The act of bumpitrage occurs when an activist investor purchases shares in a company that is subject to a takeover bid. The activist rallies other shareholders by suggesting the current bid or offer price is insufficient and undervalues the target firm. The aim is to bring the acquirer back to the negotiating table. In many cases, the mere threat of involvement of the activist or a reduction in shareholder approval is sufficient to convince the acquirer to raise the value offered for the target.
Proponents of the strategy claim that when used correctly, bumpitrage reinforces the rights of target company shareholders by ensuring that acquirers pay fair value for the target. Activist involvement, or the threat of, may also result in target boards being more aggressive in their initial negotiating with the acquirer.
Naturally, opponents of the strategy such as a private equity fund claim the practice increases the cost to the acquirer. This increase in cost may also increase the deal extension risk thus lowering the likelihood the deal will consummate as expected. This ultimately has a negative effect on mergers & acquisitions. It would appear however market forces could very well balance these factors out.
However, the profits made from a successful bumpitrage campaign have previously proven to be significant. A report conducted by and published on Activist Insight shows that between 2013 and 2017,
18 successful campaigns led to an average increase in consideration of approximately 21%.
This strategy generally has a shorter holding period so when the figures are annualized the returns can become extremely attractive. Although with such large returns on offer, the strategy does have its risks. The majority of cases receive no significant improvement in bumpitrage campaigns. The research and manpower and effort required in such a campaign can be costly and on rare occasion these campaigns have resulted in worse deal terms leaving the activist with a net loss.
Target firms are becoming adept at dealing with activist shareholders as strategies from both side continue to evolve. For example, see the change in tone from the once famous Dan Loeb poison pen letter. Target firms have learnt immediate and consistent communication with significant shareholders, and the retentions of proxy advisory firms can play a vitally important role in furthering the target firm’s corporate agenda.
Bumpitrage Example
Paul Singer’s Elliott management is a well known activist fund. Not afraid of taking on larger targets, the fund pushed for a better offer from Anheuser-Busch InBev, during its takeover of SABMiller. Subsequently, ABInbev’s boss Carlos Brito raised his cash offer by £1.
In recent times, the 2010’s, Europe has provided a fertile ground for bumpitraging. Buyouts from a private equity firm have become common a common sight. European takeover authorities impose higher squeeze out thresholds than other parts of the world. Bumpitrageurs have more leverage if bidders require 90 per cent of shareholders to have accepted their offer before they can buy out the remaining investors. Outside Europe, such a North America the acquiring firm can compulsorily buy the remaining target shares once acceptances from just 51 per cent of shareholders have been obtained.
Even more recently, circa 2018-2019, activists have turned their sights towards the U.K. stock market. The U.K. legal framework has minority shareholder protections which can be exploited during a merger or takeover even if the takeover is considered friendly. In a “Scheme of Arrangement” the acquirer needs to obtain 75% of the votes of the shareholders present and obtain approval from the court, thus giving a mouthpiece to dissenting shareholders. A “Contractual Offer” requires a 90% approval threshold, similar to Europe making objections to a squeeze out possible by just a single shareholder.
