From Forte’s point of view, it seemed like a dirty trick. Granada, the business best known for running a TV channel and motorway service stations, had launched an audacious bid for the biggest hotel operator in the country. Worse still, having spent countless weeks and months poring over all the industry statistics and publicly available information about Forte, Granada’s bid arrived on 22 November 1995 and the offer document was published two days later – so, under City of London Takeover Panel rules, Forte had only until 2 January – ‘Day 39’ in Takeover Code terms – to produce its final set of financial data demonstrating why Granada’s bid should fail and Forte should be allowed to thrive alone.
Penny Avis, now of Andersen’s transaction services team, was working with Price Waterhouse when the hostile bid for its client arrived. “We had armies of people working day and night, preparing all the levels of information that we needed,” Avis recalls. “All the advisory team had to work all the way through Christmas, and one would argue as a sceptic that Granada timed it deliberately so the amount of time available to prepare a robust defence and to speak to the City to tell them how great Forte was, was minimised.”
Avis thinks we are likely to see an increasing number of hostile takeover bids in coming months, as companies face the need to restructure, remove cost, wipe out the competition, prepare for the coming economic upswing and take advantage of vulnerable rivals’ depressed share prices. The question is, if your company is next on somebody’s corporate hit list, are you ready to defend yourself today? Because if not, by the time the bid breaks the surface, it may already be too late to have any realistic chance of fending off a vastly better prepared predator. And then the best you can probably hope for is to ramp up the exit price.
Some of the advanced preparations you can make are good housekeeping, while others will provide an opportunity to re-evaluate your business. Some are laden with regulatory complexities, while others are common sense.
Taken together, the process adds up to the preparation of a dummy defence which, regularly updated and refreshed, will increase the chance your business will look professional, competent and in control when a bid arrives.
But it’s also important to remember that you don’t have to be the group FD of a quoted company to be faced with a hostile takeover bid. All the reported evidence is that Barbara Cassani and the rest of her management team at no-frills airline Go were less than enamoured with the approach made to their majority shareholder, 3i, by bitter rival easyJet. And with a subsidiary there’s always the chance that a hitherto docile parent company may suddenly decide to reclassify it as “non-core” and flog it through a trade sale to a competitor. In either case, the management of the company about to be sold may have to act quickly to make a convincing case to its parent company board or its venture capital backers in order to persuade them why the business should remain in management hands.
Perhaps the single most important thing to sort out in a defence strategy is a proper review of the company’s track record. This will almost certainly look back over five years. “That’s the shareholder return period that people are usually arguing about,” Avis says. It’s a long period for which to dig up data, analyse trends, defend errors and justify broken promises – but bidders will have spent a long time examining not just your performance, but what the directors have said, promised and failed to deliver, so as to undermine confidence in the management. With this in mind, it’s imperative that you can still justify any significant U-turns and argue that they were made in good time. You also need to have a convincing rationale for board-level remuneration.
Unfortunately, as Avis recalls from the Forte bid, if the bidder’s offer includes an offer of shares, then the defence team needs to make a similar analysis of the bidder in order to persuade investors that their current holding is better. “We had to look at all the Granada businesses, and we were trying to get hold of maybe only ten facts – but they were the ten facts we needed to have on page one of the letter to the shareholders saying, ‘Forte has done these five great things and Granada has done these five awful things and for these reasons we are better so stick with us,'” she says.
But, as Nick Williams, a corporate finance partner with law firm Hammond Suddards Edge, points out, time is always against the defence. He sets out the basic timetable for a hostile bid as follows: “You can expect an early morning courtesy call. The bid will be announced and there will be a short-form announcement, which will have the basic terms of the bid and the conditions. The bidder then has 28 days to get the formal offer document out, and the defence document has to be issued within 14 days of that. So, if the bidder makes an announcement and posts the offer document at the same time, you have only 14 days.”
More generally, Avis says that a lot of her job in defending against hostile takeovers is just gathering the facts and presenting them very cleanly, “looking at it cold as an outside observer without all the emotional colouring”. So cold, in fact, that Avis advises that, if the company is an audit client, then the audit team should not be involved. “Clients argue that it’s terribly inefficient to have all these people who have no idea about our business trying to learn it. I think that’s the whole point of the exercise.” On the Forte bid, the audit team set to work attacking Granada, leaving a fresh team to analyse and defend Forte’s track record.
John Edwards of BNFL told us last November about his experience as FD at builders merchant group Meyer: “In the dotcom hype suddenly builders merchants weren’t so much in favour. I thought nobody would take us over.
But we forgot there was a big company in France looking at us and just waiting for the share price to go down.” And so Meyer fell into the hands of St Gobain (as it happens, on the same day Lafarge bid for Blue Circle).
