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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Vulcan Materials shares fell over 3% to $40.03 in Monday afternoon trading. Still shares are well above the Birmingham, AL-based company's $33.58 a share price prior to Martin Marietta's initial December offer. Overall, analysts polled by Bloomberg give Vulcan Materials a $46.83 a share price target on two buy ratings, 11 holds and two sells.

Meanwhile, analysts are focusing on Georgia Gulf's long-term chemical making prospects, making a near 10% Monday stock slump a buying opportunity. "We estimated that Westlake would have paid $40 (or a tad more) but this must not have been high enough for Georgia Gulf's board," wrote UBS analyst Andrew Cash in a note reacting to the withdrawal of Westlake's $35 a share offer made in January. "We suspect many GGC shareholders are in the stock for the recovery in the chemical cycle and they believe the stock will eventually move higher than $40 on earnings momentum alone."

"In our view, we've long been skeptical that WLK would offer anything more than $35, and frankly, are surprised at the order of downward magnitude of aftermarket trading," added Frank Mitsch of Wells Fargo, in a note to clients. "We expect GGC shares to gradually recover as fundamental investors begin to get involved in the name following the removal of M&A volatility." Mitsch gives Georgia Gulf shares an outperform rating, while Cash of UBS gives shares a neutral rating and a $32 a share price target. Overall analysts polled by Bloomberg give Georgia Gulf a price target of $36.80 on two buy recommendations, five holds and a sell.

The recent setbacks of Westlake Chemical, Martin Marietta and Roche in their hostile pursuits, in addition to the mixed results of Icahn-run takeover campaigns may speak to both an improvement in the outlook of target companies, and the firming of investor expectations of a market and economic recovery as threats in Europe and the prospect of an earnings slowdown persist .

On Monday, Credit Suisse upgraded llumina shares to an outperform rating and a $55 a share price target on earnings prospects from a new set of genomics sequencing machines that it may be able to market to hospitals, as research orders by government agencies like the National Institute of Health wane. Improving recent earnings and the longer-term benefit of new products "should help ILMN penetrate the clinical market, while ILMN's management team should be able to introduce new products that will allow it to remain a leader in the genomics space," wrote Credit Suisse analyst Vamil Divan of the upgrade.

In April, Roche withdrew its $51 a share bid for Illumina as a result of a lack of shareholder support for its offer and a slate of directors it appointed to the San Diego-based company's board.

"I guess you have to give shareholders credit for thinking long-term," Jeffrey Ubben, the head of activist hedge fund ValueAct Capital told TheStreet when asked about why some recent hostile bids like Roche's offer for Illumina had not succeeded. Ubben, who was speaking at last Monday's IMN Active-Passive Investor Summit, believes now is a great opportunity for some companies he's invested in like Valeant Pharmaceuticals ( VRX) to make acquisitions .

Morgan Stanley analyst David Risinger upgraded Valeant Pharmaceuticals price target from $57 to $61 and his earnings estimates for the company through 2015 by up to 10% on Monday as a result of the company's acquisitiveness. "Future strategic activity could drive earnings materially higher over the long-term," wrote Risinger, who now expects the company to earn $4.62 a share in 2012 and $5.01 a share in the following year. In recent years, Valeant Pharmaceuticals has cut a string of deals, but it's failed to win unsolicited offers for Cephalon and ISTA Pharmaceuticals ( ISTA ).

The prospect of share gains and earnings rebounds at Illumina, Georgia Gulf and Vulcan Materials may be early reads on whether rejecting premium-priced takeover offers in falling markets proved to be in the best interest of long-term investors. On Monday, Allscripts Healthcare Solutions ( MDRX) said it would enact a shareholder rights plan -- or "poison pill" -- to ward off an opportunistic takeover bid, even before an offer emerges. To be seen is whether a poison pill will dissuade hostile bidders or activists from pushing for an Allscripts sale.

For more on hostile M&A, see why 2012 deals hinge on Goldman Sach's idea of fairness . Also see why a kinder, gentler activist emerged in recent Nook and AOL deals with Microsoft for more on shareholder activism.

-- Written by Antoine Gara in New York

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