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Merger Regulation

Stork hoists the white flag

As the management will stay in place after the proposed takeover by Candover Investments, one has to ask why the buyout should be necessary in the first place.
Will the shareholders get full value and is it not a conflict of interest when existing management is involved in buyout or merger discussions?
The campaign by 'activist' shareholders Centaurus and Paulson has not succeeded in the stated aim of breaking up the company to 'realise shareholder value'. But it has driven management into the arms of a white knight and resulted in a sizeable short-term profit to the two funds.
It is questionable that these two funds - which together controlled 33% of the outstanding shares - should be allowed to have such a large role in the future of a company. While the company has been built up over a long period and should plan with a time horizon of years funds such as Centaurus or Paulson can be in and out of the stock at the push of a button and have no responsibility to employees, customers or the other shareholders.
26-JUN-07

Boots - another fire sale?

Press comment today argues that 'there seems to be little choose but to accept £10.40' (the level of the likely bid for Alliance Boots).

If this is accurately reflecting prevailing sentiment in investment community there is little hope for the future of public share ownership. The existing mechanism for transferring ownership of a company as a whole is seriously defective if it allows insiders to bid for assets they should manage as fiduciaries or if outsiders get preferential access to information (when a company agrees to open its books to a prospective bidder). Investors that buy shares not just for a quick punt but in view of holding them for the long term or until a certain value point is reached are also unceremoniously squeezed out in a voting process that is biased in favour of auctioning off the ongoing concern to any bidder who gets a relatively narrow majority of shares.

Management should not be in the business of selling the business. It is mandated to manage a business and the stock market should decide who controls the selection of management or whether or not a company is being sold.

As we have repeatedly argued, the process of how public shareholder-owned companies are being sold short-changes the public holders of its shares. If a bidder wants to pay £10.40 for each Boots share and the majority accepts, the holders that would only have sold at higher prices are in effect forcibly separated from the asset. If the bidder is forced to buy all shares at the highest price necessary to obtain a quorum of say 95% it would mean that the takeover could only be effected at a much higher price.

As the business of takeover regulation in the UK is dominated by producer interests (stockbrokers and investment bankers) it is incumbent on public shareholders to organise a more forceful lobby to prevent the transfer of value to the promoters of buy-outs.
2-Apr-07

Spain lowers threshold

The news that Spain will lower the threshold above which buyers will have to make a mandatory bid for the remainder of the shares from 50 to 30 percent is welcome. But it leaves open the general question of what is so magical about the 30 percent limit that it has become enshrined in the takeover regulations of several countries.

 It also leads to the question of who is setting these limits and how their impact is being monitored. Closely related is the question of the way the mandatory bid has to be made after the threshold gets triggered. So far, legislators, market insiders from the producer side (banks, securities firms and investment managers) dominate the discussion and there is little regard for the voice of the ultimate owners of the businesses.
30-Mar-07

Boots Deputy Chairman involved in bid for Company
It is time that the public shareholders create robust defences against conflicts of interest that exist when all or part of top management and board members are involved in bids for the company or assets that are being sold off.
These insiders have a substantial advantage over the public shareholders when assessing the intrinsic value of a company's asset and it sounds more than hypocritical when they argue that they want to make a bid because the market undervalues the shares of the company. Let them buy shares in their private investment account but do not allow them to make bids within a cooling off period of one, preferably two years after leaving the company.
11-Mar-07

TXU - how quickly can you raise the white flag?

Towards the end of last week a bid by leveraged investment funds for the US utility company was announced and just one weekend later the board and management are already raising the white flag and agree to the terms of the buy-out offer.

It is surprising - to say the least - that a substantial business in a crucial sector of the economy can be 'taken out' in such a speedy fashion.

Should management and the board only be interested in giving shareholders access to a quick profit or should they manage the business with a longer-term perspective and leave it to the market whether or not control of the company passes to another set of shareholders?

Pro-Gov argues that in many cases the takeover terms on offer to the existing shareholders allow bidders to take control without being forced to pay an adequate premium.

The existing management is also incentivised to accede to buy-out terms too quickly as their golden parachutes and outstanding share options are crystallised in case of a transfer of control. In addition, management may be softened up by the promise of lucrative new terms of employment and share options by the new owners.
26-Feb-07

Are public companies sold too cheaply?

Takeovers of public companies make a lot of people happy. Shareholders can sell at a price that seemed out of reach, management gets new - and usually better - incentives or jumps ship thanks to generous golden parachutes. Investment Bankers make fat fees and all in all - thanks to supposed higher efficiencies created by the new owners - everyone is left better off.

