Abid can be brewing for many months before it is formally announced. Sometimes talks are held and the bidder walks away, only to return with new proposals when it feels that the target company will be more receptive.
These informal talks, out of the glare of publicity, can be very useful in determining whether it is worth pursuing a potential bid or in negotiating terms acceptable to all parties.
Time was when companies refused to comment on market rumours, but nowadays the Takeover Panel requires them to issue statements when the market gets wind of a potential bid, which is quite often.
When companies must issue a statement
Although it is not necessary to comment on a rumour that is utterly without foundation, target companies must own up if a firm offer has been received, or there is untoward movement in the share price after an undisclosed approach has been received or when negotiations are taking place.
There is no specific ruling about how untoward a movement in the share price has to be. It used to be 10% but a more flexible approach is taken these days and companies tend to err on the side of revealing all when their shares move sharply upwards.
A company cannot be wrong in making an announcement but it can regret keeping quiet and subsequently having to admit it has been hiding an approach. If in doubt, companies can consult the Takeover Panel, which leans on the side of making an announcement if it is in the interests of shareholders.
The bidder must put any proposal to the board of the target company before it makes it a public pronouncement. That is not only courtesy, it gives the target company’s directors a chance to assess the proposal and decide on what stance to take.
Getting the two sides together at an early stage, before any announcement is made, can be advantageous to shareholders. It means that the share price of the target company is not distorted by the announcement of an approach that has no chance of success. On the other hand, it gives the target company the opportunity to try to persuade the bidder to offer a higher price.
At this stage there is no obligation on either side to make a public announcement. It is impossible to say how many approaches are never revealed but it is likely that they are heavily in the majority.
When news of a takeover bid leaks out
Inevitably, though, word of an approach sometimes leaks out. It shouldn’t, and it is against the Code, but it happens. The manifestation of the leak comes in a sharp rise in the shares of the target company. When that happens, the target company is obliged to reveal the approach.
This is usually done by issuing an anodyne and fairly vague statement along the lines that an approach has been received that may or may not lead to an offer; the approach is very preliminary and there is no guarantee that a bid will be made.
Occasionally matters are at a more advanced stage. The target company may be able to say that it is in discussions with the potential bidder and possibly indicate a proposed price per share.
An approach can be tentative or an outright threat or anywhere in between.
At the most tentative level, a predator and target company will simply be having preliminary talks with no proposal of any kind on the table.
Pre-conditional offer
The next level up is a pre-conditional offer. The predator has put forward a proposal in principle but there are conditions to be met before this is turned into a firm offer. These conditions usually include the right to look at the target company’s accounts in confidence, referred to as carrying out due diligence, and it may still be necessary for the predator to raise enough finance to pay for the bid. Pre-conditional offers are often rejected out of hand by the target company as being too vague.
Indicative bid
Somewhere in the middle of the scale in an indicative bid. The predator indicates the price it intends to offer for the target company’s shares.
Indicative bids may be rejected by the directors of the target company. You will often see phrases such as ‘seriously undervalues the company and its prospects’. It is the duty of the target company’s board, in the interests of their shareholders, to try to drive the bid price as high as possible.
Indicative bids are frequently dismissed as opportunistic, a pretty meaningless term, since every bid is made because someone sees an opportunity.
Firm offer
At the top end of the scale is a firm offer. The predator has finance available and has put forward a bid price. This has to be taken seriously by the target company although the offer can still be rejected as too low.
A firm offer must include:
· the terms of the offer
· the identity of the person or company making the bid
· all conditions attached to the bid
· the intentions of the bidder towards the business it is bidding for and regarding employees and the pension scheme
· details of any shares held in the target company.
Who makes the announcements?
These announcements would normally come from the target company but the predator may sometimes make an announcement even if no bid is yet on the table. This could be to state an intention to make a bid if finance can be raised, or it could be a decision not to bid after all.
If a predator rules out making a bid it cannot then make an offer for at least six months except in special circumstances. The main exceptions are if another predator makes an offer or if the target company agrees to submit to a firm bid.
Offer period
A company may be deemed to be in an offer period even before a formal proposal is put forward, provided a serious possibility of a bid has arisen.
During an offer period all shareholders holding more than 1% of the shares in the target company must announce any share purchases or sales they make. Directors in the target company are barred from dealing in the shares.
The company is also obliged to make far more disclosures of all its activities and day-to-day matters than it would normally have to tell the stock exchange about. This is to ensure nothing affecting the bid is hidden.
Takeovers are time-consuming for the company secretary, who has the unenviable task of issuing all the information. They are also expensive for the potential bidder, which will be paying advisers to assist in evaluating any bid.
Put up or shut up
To stop the whole process rolling on indefinitely, with the target company distracted from its day-to-day business, the Takeover Panel introduced a deadline by which a potential bidder must make a decision on whether to bid or not. This is known as a put up or shut up ruling.
