Mergers and Acquisitions Hostile take-overs: M&A as war!

Professor Duncan Angwin

Professor of Strategy Oxford Brookes University

Structure

What are hostile takeovers? Why do they happen? How common are they? What defence tactics are there? Which ones work best?

Case study: Granada/Forte

What is a hostile takeover?

Acquisition:

Purchase assets from a selling firm Gain control of majority equity stake through

negotiated transaction with large shareholder tender offer: bypass management and make offer directly to shareholders (creep by open market operation

Hostile takeover:

Management of target firm does not recommend bid to shareholders Offer direct to shareholders

Examples?

Europe

Paribas v. BNP Vodaphone v. Mannesman LVMH v. Gucci Arcelor v. Mittal

Hanson v. ICI Granada v. Trust House Forte Kraft v. Cadburys Comcast v. Disney

UK

US

Why do they occur?

Value can be created, by restructuring the target, changing its financial policies and reversing earlier diversification strategies (Bhide, 1989). Market for corporate control Anglo-American economies Where managers have failed to make the most efficient use of corporate assets Managers guilty of shirking, consuming perquisites, diversification and excessive growth Hostile take-over targets older, slowly growing firms valued significantly below replacement cost of tangible assets (Morck et al, 1988) concentrated in troubled industries and marginally under-perform their industries

boards may be less able to deal with industry-wide problems (Morck et al, 1989) Often cash rich and over diversified

Agency problems
1. 2.

3.

Effort: less incentive for managers to exert full effort in increasing shareholder value as their ownership of the firm falls Time horizon: managers prefer investment or operating strategies that have lower costs and produce results more quickly than potentially more profitable long-term projects that have higher initial costs Risk: managers prefer less risk than shareholders
1. 2. 3.

stand to lose much if their firm becomes financially distressed but benefit relatively little if the firm is successful. Shareholders are able, through portfolios, to eliminate firm specific risk Managers may also prefer lower levels of debt and lower dividend payouts than shareholders as less debt lowers the risk of financial distress and lower dividends result in greater cash reserves available for investment

4.

Asset use: can be expropriated by managers. Beneficial if attracting and retaining good managers. Destructive if excessive consumption.

former Tyco CEO, Kozlowski, accused of fraud (SEC) m dollar low interest loans Jack Welch, one of the most fted of US CEOs, accused of excessive expenses
Manhattan apartment, limousine services, security guards, corporate jet, best seats.

In most cases top executives are removed

88% (Franks and Mayer, 1990), 73% (Jenkinson and Mayer, 1994)

How common are they?

US hostile takeovers
2008: $362bn global 2009: $124bn global -66%
Dealogic

But Disney!

En Garde EuropeanHostile bids ($bn)

Source: J.P.Morgan

140 120 100 80 60 40 20 0 1990 91 92 93 94 95 96 97 98 99 Continent Britain

European situation

Drive towards a single market / EMU and Euro has encouraged internal cross border acquisitions and development of pan-European businesses.

Pan-european strategies now in vogue

European companies consolidating to match economic scale advantages of US and Far East counterparts (Calori & Lubatkin 1994). Fears of Fortress Europe, its size and sophistication make it an attractive hunting ground for non-European multi-nationals.

Hostile acquisitions in US / UK

Nothing new

US employees expect it and are better prepared to move UK Nestl / Rowntree

Stop the Swiss stealing our Smarties! Questions asked in the House of Commons Workers marching on London Trades Unions Union power demolished by Margaret Thatcher

Bank of Scotland / National Westminster Bank

A new era of hostile takeovers in Europe

Deflation puts earnings under pressure to keep ratings, companies buy other companies earnings Boardroom obsession with scale - management incentives CEOs behaving like prima donnas, flitting between bizarre strategies, trying to save own skins Takeover rules are vague or untested. Fertile ground for advisors - all feeds hostile M&A Outraged managements talk of national interests, poison pills, huge adverts in press

BNPs v. Soc Gen. & Paribas ($37bn); LVMH v. Gucci; Olivetti v. Telecom Italia($65bn); Arcelor v. Mittal

clash of business systems / cultures Vodaphone v. Mannesman who is the company run for? Pluralist motives (social responsibilities & profit v. profit) Loyalty matters - emotions run high

The rise (and fall?) of Behemoths

Only one third of hostiles successful!(J.P.Morgan) Continental hostile bids have premiums of 50% 60% (40% in UK) Have to increase profits, BUT, employment constraints - expensive, time consuming, unpopular Why high prices?

desperation, a white knight, National interests

Always better for the acquired than the acquirer, Failed bids, only a 1 in 3 chance of survival!

