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

Professor Duncan AngwinProfessor 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

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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 offerdirectly to shareholders (creep by open marketoperation

Hostile takeover:

Management of target firm does notrecommend bid to shareholders

Offer direct to shareholders

Examples?

Europe Paribas v. BNP

Vodaphone v. Mannesman

LVMH v. Gucci

Arcelor v. Mittal

UK Hanson v. ICI

Granada v. Trust House Forte

Kraft v. Cadburys

US Comcast v. Disney

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Why do they occur?

Value can be created, by restructuring the target,

changing its financial policies and reversing earlierdiversification strategies (Bhide, 1989). Market for corporate control

Where managers have failed to make the most efficientuse 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 marginallyunder-perform their industries boards may be less able to deal with industry-wide problems

(Morck et al, 1989) Often cash rich and over diversified

Anglo-American

economies

Agency problems1. Effort: less incentive for managers to exert full effort in increasing

shareholder value as their ownership of the firm falls2. Time horizon: managers prefer investment or operating strategies that

have lower costs and produce results more quickly than potentially moreprofitable long-term projects that have higher initial costs

3. Risk: managers prefer less risk than shareholders1. stand to lose much if their firm becomes financially distressed but benefit

relatively little if the firm is successful.2. Shareholders are able, through portfolios, to eliminate firm specific risk3. Managers may also prefer lower levels of debt and lower dividend payouts than

shareholders as less debt lowers the risk of financial distress and lowerdividends result in greater cash reserves available for investment

4. Asset use: can be expropriated by managers. Beneficial if attracting andretaining 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)

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US hostile takeovers

How common arethey?

But Disney!

2008: $362bn global2009: $124bn global -66%

Dealogic

En GardeEuropeanHostile bids ($bn)Source: J.P.Morgan

0

20

40

60

80

100

120

140

1990 91 92 93 94 95 96 97 98 99

Continent

Britain

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European situation

Drive towards a single market / EMU and Eurohas encouraged internal cross borderacquisitions and development of pan-Europeanbusinesses.

Pan-european strategies now in vogue

European companies consolidating to matcheconomic scale advantages of US and Far Eastcounterparts (Calori & Lubatkin 1994).

Fears of Fortress Europe, its size andsophistication make it an attractive huntingground for non-European multi-nationals.

Hostile acquisitions in US / UK

Nothing new

US employees expect it and are better prepared to move

UKNestl / Rowntree

Stop the Swiss stealing our Smarties!

Questions asked in the House of Commons

Workers marching on London

Trades Unions

Bank of Scotland / National Westminster Bank

Union power demolished by Margaret Thatcher

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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 bizarrestrategies, trying to save own skins

Takeover rules are vague or untested.

Fertile ground for advisors - all feeds hostile M&A

Outraged managementstalk of national interests, poisonpills, 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. Mannesmanwho 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 hostilessuccessful!(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!

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Takeover decision

Need to review targets defences

Friendly approach

Less costly

Avoids auction environment

Helps pre-merger planning

Minimises loss of key personnel

Risk: loss of surprise.

If target rejects approach then time has been lost

Target can build defences

Bidder adopts friendly approach Bidder adopts more aggressive approach

Targets response

Yes No Bear Hug

Proceed to

negotiated

settlement

Walk away Yes No

Proxy Open Tender Tender

Battle Market Offer Offer andPurchases Proxy fight

Tender offers

Yes No

Target response

Rescind tender offer. Proceed to negotiated settlement Implement tender offer

Proceed to

negotiated

settlement

Takeover

decision Tree

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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 shareholdersarbitragers build stakes (easier for bidder to acquire blocks)

Proxy contests

Fights over seat on board to replace management againsttakeover

Allows control without owning 51% of shares

Can eliminate takeover defences (poison pills)

Expensivehigh 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 bidsecret to keep price down Advantage in getting voting power for a proxy fight

Can be sold later at a profit to offset costs

Limitations by law Hart-Scott-Rodino filing (US)

Takeover code (UK)

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, timeperiod must be extended to give time to consider

Uncontested tender offers successful in 90%

Contested offers successful in 50%

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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 ordividends/rights to buy shares))

Change management structure/incentives (shark repellents:staggered boards, parachutes)

Cultivate unions/workforce

External

Cultivate shareholders/investors for support Inform analysts fully to avoid undervaluation

Make strategic defence investment

Monitor share price register for unusual movements

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

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Post-bid actions and outcomesDefence Advantages Disadvantages Return

s

Greenmail* +standstill agreement

Encourages raider to go away and notreturn for a specific period

Reduces risk to raider of losing money. Exacerbatesnegative returns to target shareholders. Unfairlydiscriminates against non-participating shareholders.Often generates litigation. Tax consequences