It allowed target companies to request that a potential bidder should be ordered to ‘put up or shut up’ within six to eight weeks, which was regarded as adequate time to get finance in place and decide on an offer price.
This rule was enforced when US food group Kraft bid £12 billion for UK confectionary manufacturer Cadbury, but the outrage over a foreign company grabbing a national treasure prompted a further tightening of the rules in 2011.
Now any company revealing that it has received an approach must name the potential bidder and the put up or shut up timetable starts rolling automatically at this point, which takes the onus off target companies of having to request a ruling. The grace period has been shortened to 28 days.
Target companies can, however, ask for the period to be extended if talks are bearing fruit and there is a genuine possibility that a bid will be forthcoming that is in the interests of the target company’s shareholders.
If the predator chooses to walk away, it cannot bid for six months unless an alternative bid emerges from another bidder.
Mandatory offers
One key rule of the Takeover Code is that if a major shareholder buys more shares and its stake rises above 30%, it is obliged to make a bid for all the rest of the shares. The aim is to spare minority shareholders from getting locked into a company where a large shareholder has gained control.
A mandate is a command. Do not be confused by the way that politicians misuse the word to mean permission. A mandatory offer is one that must be made.
The bid must be at least equal to the highest price that the bidder has paid for shares during the previous 12 months.
You may wonder why 30%. After all, you need just over 50% to gain full control of a company. With more than half the shares you can then outvote all the rest of the shareholders put together.
However, it is possible for a large shareholder to gain effective control of a company with less than 50%. If one shareholder has 45% of a company and the rest of the shares are divided among a large number of holdings, it is highly unlikely that the small shareholders would be able to band together as an opposing force.
In any company there are always shareholders who fail to vote at all, while many more slavishly back the existing board.
Stock exchanges in various parts of the world have considered at what level a major shareholder is likely to take effective control. Any figure is inevitably arbitrary but it is there to protect small shareholders.
The Australian Stock Exchange settled on 20% as the threshold. That does seem, though, to be rather on the low side. London chose 30% as a fair compromise.
Concert parties
Normally a bid comes from just one source but it is possible that two or more individuals or companies are acting together. This is known as acting in concert and the group is referred to as a concert party.
Where this happens their separate holdings in the target company are treated as if it was one aggregate holding. Thus if, say, one company in a concert party held 20% and another acquired 11% of the target company’ shares, this would count as a 31% holding and would invoke a mandatory bid.
Inducement and break fees
Another change that was made when the takeover rules were tightened in 2011 was the banning of:
· inducement fees, under which the target company paid some or all of the predator’s costs in launching a bid
· break fees, where the target company paid the bidder’s costs if an agreed bid failed because a better offer was forthcoming from another bidder.
These fees cannot now be paid without the consent of the Takeover Panel, which is given only in exceptional circumstances, where the Panel is satisfied that the payment is in the interests of the target company’s shareholders.
They were previously permitted on the grounds that they might encourage a bid that was to the advantage of the target company’s shareholders. They were always controversial because it was a moot point whether it was right for a company to pay the bidder’s costs as well as its own.
Due diligence
Bidders naturally want to be quite sure the target company is in good health and they will ask to be allowed to carry out due diligence.
Assuming that the proposed takeover is a friendly one, this is no problem and the target company will allow the bidder to take a detailed look at its accounts (also called looking at the books).
The general financial health of the target company will be pretty well known because it can be gleaned from the twice-yearly results statements the company is required to release.
However, companies hold back data that they consider to be commercially sensitive, information that they think would help the rivals they are competing against in the marketplace.
Accountants, legal experts and other consultants for the predator will sign undertakings not to divulge any secrets before being allowed to look at information such as the terms of bank loans, contracts with customers, tenancy agreements, employment contracts and other minutiae that could have an impact on the value of the business.
The process can be expensive if those highly paid consultants are poring over the books for several weeks. They will be looking for ways to boost sales or, more likely, to save money by cutting out duplicated costs.
Due diligence is a bit tricky when the bid is hostile, since the target company will be reluctant to allow an unfriendly bidder to see its innermost secrets, especially if the approach has come from a rival. However, if a target company allows one bidder to see the books, then it must allow the same privilege to any other bidders.
You must be serious
Any person, company or institution launching a bid has got to be able to see the bid through. Any potential bidder must, therefore, disclose its financial position to ensure that if every shareholder in the target company accepts the offer there is enough cash to buy them all out.
The bidder must also disclose all fees relating to the deal that it is paying to its advisers and it must give detailed information of its intentions regarding the employees of the target company.
These rules were tightened after the Kraft takeover of Cadbury, partly because Kraft indicated that it would save the Cadbury factory at Keynsham, near Bristol, that was due to close, only to backtrack after the bid went through.