Is a Hostile Takeover the Only Path Left for PPG Industries and Akzo Nobel?

PPG Industries has given up its pursuit of Dutch rival Akzo Nobel and said it won't make a hostile takeover bid. After being rebuffed three times by the coatings specialist and having a judge toss out a lawsuit brought by a hedge fund to force the issue, PPG will walk away and lick its wounds.

But as someone once said, never say never, so don't be surprised if you see it revisiting the issue later this year.

There's a cooling-off under Dutch law that PPG has to abide by before it can mount another attempt, and Akzo Nobel has already said it will explore spinning off its specialty chemicals business to mollify investors and return value to shareholders. Yet after that deadline has expired and with Akzo possibly a newly slimmed-down company, PPG's taking a fourth bite at the apple -- and going hostile if necessary -- might not be so fanciful.

The coatings business is consolidating, as seen with Sherwin-Williams and its recently finalized acquisition of Valspar, which has made it the biggest paint and coatings company, with combined revenue of more than $16 billion. PPG bought Mexican paint leader Comex two years ago, after Sherwin-Williams failed to gain approval from antitrust regulators south of the border, while Akzo bought BASF's industrial coatings business this past December.

Yet Akzo Nobel's operations were seen as a good complement to PPG Industries' own, and after being turned down time and again, it's quite possible the company will try again.

Swallowing a poison pill

Elliott Management, the hedge fund that pushed hard for Akzo Nobel to make the deal with PPG -- going even so far as to take the company to court in an attempt to oust its chairman -- has increased its stake in the paint specialist to 5%, making it Akzo's largest shareholder. It might be able to rally support in favor of the effort.

Biding its time

Yet Akzo Nobel would be the real prize, and after it spins off the specialty chemicals business, it might even be more attractive to PPG, which itself has shed businesses over the years to become more focused.

The Dutch coatings company would have to execute well on its plan as a stand-alone company while trying to repair its fractured relationship with shareholders. Any miscues in the implementation of the strategy would likely create a greater impetus for it to get acquired, perhaps even among its board.

While it remains to be seen whether a new takeover attempt is in the cards six months or so down the line, PPG Industries making a hostile bid for Akzo Nobel is not so far-fetched and could be necessary. Sales have gone virtually nowhere for the last three years, mired at around $14.8 billion, and though it's widened margins through cost-cutting initiatives, gains from asset sales have been used more for share buybacks than developing a comprehensive growth plan.

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That's likely why PPG Industries vested so much in the Akzo Nobel pitch, a move, had it been successful, that would have been transformative in scope. It has bided its time in making other deals, such as the one for Comex, so a new attempt -- even a hostile one -- may yet happen. If it doesn't, investors may be left with a stagnant coatings specialist that will see others pass it by.

While there's no guarantee PPG would succeed, because Akzo has in place an entity called a stichting that prevents would-be acquirers from gaining voting share majorities or electing people to the board of directors, stichtings also typically follow the will of the shareholders, so that if they favored a merger of the two companies, the legal entity would as well.

PPG Industries remains intent on making an acquisition. Bloomberg notes that it vowed to spend some $3.5 billion on the effort over the next year, and cites a UBS analyst as saying that smaller rivals like BASF's Suvinil division or privately held Kelly Moore paint could be targets. The analyst said that there are over 20 potential targets that would fetch at least $1 billion each.