Breakingviews: An $11 bln deal devalues ‘undervalued’ defense

Semantic satiation is the technical term for what happens when a word or phrase loses its meaning from overuse. In the world of M&A, takeover targets shout “undervalued” in response to unwelcome acquisition offers so often that it’s easy for suitors and shareholders to tune it out. Beacon Roofing Supply’s $11 billion sale provides a perfect example of why it happens. CEOs and their advisers would be better served by choosing their words more carefully.

QXO is effectively a shell company helmed by dealmaker Brad Jacobs that aims to roll up a building-products behemoth with $50 billion of sales, starting with Beacon. After its confidential $124.25-a-share cash bid was rejected in November, QXO appealed directly to the target’s shareholders, initiating a tender offer at the same price and a campaign to win control of the board. Beacon’s retort: the entreaty “undervalues” the company. In seven press releases over two months, it used the word – sometimes modified by “significantly” – more than a dozen times.

Boards often pull out wildly ambitious growth projections to argue that they’re just fine without a deal, either to scare off a suitor or squeeze out a higher offer. Bidders also frequently lob in lowball offers simply to spur talks. Moreover, investment bankers are always available to whip up an Excel spreadsheet to back up the idea that a takeover approach slights the target’s real worth. It doesn’t mean, however, that the word undervalued is always – or even often – a useful negotiating ploy.

In this case, QXO proffered a 26% premium to Beacon’s undisturbed stock price on November 15, valuing it at an all-time high and at a multiple notably above its recent historical range. In the ensuing months, peers such as Boise Cascade and Builders FirstSource lost market value as construction outlooks soured. Even after Beacon’s own fourth-quarter results disappointed shareholders last month and its efforts to find another buyer flopped, the board unanimously insisted as recently as two weeks ago that the offer significantly undervalued the company.

In the end, Beacon bowed to Jacobs, who threw in another dime per share, worth just 0.08% extra to shareholders. By accepting the paltry sweetener, the company further devalued the whole premise of its “undervalued” resistance. To give the assertion greater meaning, dealmakers might consider adding some scarcity value.