Takeover decision

Need to review targets defences Friendly approach

Less costly Avoids auction environment Helps pre-merger planning

Minimises loss of key personnel If target rejects approach then time has been lost Target can build defences

Risk: loss of surprise.

Bidder adopts friendly approach Targets response Yes No

Bidder adopts more aggressive approach

Bear Hug

Proceed to negotiated settlement

Walk away

Yes

No

Proceed to negotiated settlement

Proxy Battle

Open Tender Market Offer Purchases

Tender Offer and Proxy fight

Takeover decision Tree

Yes

Tender offers Target response No

Implement tender offer

Rescind tender offer. Proceed to negotiated settlement

Bidder approaches

Bear Hug Limits targets option

Formal acquisition proposal (Morrisons) to move board to negotiate Fiduciary responsibility to target shareholders Directors voting against liable to law suit if offer at high premium Target is put into play lobbying by institutional shareholders arbitragers build stakes (easier for bidder to acquire blocks)

Proxy contests Fights over seat on board to replace management against takeover
Allows control without owning 51% of shares Can eliminate takeover defences (poison pills) Expensive high litigation fees Bidder (also a shareholder) attempts to call a special shareholders meeting to replace board members Prior to meeting an aggressive PR campaign Low success rate but target share holders + 6% -19% Example: Dominion PLC

Bidder approaches

Open market purchases Begins before bid secret to keep price down

Advantage in getting voting power for a proxy fight Can be sold later at a profit to offset costs
Hart-Scott-Rodino filing (US) Takeover code (UK)

Limitations by law

Tender Offers Deliberate attempt to circumvent target board

Early 1980s very successful, but now better defences

Offer of Cash or securities direct to shareholders Specific time period but if another offer is made, time period must be extended to give time to consider Uncontested tender offers successful in 90% Contested offers successful in 50%

Defences against hostile bids

Internal

To raise share price/eps

Improve operational efficiency Improve strategic focus/restructuring/divestment

Change ownership structure (dual class shares, high gearing, share buy back, poison pill (new class of share or dividends/rights to buy shares)) Change management structure/incentives (shark repellents: staggered boards, parachutes) Cultivate unions/workforce
Cultivate shareholders/investors for support Inform analysts fully to avoid undervaluation Make strategic defence investment Monitor share price register for unusual movements

External

Post-offer defences

First response and pre-emption letter Attack bid logic. Advise shareholders to refuse bid Defence document Praise own performance and prospects. Deride bid price/logic/track record/financing Profit report/forecast: make offer look cheap Promise higher future dividends: increased returns weakens bidders promises of superior returns Asset revaluation: properties/intangibles Share support: white knight, ESOP, employee pension fund Regulatory appeal: lobby anti-trust authorities Litigation: force disclosure of nominee shareholders Acquisition and divestment: sell crown jewels, MBO. Makes target bigger or incompatible Unions/workforce: to lobby politicians Red herring:attack predator on peripheral issues Advertisement: use media to discredit predator

Post-bid actions and outcomes

Defence
Greenmail* + standstill agreement

Advantages
Encourages raider to go away and not return for a specific period

Disadvantages
Reduces risk to raider of losing money. Exacerbates negative returns to target shareholders. Unfairly discriminates against non-participating shareholders. Often generates litigation. Tax consequences Target has to be able to fund it may emasculate both firms Loss of independence

Return s

Pac-Man White Knights/white squires ESOPs Recapitalisations

Target will defend at all costs Preferable to hostile bidder

Can be very effective Target less attractive

Support of employees not guaranteed. Avoid overpaying for shares or may be disallowed by law May cause substantial negative returns to shareholder and reduces capacity for raising debt

Share repurchase plans Corporate restructuring Litigation Just say no

Reduces number of shares available for purchase Going private May buy time to build defences and increases takeover costs Buys time to build defence and determine appropriate defence

May facilitate bidder gaining control May greatly reduce shareholder value Negative impact on shareholder returns Must satisfy conditions of courts

Evidence of US defence effectiveness

Shareholders with poison pill defences are likely to experience substantially greater premiums than firms without

Doesnt reduce likelihood of being acquired

Golden parachutes increase returns as management are incentivised Greenmail effects are negative Recapitalizations resulting in higher leverage for shareholders results in lower returns Litigation doesnt affect returns but buys time

