Avis Budget Boosts Its Dollar Thrifty Bid: Do Interlopers Have an M&A Edge?

Avis Budget increased its offer for Dollar Thrifty Automotive Group on Thursday,

firing off the latest salvo in its six-month bidding war for Dollar with archrival Hertz Global Holdings (HTZ). It's a move that should be a big surprise to no one: In the world of mergers and acquisitions, there are advantages to being late to the party, and the patterns show that in many years, interloping bidders have a better chance of taking home the prize.

Avis raised the cash portion of its bid to $45.79 a share -- a 12.4% increase over its offer earlier this month -- plus 0.6543 shares of Avis Budget (CAR) stock for every share of Dollar Thrifty (DTG). At Thursday morning's share prices, that values the bid at about $52.79 a share -- higher than Hertz's latest $50 a share offer.

Along with the bid, Avis levied some publicly critical comments at Dollar's board.

"We would be willing to offer an even higher price in the absence of the break-up fee that Dollar Thrifty's board has provided for in its agreement with Hertz.," Avis Budget said in a statement. "Dollar Thrifty's Board continues to disappoint. Not only have they once again failed to engage in any discussions with Avis Budget prior to entering into the new binding agreement with Hertz, but they have also failed to use the renegotiation with Hertz as an opportunity to create a level playing field for all potential bidders."

Dollar Thrifty has agreed to pay Hertz a $44.6 million termination fee if antitrust regulators don't allow the deal to go through.

Which Suitor Usually Wins?

Hindsight is 20/20, and the cliché applies in the M&A arena as well. But in the case of bidding wars, it's wise not to get too excited about the possibility of turning hindsight into foresight: Every buyout is different, and people who bet on history repeating can easily get burned.

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That said, history has often repeated itself in mergers and acquisitions.

Over the past seven years, in bidding wars involving publicly traded U.S. companies, the interloper (or "jumper") has won about half the time. But in most years since 2004, it has more often than not been the interloper whisking away the target company and leaving the original suitor standing alone at the altar, according to figures from FactSet MergerMetrics.

For example, Hewlett-Packard (HPQ) was the Johnny-come-lately in its fast and furious three-week courtship of 3PAR (PAR), and its bidding war with Dell (DELL) went seven rounds before the Texas computer maker called it quits earlier this month, after having made the original bid for 3PAR back in mid-August at $18 a share, or $1.15 billion. HP ultimately will pay $33 a share for 3PAR in a $2.4 billion transaction that is expected to close by the end of the year.

Don't feel too bad for Dell: It gets a $72 million breakup fee from 3PAR as part of its previous merger agreement with the
company.

Breakup fees, which tend to range from 2% to 4% of a deal, go a long way in explaining why original bidders with definitive agreements in hand tend to be more willing to walk away than interlopers, says a senior investment banker, who requested anonmity.

"Call it rough justice," the banker says.

And in situations where an interloper has a substantially larger market cap or a deep treasure chest of cash, there's even more reason for the original bidder to bail. Or, as the banker noted, it's a "reality check."

And, of course, there is the Avis Budget deal. Hertz announced five months ago its plans to acquire Dollar Thrifty for $25.92 a share in cash and struck a deal with its rival. That prompted Avis Budget to weigh in with a competing offer; Thursday's bid marks its third attempt to snag Dollar. The latest Avis Budget offer comes a week before Dollar Thrifty shareholders are scheduled to vote next Thursday on Hertz's $50 a share counteroffer.

Hot Markets Lead to More Interloping

Attorneys who specialize in mergers and acquisitions, along with proxy advisers and folks at FactSet, say each bidding war is unique and investors shouldn't rely heavily on historical data to point them toward one suitor or the other.

Jim Mallea, vice president of FactSet Research Systems's Merger Metrics, observes that a heated M&A environment also leads to more interloping.

"In 2006 and 2007, when the M&A market was going like gangbusters, there was significantly more deal jumping," Mallea said. Bidding wars accounted for approximately 3% of the roughly 540 mergers and acquisitions in each of those two years, compared with approximately 1% to 2% in the other years of the past decade.

Some of those bidding wars resulted in increases of 50% or more in shareholder value, while others added more than $1 billion to the total cost of the transactions. The pending 3PAR deal will do both -- carrying an 83% increase in shareholder value above the original Dell bid and bringing $1.25 billion more to the table.

"Every bidding war is unique, and it's only after the fact that they may be grouped into patterns," says Igor Kirman, a partner at Wachtell, Lipton, Rosen & Katz, who specializes in mergers and acquisitions. He notes that investors need to do their own analysis of each potential deal instead of relying on any trends or patterns found in data.

The pursuit of high-growth companies, like those found in the technology industry, can lead to escalated bidding wars as well, says Kirman, because suitors may have markedly different estimates of value and growth prospects for the target company. Compare that with companies in mature industries where bidders' financial analysis of a deal is likelier to draw them to similar conclusions, tempering the feeding frenzy that can be found in high-growth bidding wars.

Kirman also notes that when it comes to industry rivals making a play for the same company, the competition can create a situation where the point moves beyond just making an acquisition. In many cases, the bidding war can evolve into a situation in which the companies are pursuing the deal with the rivalry in mind.

In those cases, the bidding can take on a fevered pitch, compared to situations where bidders may be from different industries or private-equity firms.

"It's not only about winning the prize, but also denying the prize to the other guy," Kirman says.