Even those who may not get excited about the stodgy industrial gases business but with a passing interest in the topic of M&A may find this story intriguing. It gives a glimpse into two hostile takeover defenses: the poison pill and a staggered board.
It’s also a tale that hits particularly close to home (if home is France) because the happy ending involves Paris-based CAC40 member Air Liquide successfully acquiring its American counterpart, AirGas.
Finally, as with any compelling story, there’s a victim-turned-hero: AirGas CEO Peter McCausland, and a villain: American giant Air Products (and arch-rival of both AirGas and Air Liquide).
The industrial gases sector is a textbook oligopoly. A handful of corporations dominate the boring but ridiculously profitable business of producing chemicals in gaseous state — largely oxygen, nitrogen, hydrogen, but also a basket of other gases like inerts or rare gases. Customers of industrial gases count almost every type of manufacturing business (semiconductors, automotive, food, consumer products, etc.) as well as service sectors like health care.
[An inside joke once shared with me by my VC fund’s LP, Air Liquide, went as follows. Q: How does the production of oxygen for the health care sector differ from that for the manufacturing sector? A: Slap a big “HEALTH CARE” sticker on the side of the oxygen tank and triple the price!]
Anyway, the industrial gases sector is slow-growth but predictable. Innovation usually takes the form of incremental cost savings initiatives. Profitability in this mature market follows general macroeconomic trends. The relatively low volatility and consistent dividend policies of this sector’s firms makes them a reliable bedrock of a long-term retirement portfolio. The only way these firms can unlock a step function in growth is via the rare acquisition of a peer.
Back in 2010, Air Products thought it saw some vulnerability in its U.S. rival and made a hostile takeover bid for AirGas at a value of approximately $5 billion. Remember, in 2010 the U.S. stock market was still early in its recovery from the financial crisis. AirGas chief executive Peter McCausland judged this valuation too low and resisted the takeover bid.
When Air Products persisted, raising their offer and upping the pressure, AirGas enacted a poison pill defense, which prevented parties from acquiring more than 15% without the approval of AirGas’ board of directors. Furthermore, AirGas had a staggered board, meaning that only three directors (out of 11) were eligible for election each year.
So Air Products escalated its battle on two fronts: a proxy fight and a lawsuit. Air Products lobbied AirGas shareholders to advance the annual meeting and replace the directors: three at a time but six within a four-month window. The lawsuit challenged the validity of the poison pill in a Delaware court. AirGas lost the first skirmish but prevailed in court in a controversial ruling, essentially granting the company more time to fend off the hostile bid.
In 2015, Air Products’ new CEO approached McCausland again with an aggressive stance to acquire AirGas by leveraging the support of some activist shareholders. The historical bad blood between the companies, reinforced by the new Air Products CEO’s menacing attitude, motivated McCausland and AirGas to seek a white knight.
They found their chevalier blanc in Air Liquide. Air Liquide offered and all-cash deal valuing AirGas at $13.4 billion (including its outstanding debt), more than double the highest hostile bid from Air Products.
It’s hard not to root for the AirGas CEO in this story. By resisting the hostile takeover, McCausland doubled the value of his company and found a friendlier acquirer.
Air Liquide proved far more lavish on price, paying twice as much as Air Products had offered. However, the complementary geographic coverage turned Air Liquide into a highly motivated strategic buyer. In contrast, the bad blood resulting from Air Products’ aggressive tactics impeded a constructive deal, probably at any price.
Reinforcing the rationale for this acquisition was the year-end merger of two other sectoral giants: Linde and Praxair, a transaction whose highest praise was “not the worst deal in the world” by the Motley Fool.
Finally there’s a moral to this story for all activist investors and meddlesome board directors: sometimes, even against your better judgment, management is right.