The global credit crunch has been the bane of businesses and banks, but it helped International Rectifier Corp. dodge a hostile takeover bid.
Vishay Intertechnology Inc. said last week that it was abandoning its $1.7 billion tender offer for the El Segundo maker of power management chips, whose products appear in everything from washing machines to laptop computers.
The announcement came four days after the annual meeting of International Rectifier shareholders, who rejected a Vishay-backed slate of nominees for the board.
Vishay acknowledged defeat in its two-month back-and-forth battle with its rival semiconductor manufacturer. International Rectifier successfully fended off two unsolicited bids by Vishay, which said International Rectifier executives were protecting their own interests to the detriment of shareholders.
In arguing against Vishay's $23-a-share bid, International Rectifier executives repeated their contention that it dramatically undervalued a company they said is on the verge of a turnaround.
But analysts said Malvern, Pa.-based Vishay's inability to secure financing in the current credit market was likely the decisive factor.
"The fact that Vishay didn't have a firm financing commitment offer from some bank guaranteeing the money ultimately is why this fell apart," said Craig Berger, equity research analyst at Friedman Billings Ramsey Group Inc.
"If Vishay had gone public with a letter of credit, then more shareholders would have been willing to back it," Berger said. Without such a letter, shareholders saw the offer as "garbage."
International Rectifier executives drew on doubts about financing to imply that Vishay may not have been making a serious bid for the company.
In a Sept. 29 letter to shareholders under the heading "Vishay's $23 offer is it real?" management wrote that if Vishay did get funding, shareholders "should read the fine print. How certain will that financing be?"
A spokesperson for Vishay declined to comment.
In a statement last week, Vishay said that the company "cannot pursue our proposal in the face of opposition from a board that has refused to engage in any discussion with us regarding our offer."
Vishay isn't the only company that has seen a takeover attempt torpedoed by the contracting credit market. Last week, Waste Management Inc., the nation's largest trash collection company, dropped a $6.7 billion unsolicited bid for Republic Services Inc. because financing the transaction had become too expensive.
Failed bids like Vishay's illustrate the chilling effect a down economy can have on acquisition deals, analysts said.
An all-cash offer might seem attractive to shareholders who have seen market values recently in free fall. But it can also make companies less inclined to sell out at depressed prices.
Shares of International Rectifier, for instance, closed at $12.75 last week though in the past year they have reached as high as $36.80.
"Deals are not happening because management teams don't want to sell at the bottom," Berger said.
International Rectifier and Vishay are two of the oldest chip manufacturers in the country and for decades have regarded each other as competitors. But that competition had taken on the tinge of bad blood even before Vishay's hostile bid.
The tension between the two companies grew out of Vishay's cash purchase last year of International Rectifier's Power Control Systems business unit for about $290 million.
Since then, Vishay has questioned the value of the unit and claimed the cost of separating it from International Rectifier was higher than expected. Vishay has tried to undo the deal and threatened International Rectifier with litigation.
International Rectifier has denied Vishay's claims, and some of its management questioned whether Vishay had timed the legal threats to coincide with its takeover bid.
They cited a similar situation in 2001 when Vishay launched an unsolicited offer to buy General Semiconductor while a Vishay subsidiary simultaneously filed a patent infringement lawsuit against the rival company.
Some analysts at the time speculated that the Vishay subsidiary had filed the suit to exert additional pressure on General Semiconductor to accept its parent company's bid.
Vishay denied any connection. It acquired General Semiconductor later that year for $539 million in stock.
Vishay denied a connection between its bid for International Rectifier and its threat of litigation over the subsidiary. But the General Semiconductor case raised questions at International Rectifier.
"Some people at IR pointed to that example and wondered whether that was a tactic," said Portia Switzer, vice president of investor relations at International Rectifier.
Pressure to perform
International Rectifier's rejection of Vishay puts pressure on current management to complete a company turnaround and deliver on ambitious promises of higher profits by 2011.
In spring 2007, the company was hit by a wave of accounting problems at its Japanese subsidiary that cost International Rectifier about $117 million, forced the company to restate two years of earnings and led to the ouster of Chief Executive Alex Lidow and two other top executives.
The new chief executive, Oleg Khaykin, has embarked on a turnaround campaign to bring the company's annual revenue up 30 percent to $1.25 billion within the next three years.
Switzer said executives are confident the effort will succeed.
Analysts, though, said the goals might be too ambitious, especially given the faltering economy.
"I think IR actually went a little overboard in terms of what they're promising," said Steve Smigie, an analyst at Raymond James Financial Services Inc. in Fort Lauderdale, Fla. "They set a pretty high bar for themselves and they'll have to work hard to get there."
If the company can't clear that high bar, shareholders may look back at Vishay's tender offer a 9 percent premium over International Rectifier's then-closing price as a missed opportunity.
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