Portugal Telecom/Sonaecom

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In the film Rebel Without a Cause, people risk driving off a cliff rather than be called chicken. Sonaecom is now experiencing free-fall. Late on Thursday it became clear that its hostile bid for Portugal Telecom, which it had refused to raise for a second time, had failed. Since then its stock has collapsed by 26 per cent. Shares in its target, PT, supported by a buyback, have fallen just 5 per cent.

The deal made sense, with clear synergies, worth perhaps €2bn or 115 per cent of Sonaecom’s current market capitalisation. What went wrong? Sonaecom, part of a family-controlled conglomerate, had some important backers including Telefónica, with a 10th of PT’s shares, and a curiously compliant competition authority. But in the final analysis it did not win over the market.

At Friday’s vote on amending PT’s bylaws to permit a bid, PT won the support of only 31 per cent of the capital – about four-fifths of which comprised “strategic” rather than institutional investors. Yet excluding Telefónica, Sonaecom mustered just one-fifth of the shares. Some 40 per cent of the capital abstained or did not attend. Sonaecom made three mistakes. It did not offer a fair price – as shown by the recent market reaction. It played brinkmanship badly, twice amending its terms in spite of prior protestations it would not, damaging the credibility of its claim that it had made its best offer. In the end it showed little grace, for example accusing PT’s board of “regrettable” behaviour.

In order to get an agreed conclusion to a hostile battle, the would-be acquirer must typically meet two tests. It needs to offer enough value to motivate the event-driven funds to go into battle. And it must show enough magnanimity to allow a negotiated conclusion – think of Lakshmi Mittal’s cool-headed dismissal of the “monkey money” jibes made by Arcelor. Sonaecom failed both tests.

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