the past year.

The problem? First of all, the company may find it harder to maintain growth -- or develop niche markets. Next, it doesn't want to miss out on the expected comeback in the global economy.

Air Products is looking for a transformative acquisition to help achieve its goals. And Airgas is definitely a good choice. The company is a strong player in the U.S. packaged-gas market (such as nitrous oxide) and has a solid customer base.

An Acquisitive Company

Interestingly enough, Airgas is the result of over 350 acquisitions. While a roll-up strategy can be tough to pull off, this time it has paid off nicely. Airgas's revenues have grown at an annual compound rate of 19% for the past five years, now totaling around $4.3 billion.

So as a combined entity, Air Product and Airgas would be a powerful force. Air Products pegs the cost savings at $250 million per year (at the end of year two). Air Products can leverage its information technology system and supply-chain management infrastructure -- which is based on SAP (SAP) enterprise software. Airgas, on the other hand, would bring top-notch merger and acquisition skills -- especially in buying smaller companies -- and a sales force of 1,500.

On the investor conference call, Air Product's management made it clear that it was ready to launch a proxy contest to win Airgas. Keep in mind that Air Products has already made two overtures -- in the past four months -- to purchase Airgas.

However, hostile takeovers can be time-consuming and expensive. Moreover, Airgas has some key anti-takeover advantages. Its board members have staggered terms so that only a handful are up for election each year. Also, CEO Peter McCausland owns 10% of the outstanding shares, giving him substantial leverage.

White Knight to the Rescue?

In addition, Airgas has a poison-pill defense. Thus, even if Airgas shareholders want to sell out, doing so will become prohibitively expensive because the company will issue more and more shares.

Finally, Airgas may be attractive to a major European company, like Air Liquide or Linde. Either one could be a white knight to fend off the hostile advances from Air Products. That would also help juice Airgas's stock price and likely make this an exciting takeover battle for months to come.

Tom Taulli advises on
business tax preparation and resolving tax problems. He is also the author of a variety of books, including the including The Complete M&A Handbook. His website is at
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