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As Hostile Takeover Bids Recede, Investors Bet on Earnings

NEW YORK (TheStreet) -- Just a few months ago, hostile bids for Georgia Gulf (GGC), Vulcan Materials (VMC) and Illumina (ILMN) seemed to be a savior for faltering shares. Takeovers now seem less likely to work, but investor reaction to stalled premium share bids has been muted.

For many C-suites looking at the prospect of a European meltdown, the U.S. "fiscal cliff" caused by a divided Congress, and a still lukewarm economic recovery, it's been a difficult nine months, but few companies had it harder than those that became the target of activist funds and hostile corporate bidders as their shares tumbled.

Now analyst forecasts and the investor reaction signal that as those bids recede, the prospect of earnings recoveries in coming years may outweigh the share jolt of an immediate deal.

Amid generally weak M&A markets and overall economic uncertainty, a string of unsolicited takeover offers such as Westlake Chemicals (WLK) $1.1 billion bid for Georgia Gulf, Martin Marietta's (MLM) near-$5 billion bid for Vulcan Materials and Roche's $6.8 billion offer for Illumina -- in addition to a flurry of activist campaigns waged by Carl Icahn on Commercial Metals (CMC), Oshkosh (OSK) and CVR Energy (CVI) -- have given many investors and corporate executives a tough choice: Sell now at a premium to battered share prices or draw up plans to capture an economic or business cycle recovery?

In the case of most of those bids, and recent unsolicited offers by for Avon Products (AVP) and Human Genome Sciences (HGSI), management seems to favor gutting it out independently. While the verdicts still loom for Avon Products and Human Genome Sciences, among others, recent shareholder votes and analyst forecasts indicate more excitement about the long-term stock earnings of some companies in hostile crosshairs than the immediate gain of a sale.

On Friday, a Delaware court delayed Martin Marietta's bid for Vulcan Materials by four months and beyond the company's June annual shareholder meeting where a slate of hostile Martin Marietta directors had been nominated to Vulcan's board. In reaction, Wells Fargo analyst Adam Rudiger noted that shares of Vulcan were unlikely to fall back to a share price in the mid $30s before a hostile bid emerged in 2011 because of the company's progress in cutting costs, and improving margins in its construction aggregates business to go with generally improving earnings.

If [Vulcan Materials] shares trade down significantly below $35, we believe they would be attractive to long-term investors, all else being equal," adds Rudiger, who notes that nearly $500 million in planned asset sales can help the company's debt fall to more sustainable levels. Meanwhile, the key to any deal may hinge on regulatory approvals from the antitrust division of the Department of Justice.

"This is a setback for MLM, but in our view the coming decision of the DOJ on the assets that need to be divested remains the key decision," wrote Jefferies analysts Mike Betts in a Monday note to clients. Betts gives Vulcan shares a buy rating and a $61 a share price target. Rudiger of Wells Fargo gives shares a market perform rating and a $41 to $42 a share price target.

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