US PHARMACEUTICAL GIANT Pfizer’s recent attempt to take over another major player in the industry, AstraZeneca, shows how easy it for a deal to fail.
Having spent a month out in the open after making public its desire to buy the British drugmaker, Pfizer was unable to clear enough hurdles to push the deal through. Concern that the transaction was merely a tax mitigation exercise certainly didn’t help matters, while AstraZeneca’s board was stubborn in its call for a higher price to be set – one that would incorporate its future pipeline of medicine.
Robert Beveridge, a former CFO and non-executive director, says that the saga has created a lot of emotion, some of it negative. In spite of this, he expects there will be some re-engagement of communication with AstraZeneca’s board “in the future, at some point”. He believes that the 57% premium of the final offer was a high price and says it was brave of AstraZeneca to decline it. Nevertheless, there has to be some mutual benefit and understanding about how the transaction would add value to both companies.
“I wonder whether Pfizer has worked hard enough to make it attractive enough to AstraZeneca’s shareholders, because AstraZeneca’s board said that it would have accepted £59 per share, so what was driving the acquisition in the first place is still there,” he explains.
AstraZeneca’s stance could have been influenced by its largest and most influential shareholders, such as BlackRock. It’s the job of a target company’s CFOs to consistently communicate with them to explain “how the current management team is the right team for the job of creating shareholder value and good returns”, says Gene Kamarasy, CFO partner at Randstad’s professional services firm Tatum. CFOs are a key part of the management team, but they can’t mount a defence, or even promote a takeover, on their own.
“In such a leadership position, the CFO would be directing and co-ordinating the effort to develop the financial arguments either for or against the offer, and you would expect the CFO to know the investment bankers on both sides to be able to drive the parts of the strategy either in defence or offence,” he explains.
CFOs need to gain insight into how the other side is thinking, and an investment bank would need to do the same in order to mount the defence. With this knowledge, they can work on influencing the deal by perhaps expounding the future standalone performance of the target company in the way AstraZeneca’s board has managed to do.
“By being a standalone firm, you can deliver above the offer price and, in AstraZeneca’s case, their final price tag of £55 per share will now be a very firm and real target to hit,” comments Anna Faelten, deputy director of the M&A Research Centre at Cass Business School. CFOs and their boards need to clearly state what the share price should be, and communicate to the market and the company’s shareholders what their targets are. AstraZeneca is not out of the woods yet; its board needs to meet its promises to avoid a vote of no confidence at its AGM in April 2015. It’s a hard call as the board has claimed that growth will increase by 75% over the next decade.
So a company that has pushed away a takeover can still leave itself vulnerable, but there is a number of levers that can be used to protect a target company against a hostile takeover. The poison pill and structured leveraging are “key elements of the hostile takeover defence playbook”, and these defences need to be thought through and structured long in advance of the actual event, Kamarasy says. Target companies can defend themselves by using exceptional dividends and stock buy-back programmes to flush shareholders with cash and prevent the acquirer from accessing it.
Pension plans can be used as a poison pill too, if they are under-funded. In this situation, the target firm can require them to be fully funded as part of any deal. A sinking fund can prevent a hostile takeover. But poison pills are a last resort as they often disregard the interests of the company’s shareholders and are driven by directors’ egos, and as such they may involve PR campaigns in which mud is slung at an opposing party in order to make the commercial relationship seem unattractive.
The acquiring CFO
“One of the key things I ask large corporates is what they would have done differently in beginning their integration plan early. You should have already considered who’s going to run the business to the best of their ability at the due diligence stage,” suggests Faelten when asked about the role of the acquiring company’s CFO and board. The problem is that they tend to underestimate the integration of each company from the people point of view.
There are bound to be management and job losses, creating uncertainty about what the changes are going to be. Employers and managers subsequently walk around not knowing if the deal will end their jobs, and so it’s important to have a plan in place for this. CFOs therefore need to convince both shareholders and employees that an acquisition is good for them and the business as a whole.
You can then get them to buy into the concept of buying and integrating with another company. So keeping people – all of the stakeholders – in the loop about your plans is vital to success. This will inevitably include, as Pfizer did, communicating with the target firm’s largest shareholders to convince them that any acquisition is in their best interests. They can then put pressure on the board to accept the deal.
The acquiring company’s CFO needs to listen actively in order to make sure a deal goes through, suggests Robert Beveridge. You could argue that Pfizer didn’t do enough of this because it went ahead and announced its interest in AstraZeneca without first of all gaining a consensus. For this reason, it was felt that Pfizer’s approach was more hostile than friendly.
“From what AstraZeneca said, Pfizer needs to make a compelling deal, and an acquiring CFO would need to communicate why it’s a good deal and beneficial to both parties,” he says. As was seen in the Kraft/Cadbury deal, an acquiring company’s CFO needs to consider – when taking over a premium British brand where the company is famed for its culture and ethics – the people aspect of an offer, the differences in culture of the two organisations and other factors to ensure that such problems as this don’t taint the offer or the deal.
Many takeovers maintain that sentiment, from the two parties involved to other stakeholders, during the process. Greg Gould, a consultant with Gould LLC, was the CFO at Atrix when it was sold to Vancouver-based pharmaceutical company QLT Inc. “When we sold the company, it was fairly well received by our shareholders, with a vast majority of them voting for the transaction,” he says. As a result of the sale, Atrix stock value increased by 30%, and so he views it as a very good deal for investors, and they were very happy with it too. In contrast, AstraZeneca’s stock fell upon its rejection of Pfizer’s final offer.
Originally, Atrix wanted to buy a company to increase its pipeline. But as talks began with QLT, the company hired an investment banker to make sure that it was offered the highest price. The deal was then brought back to the board, and it was agreed that what was on offer represented good value for Atrix’s shareholders.
“We were not actively marketing the company but we would listen if somebody showed up, and QLT felt that we had a very strong pipeline,” he says. Atrix remained a very small company but the discussions with QLT led to an opportunity to increase shareholder value and to minimise risk by completing the transaction.
The regulatory landscape in the US differs from the UK in that it is more hands-off. US regulators have taken the approach that shareholders should decide what’s best for the company. Boards may also use more poison pills than they would be able to employ in the UK to defend their companies from a hostile takeover. You could, for example, issue more shares to the existing shareholders at a lower price than their valuation.
“Most of the poison pills are illegal in the UK; you will see fewer hostile bids as it’s more difficult for the management to protect itself, and hostile takeovers can backfire in one way or another,” explains Anna Faelten.
This is because 60-70% of mergers and acquisitions fail to deliver value due to poor integration. Unsolicited approaches to a company’s board can also push up the price, making it probable that little will be gained from a deal. It’s possible to make an offer public and then increase it, while going directly to shareholders could devalue the deal over time “as shareholders may still rely upon the recommendation of the target company’s board”, says Faelten.
In the UK, regulators allow you to make an offer and then directly approach the shareholders as part of a process. The framework covers the kinds of defence that a company can use, and Sriram Prakash, head of mergers and acquisitions at Deloitte, says the UK takeover code was introduced in 2011 to give the target company more bargaining power to repel hostile takeovers. ■
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