My earlier article talked about how a board should respond to an unsolicited approach for the company. This looked at a straight-forward offer that the board has to review and accept or reject. However it’s not always so easy, as much depends on the attitude and tactics of the offeror.
The chairman of one of my competitors, calling out of the blue, explained that they were about to offer for my company. They had already spoken to my two biggest shareholders, who had signed irrevocable commitments to vote their shares in favour of the offer. Since their combined shareholding was pretty much 50%, the chairman explained, it was just a matter of us handing over the due diligence they required, and the deal would be done. This is what is known in polite terms as a ‘bear hug’, and would be classed as an unfriendly approach.
Friendly or unfriendly?
The tone for an offer will inevitably be set by the offeror’s first contact with the target. That initial approach could be direct to your chairman or indirectly via your advisers. It can be made on an exploratory, friendly basis; such as, “We think that this is a good idea. Would you be interested in exploring it further?” It could be on a firm, but friendly basis; as in “Here is an offer at X pence per share. Would you consider it and perhaps we can talk about it further?” Or it can be delivered as an unfriendly ultimatum. A ‘bear hug’ is where either the initial price is a knock-out one or sufficient target company shareholder support has already been secured behind the board’s back. In either case, the offeror aims to position the target board so that it has no option but just to accept the offer.
So why do some offerors start off unfriendly? There are a number of possible reasons;
- The offeror believes that the target board will not act rationally in the interests of its shareholders. There is therefore no point in trying to be friendly.
- The offeror believes itself to be in such a strong position, through a high price or shareholder support, that it does not need to be friendly.
- Either the offeror or its adviser is innately aggressive and believe that being unfriendly is a good tactic.
In my experience, none of these reasons are very good ones. Most boards will, in the end be rational, and will be urged to be so by their advisers, acting in their own view of shareholder interests. A powerful offer is not weaker for being friendly. In this example, I think that the competitor believed it was in an unassailable position, and it was counselled by poor quality advisers to deliver the offer as an ultimatum.
What are irrevocable commitments?
To the man in the street, an irrevocable commitment is one that you cannot get out of. However, in the streets of the City, nothing is ever that simple. It is imperative therefore, that the target board gets hold of either the actual irrevocable document or an impartial summary. From my experience, you cannot rely on a summary produced by the offeror or its advisers.
The key point is that an irrevocable commitment can have conditions attached to it, ie actually be revocable. The UK Takeover Panel, which tends to take a legalistic approach, will even allow a revocable agreement to be called ‘irrevocable’ in public announcements. However it can take a tougher line if an announcement adds more detail to the ‘irrevocable’ without also giving any explanation of material conditionality.
In my example, one of the ‘irrevocables’ was conditional on my board actually recommending the offer. This was not therefore a true ultimatum, as the board duly rejected the offer and the irrevocable fell away. The stranglehold that the offeror thought it had was dependent upon not revealing the true nature of the shareholder commitment.
Cash and shares
A cash offer has a value, which should be unchanging and clear. However, if the offer is in shares, neither of those may be true;
- The offeror’s share price may move on the announcement, either up or down, depending upon shareholders’ views of the attractiveness of the bid.
- The offeror’s share price may move during the process as a result of market moves or new developments.
- If the offeror’s shares are trading at a premium, the target board will need to consider what the ‘true’ value of their shares is.
A share offer is therefore inherently uncertain. Furthermore, if the nominal share offer is increased, it may not result in a higher effective price. For example, if an offer in stock is increased, but the offeror’s shareholders think that this is too high, then the offeror’s share price may fall. This then reduces the value of the offer.
The relative share-price premia need to be considered. Take a property company offering for another very similar one. The offeror is likely to feel strong enough to make the offer because it has a healthy premium to its net asset value. Let’s say that it has a 20% premium, whereas the target trades at NAV. The offeror may offer a 10% premium for the target’s shares, but in practice the target shareholders would still be left owning a lower NAV per share than before. The same could be true of earnings per share, but synergies may soften this.
Advisers
A board should ensure that it has good advisers. There is no substitute for good, experienced advice, and preferably from more than one source. The best chance of getting a deal done is also for the other side to have good advisers too. I have known situations where one side even recommended particular advisers to the other party. The worst situations are always when the other party (offeror or target) has inexperienced, out of their depth or macho advisers.
Summary
- If an offer comes in on an unfriendly basis, there is a good chance that it will end up hostile.
- Keeping the process ‘friendly’, at least initially, should be in everyone’s interests.
- ‘Irrevocable’ commitments can be anything but. Make sure that you know the full facts.
- Be especially careful of offers in shares and what they really mean for value.
- Employ good advisers, preferably more than one, and hope that the others do too.
- Whatever happens, stay rational and do what’s right for your shareholders.
My next article will run through what tends to happen next following the receipt of an offer.