Recently, however, some critics argued that buy-outs by Private Equity Investors have some less desirable aspects. In the US there is even a possibility that club-deals by several large buy-out firms may have restricted competition and allowed them to pick up companies for lower prices than would otherwise have been the case.

Other factors pushing companies into the hands of new owners are: managements that are promised cut-price equity stakes or benefit from golden parachutes and option schemes that pay out in the event of a takeover or stake building by investors that have no interest in the long-term future of the business.

We would argue that some simple adjustments to company law might make it possible that the public shareholders would get a higher price in successful takeover attempts. A limit to the number of shares that each holder can vote and a minimum holding period before shareholders can vote with their shares would limit the impact of stake building by hot money that is only to happy to sell out for a small profit.
18-Oct-06

Do shareholders get fair value in Buyouts?

Today's announcement that Hospital Operator HCA has agreed to be acquired by an investor group again raises the question if public shareholders really are well served by the procedures that are currently applied during these transactions.

When management (which often benefits from takeovers either due to accelerated option vesting, Golden Parachutes or cut-price stakes in the succeeding corporate entity) and the board engage in secret negotiations that lead to a take-out price that is close to the upper end of a decade-long trading range of the company's stock it sets alarm bells ringing.

In our opinion, the price offered to all shareholders should be determined by the highest price that the bidders have to pay to get the required percentage holding that would allow them to control the company.

A proper auction process and clear rules about which shares the bidder may vote in any company meeting are necessary to reduce the 'Bidder's Surplus' as much as possible and minimise the risk that public shareholders sell out at too low a price.
24-Jul-06

Should Bid targets pay break fees?

We do not think that bid targets should be allowed to enter into binding agreements to pay any indemnity to the bidder until the shareholders have been able to formally vote on the merger/sale proposal.

All too often, the amounts that are agreed are way above any reasonable costs that the bidder may have incurred.

One has to assume that this type of agreement more often than not is intended to discourage competing bids. As such, break-up fees are not in the interest of the company's shareholders.
7-Jul-06

Should VC's get privileged access to Company Books?

Venture Capital firms do not like to make hostile bids, in many cases their investors do not allow them. So while it is understandable that VC firms try to get a chance to do due diligence before making a firm offer we think that this practice should be examined. Does it not give a clear advantage to the bidder? He gets something that is very valuable for free and should at least have to pay a fair price for this information. Existing Shareholders - Retail as well as Institutional Shareholders - are required to rely on publicly available information and are thus kept at a disadvantage.
11-April-06

Deutsche Boerse - Round 2

We still have not received a reply from the prominent investment firms that fought against the Deutsche Boerse bid for the London Stock Exchange.

We wholeheartedly supported their campaign for the right of Deutsche Boerse shareholders to be consulted over the bid. But we are also firmly in the camp of those who think that this right should be firmly enshrined in Europe's Corporate Governance Rules. So when we made inquiries about the commitment of some of these firms and did not get a clear statement supporting this principle we got a bit suspicious. Was this campaign only a tactical ploy to allow individual funds to make more money?

Maybe they should publish a history of their their dealings in the shares of Deutsche Boerse and the LSE before, during and after the bid attempt?
11-April-05

LSE sees off Deutsche Boerse

Is the defeat of the bid by Deutsche Boerse for the London Stock Exchange really a triumph for shareholder democracy at the Financial Times claims?

Everyone familiar with the listed sector in Germany will be aware that shareholder groups such as DSW have for a long time been in the forefront of the fight for fair treatment of shareholders.

The sudden emergence of a new and vociferous group of 'activist' shareholders has in our opinion not really improved the situation of the public shareholders.

Yes, a battle has been won. But on what principle? Has anyone really objectively analysed the arguments for and against a bid? Have the leaders of the 'coup', such as Atticus or TCI and their followers such as Fidelity or Assicurazioni Generali really been guided by the principle that major acquisitions should be approved by the shareholders as a whole?

Only then could we say that a victory has been won for shareholder democracy. Since the LSE bid came to light a number of major acquisitions and mergers have been announced. It would be desirable that they would receive the same amount of scrutiny and passionate argument that was given to the LSE/DB bid.

It would also make interesting reading to have the disclose the dealing records of the major participants in the discussion for and against the LSE/DB combination. If anyone had bought the DB shares shortly after the announcement of the bid, should he really have the legal - and more importantly, the moral - right to participate in the bid discussion?