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Structure
What are hostile takeovers? Why do they happen? How common are they? What defence tactics are there? Which ones work best?
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
UK
US
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.
88% (Franks and Mayer, 1990), 73% (Jenkinson and Mayer, 1994)
US hostile takeovers
2008: $362bn global 2009: $124bn global -66%
Dealogic
But Disney!
European situation
Drive towards a single market / EMU and Euro has encouraged internal cross border acquisitions and development of pan-European businesses.
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
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
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
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?
Always better for the acquired than the acquirer, Failed bids, only a 1 in 3 chance of survival!
Takeover decision
Minimises loss of key personnel If target rejects approach then time has been lost Target can build defences
Bear Hug
Walk away
Yes
No
Proxy Battle
Bidder approaches
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
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%
Internal
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
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
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
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
Shareholders with poison pill defences are likely to experience substantially greater premiums than firms without
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
the balance of power should not unduly favour shareholders and should take into account other stakeholders such as employees (Dutch Law)
Barriers are
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
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
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
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
Takeover defences
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
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
- 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