UK Takeover Code

Rule 21

Target management is obliged to get shareholder approval for any frustrating action including

Issue of shares, options, securities convertible into shares Disposal or acquisition of assets amounting to 10%+ of targets assets Contracts outside of the ordinary course of business Golden parachutes arranged at onset of bid

Continental defences

Hostile takeovers much more difficult Directors responsible to company stakeholders

the balance of power should not unduly favour shareholders and should take into account other stakeholders such as employees (Dutch Law)

Barriers are

legal/regulatory, institutional, cultural

Supervisory boards, employee representatives (France), workers councils Share transferability limited, double votes if held for some time (France), voting rights can be limited Removal of top management can be difficult as well as employees

Conclusion

Hostile previously Anglo-American - now European Its a war out there!

market for corporate control- remove under-performing mgt. differences over the use of assets - clash of strategic vision always a significant restructuring after a bid

Hanson v. ICI = ICI and Zeneca

clash of business systems / cultures

Market Forces v. Society

Who is right about Granada / Forte?

Granada / Forte

Granada bid for Forte on 22nd November 1995 controversial, colorful, fiercely fought Forte 940 hotels, 97,000 rooms, 600 restaurants (incl.. George V in Paris). Mostly UK. 2.6bn cap. Granada TV (BSkyB), rental and computer services, Leisure (hotels, theme parks, travel, catering) one of the largest and most profitable companies in Britain - 4bn cap. Strong cash generator Stakes: establishment (Sir Rocco Forte, Grovesnor House Hotel) + household names (Little Chef), versus Gerry Robinson (9th of 10 children of a carpenter) strong turnaround track record.

Granada/Forte Questions
1. 2.

3. 4.

Why did Granada bid for Forte? Comment on the timing of the bid and the preparation that Granada undertook. What defence tactics did Forte use? Why did Forte lose?

Summary

Hostile bid as disciplinary force? Clash between commercial strategy and financial return of markets? Granada Group hotels not very pleasant Rocco Forte seems to be doing well

UK Bid timetable Announcement day Posting day (Day 0)

Day 14 Day 21 Day 35

Bidder announces offer with terms and conditions Offer document must be posted within 28 days of announcement
Last day for target to recommend to shareholders and to respond to offer document First offer closing day. Offer may be extended. Offeror may buy target shares in market above 30% End of period for acceptance when offer went unconditional on day 21

Day 39
Day 42

Last day for target to release new information e.g. profit forecast
If offer had become unconditional on day 21 then last date for fulfilling all other conditions Target shareholders can withdraw acceptance if offer not declared unconditional on Day 21

Day 46 Day 60
Day 81

Last day for bidder to revise and post offer terms e.g. raise offer price, release new information e.g. dividend forecasts Final closing date e.g. last day of offer period. Bid either fails or is declared unconditional
Last day for clearing all other conditions attached to bid

Day 95

Last day for delivery of consideration

Takeover defences

Share watch tracking share movements Pre-bid defence Poison pills

New class of securities issued to shareholders No value unless investor acquires specific percentage of voting shares. Then dilute investors stake in the combined company dead hand only original directors can rescind

1st generation: Dividend to shareholders convertible into common shares of the acquiring company following takeover 2nd generation: flip-over pill: issuance of rights to shareholders to buy specific amount of shares in the acquiring company at discount. Flip as become acquirer shareholders 3rd generation: flip-in, flip-over: receive special dividend to buy shares in issuing company as well as bidding company at discount

Effective in delay and increasing overall expense of bid Board has escape clause if bid becomes friendly

Shark Repellents
Defence
Strengthening board
Staggered boards

Advantages
Delays assumption of majority control

Disadvantages
Circumvented by increasing size of board Can be circumvented Legislature requires special meeting if enough shareholders request it Can be challenged in court Can be challenged in court

Return s

Limitations on director removal - calling special meetings

Narrows range of reasons Limits ability to use meetings to add board seats/remove members Limits dissident shareholders to start proxy contest Gives board time to select own candidates Used for hostile takeovers Increases costs of two tiered tender offer Gives friendly shareholders more voting power that others Take advantage of most favourable state anti-takeover statutes Emboldens target management to ask for higher premiums; raises costs to bidder

Limiting shareholder actions

- consent solicitations - advance notice provisions - supermajority provisions Fair price provisions Super-voting stock

Increases white knight costs Difficult to implement as requires shareholder consent Requires shareholder approval; time consuming Negative public perception expensive to get rid of top management

Others

Reincorporation

Golden, silver and tin parachutes