. After it announced its “transformational” £5.2bn bid for ISS yesterday, shares in G4S lost almost a quarter of their value. Having pulled plans for a flotation due to lack of demand, the private equity backers of ISS have now successfully shopped the business to G4S. But the thinking among some shareholders is this: if institutional investors didn’t want it through a public sale, then why are we buying it trade?
Then there’s the huge £3.67bn debt pile that often comes with private equity-owned assets and the dilutive £2bn rights issue G4S is doing to help fund the deal. To cap it off, it is paying a lot for a firm that has been on the block since the start of 2011: 8.5 times historic ebitda.
Nick Buckles should be very worried about the performance of the G4S share price. In the boom years, it was quite common for firms to pay too much, get punished by shareholders, and still get the deal away while holding onto their job. Since 1997, the proportion of deals in which the immediate market reaction caused the acquirer’s share price to fall – suggesting it was overpaying – has averaged 60 per cent, according to McKinsey. But last year, the percentage of overpayers fell dramatically to 47 per cent.
There is one very recent precedent for what happens when an executive pursues a “transformational” takeover without shareholder backing. When HP boss Leo Apotheker agreed a $103bn (£65bn) acquisition of Autonomy, HP’s shares plunged 20 per cent in a day. A month later he was ousted. Buckles needs to convince shareholders this is a good deal – and fast.