Deason, backed by investment group Cerberus Capital Management, tabled a first public offer of $59.25 per share on March 20. But in a plain-speaking open letter to ACS’ board of directors yesterday, he said that ACS’ special committee had so far refused to negotiate or allowed them to undertake any due diligence during the last month.
In what Deason referred to as a final attempt to show [ACS’ shareholders] our good faith, he has upped the offer to $62 cash per share, which represents a 21% premium over the pre-announcement closing price. The company’s shares rose 4.6% to $61.45 in response to the new bid, giving ACS a market capitalization of $6.1bn.
Deason said that the offer is conditional on the prompt commencement of due diligence and prompt negotiation of a definitive merger agreement. He added that if an agreement was reached, he would allow ACS a 40-day period to solicit any other offers, and that if ACS opted for one of them, Deason and Cerberus would be entitled to a break-up fee of just 1.5% of ACS’ equity value.
This appears to highlight the main sticking point on the deal, with Deason stating in his letter that ACS’ advisors have stated that private equity takeover offers never attract topping bids once a merger agreement has been agreed. Deason disputes this and points to the recent takeover of European pharmaceutical group Alliance Boots, among others, as evidence that equity buyers can trump financial buyers.
ACS ranks as the largest specialist outsourcing group in the US, with a strong position in providing business process outsourcing services to commercial sector and government clients. However, the company has had rough ride in the last 18 months, after a stock option scandal claimed CEO Mark King and CFO Warren Edwards, and the subsequent investigation led to delayed financial filings. It recently reported a 29% drop in second-quarter profit due to charges related to its ongoing stock options review.
Deason said that he plans to remain as chairman of the company for the next five years, regardless of the outcome of the latest takeover bid.
In a statement yesterday confirming the new offer, ACS said it still had several reservations about certain parts of the proposal. According to a letter to Deason, the company said that should it agree to the offer, it would still require reasonable opportunity for potential strategic and financial buyers to bid. ACS said it was concerned how other potential buyers would view Deason’s voting power and pledge to stay on as chairman of the company. ACS also indicated that other bidders may object to the proposed exclusivity agreement in which Deason and Cerberus would have access to company information after an agreement and during the open bidding period.
Our View
Deason says he is convinced that the overwhelming majority of ACS’ shareholders back his takeover bid for the company, and considering the company’s recent patchy performance, the executive committee may find the $62 per share bid too good to resist. At the start of the year, its shares were trading at just $48.
But what are the chances of another bidder entering into the fray? Private equity interest in the IT services sector is intensifying, and ACS is an attractive target as the breadth of its portfolio (which covers everything from processing healthcare benefits to handling transport toll schemes, as well as pure IT services projects) could enable the buyer to carve the company up and sell or float some of its operations.
However, another suitor from an investment background may be wary of trying to beat an offer led by someone with such close ties to the business, and who remains a popular figure with many shareholders. ACS has already flirted with a private equity sale once before, having held ultimately fruitless discussions with investment groups including Texas Pacific Group, Blackstone Group, and Silver Lake Partners at the beginning of last year.
There doesn’t look like many potential suitors stepping forward from the IT services community. The fact that ACS makes some 40% of its revenue from the offshoring-averse public sector might deter some of India’s big vendors from an approach, and the likes of TCS, Infosys and Wipro have been largely conservative in their M&A activity to date.
ACS’ Texan rival EDS is back on the front foot in 2007, but said in February that it is looking to spend between $1.5bn and $2bn annually on acquisitions which would put ACS off the top end of its radar. HP Services, which is looking for fresh momentum in its BPO business, is one possibility, but it looks like Deason’s new bid puts him very much in the box seat.