Pac-Man Target will defend at all costs Target has to be able to fund itmay emasculate bothfirms

White Knights/whitesquires

Preferable to hostile bidder Loss of independence

ESOPs Can be very effective Support of employees not guaranteed. Avoidoverpaying for shares or may be disallowed by law

Recapitalisations Target less attractive May cause substantial negative returns to shareholderand reduces capacity for raising debt

Share repurchaseplans

Reduces number of shares availablefor purchase

May facilitate bidder gaining control

Corporaterestructuring

Going private May greatly reduce shareholder value

Litigation May buy time to build defences andincreases takeover costs

Negative impact on shareholder returns

Just say no Buys time to build defence anddetermine appropriate defence

Must satisfy conditions of courts

Evidence of US defence effectiveness

Shareholders with poison pill defences are likelyto experience substantially greater premiumsthan firms without Doesnt reduce likelihood of being acquired

Golden parachutes increase returns asmanagement are incentivised

Greenmail effects are negative

Recapitalizations resulting in higher leverage forshareholders results in lower returns

Litigation doesnt affect returns but buys time

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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%+ oftargets 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 otherstakeholders 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 sometime (France), voting rights can be limited

Removal of top management can be difficult as well asemployees

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Conclusion

Hostile previously Anglo-American - now European Itsa 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 inParis). Mostly UK. 2.6bn cap.

Granada

TV (BSkyB), rental and computer services, Leisure (hotels,theme parks, travel, catering) one of the largest and mostprofitable companies in Britain - 4bn cap. Strong cashgenerator

Stakes:

establishment (Sir Rocco Forte, Grovesnor House Hotel) +household names (Little Chef), versus Gerry Robinson (9th of10 children of a carpenter) strong turnaround track record.

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Granada/Forte Questions

1. Why did Granada bid for Forte?

2. Comment on the timing of the bid and thepreparation that Granada undertook.

3. What defence tactics did Forte use?

4. Why did Forte lose?

Summary

Hostile bid as disciplinary force?

Clash between commercial strategy andfinancial return of markets?

Granada Group hotels not very pleasant

Rocco Forte seems to be doing well

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UK Bid timetable

Announcement day Bidder announces offer with terms and conditions

Posting day (Day 0) Offer document must be posted within 28 days of

announcement

Day 14 Last day for target to recommend to shareholders and to respond to offer document

Day 21 First offer closing day. Offer may be extended. Offeror may buy target shares in

market above 30%

Day 35 End of period for acceptance when offer went unconditional on day 21

Day 39 Last day for target to release new information e.g. profit

forecast

Day 42 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 Last day for bidder to revise and post offer terms e.g. raise

offer price, release new information e.g. dividend forecasts

Day 60 Final closing date e.g. last day of offer period. Bid eitherfails or is declared unconditional

Day 81 Last day for clearing all other conditions attached to bid

Day 95 Last day for delivery of consideration

Takeover defences

Share watchtracking share movements

Pre-bid defence

Poison pills New class of securities issued to shareholders

No value unless investor acquires specific percentage of votingshares. Then dilute investors stake in the combined company

dead hand only original directors can rescind 1stgeneration: Dividend to shareholders convertible into common

shares of the acquiring company following takeover

2ndgeneration: flip-over pill: issuance of rights to shareholders tobuy specific amount of shares in the acquiring company at discount.Flip as become acquirer shareholders

3rdgeneration: flip-in, flip-over: receive special dividend to buyshares 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

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Shark RepellentsDefence Advantages Disadvantages Return

s

Staggered boards Delays assumption of majority control Circumvented by increasingsize of board

Limitations on directorremoval

Narrows range of reasons Can be circumvented

- calling special meetings Limits ability to use meetings to addboard seats/remove members

Legislature requires specialmeeting if enoughshareholders request it

- consent solicitations Limits dissident shareholders to startproxy contest

Can be challenged in court

- advance notice provisions Gives board time to select owncandidates

Can be challenged in court

- supermajority provisions Used for hostile takeovers

Fair price provisions Increases costs of two tiered tenderoffer

Increases white knight costs

Super-voting stock Gives friendly shareholders more

voting power that others

Difficult to implement as

requires shareholder consent

Reincorporation Take advantage of most favourablestate anti-takeover statutes

Requires shareholderapproval; time consuming

Golden, silver and tinparachutes

Emboldens target management to askfor higher premiums; raises costs tobidder

Negative public perceptionexpensive to get rid of topmanagement

Strengthening

board

Limiting

shareholder

actions

Others