Ideally, as already mentioned, a vulnerable bid target should be thinking about the weak spots in a likely bidder’s track record and prepare suitable defence arguments because it keeps the bidder on the back foot. However, Avis admits it’s hard enough persuading clients to buy a “dummy defence” service without also buying a “dummy attack on the predator” module as well – especially since it all has to be verified to Blue Book (Takeover Code) standard and will be almost totally irrelevant if the bidder makes an all-cash offer rather than shares or cash-and-shares.
What’s more, it can be very difficult to guess where a bid might come from. Avis acted for French construction group Vinci in its bid for airports operator TBI – a bid that came completely out of the blue. She admits you can easily “waste a lot of time and money attacking people that aren’t really predators. But if you’ve done your bit you can spend your 14 days attacking the real predator and not running around trying to get your own house in order.”
Williams has some tips on how to spot predators that may be about to pounce. “There are small indications you can look for: for instance, if the directors suddenly stop dealing in their own shares that might be an indication they’ve got a bid planned and therefore they’re prevented from dealing in their shares – or, if they’re shifting their timetables for making announcements or whatever, that might also be an indication they’ve got something planned.”
It’s worth thinking about potential white knights if you consider that some consolidation is likely to happen in your industry or that you are too vulnerable – or attractive – to escape the clutches of an eager competitor.
Keeping in touch with investors’ views will tell you whether they think you have a strong position or that your time is up – as well as giving you the opportunity to get your message across. Just ensure that a white knight doesn’t turn out to be a black prince.
Also, remember that, unlike in a lawsuit, you may ultimately win your case but you won’t be able to get the failed bidder to pick up your defence costs. However, Avis says that it is now possible to buy insurance to cover your advisers’ well-earned fees.
You may decide it would be helpful to prepare a profit forecast, especially if it’s been a long time since your most recent results announcement or if you expect a significantly different growth rate than you’ve experienced of late. But Williams points out that forecasts have to be reported on by the accountants and financial advisers – a time-consuming process – “so that’s something you may want to get started sooner rather than later.”
Every member of the board, therefore, should have ingrained into them that they must not say anything during a bid process that will be construed as a profit forecast, otherwise the bidder will be on the phone to the Takeover Panel straight away, demanding substantiating evidence or a retraction.
That’s the kind of thing that will make you look unprofessional and as though you’re shooting from the hip.
The same applies to valuations of your property portfolio or of a crown-jewel subsidiary that you believe is undervalued. They have to be commented on by the advisers.
It seems obvious, really, but it’s vital to have lists of everyone’s phone numbers, fax numbers and emails close to hand – that includes mobiles and home numbers, not just office details – and for all the executive and non-executive directors, the auditors, the financial advisers and stockbrokers, the lawyers, PR people and any other relevant experts you may need in a hurry (property advisers, for example, if you need valuations).
Avis points out that it can take days to sort out the advisers’ engagement letters – and fees – so it makes sense to be able to track everyone down immediately.
Williams advises that the board should also decide which directors will form a bid defence committee and how they will split up the work. He also says there should be a “defence manual” with all such details, plus guidance notes on the key Takeover Code rules, directors’ responsibilities and even draft announcements.
Get your paperwork together, Williams says. Pull together mem-and-arts documents, plus key commercial contracts, banking documentation (especially on covenants), or property deeds. Make sure your filings are up to date and that there is nothing for which you can be criticised. And monitor your shareholders register. Serve notices on any nominees with new holdings to find out who the ultimate beneficial owner is: your rival didn’t buy a 2.1% stake to get on the mailing list for your annual report.
AND IF A BID NEVER MATERIALISES?
Like insurance, it’s better to pay the premium and never make a claim. It’s also good risk management to be prepared for such an eventuality.
Moreover, an impartial review of the management’s track record should stiffen resolve to perform better in future. You may even wind up doing unto yourself what others would do unto you – such as improving margins, shedding non-core business -and still remain in control. The alternative is burying your head in the sand. “It’s amazing when you go through these processes what comes to light, and some good generally comes of it,” says Williams. “By anticipating arguments that a bidder may raise you do have to stand back and objectively consider the position of the company and the way it’s going forward, and that process in itself is going to be helpful.”
EXPECT THE UNEXPECTED
– P&O Princess being bid for by both Royal Caribbean and Carnival – ongoing battle for P&O: Carnival bid was thought to be merger-spoiling tactic.
– Granada Media – similar example of a hostile bid coming as a result of an announced merger in 2000. United News & Media and Carlton wanted to merge, Granada obtained clearance to bid for either.
– WPP/Tempus – tried to withdraw after 11 September on the grounds of material adverse change. This was a landmark test of this clause with the Takeover Panel, which failed.
– Vinci SA bid for TBI – target came under pressure from shareholders to explain poor handling of bid by French group Vinci.
– Focus Do It All – bid for Wickes was described as a bolt from the blue.
– Granada takeover of Forte in 1995-96 was reported as one of the best fought battles of its time.
– Scottish Power – takeover of Manweb and Southern Water in mid-1990s. Scottish Power was regarded as being slick and well prepared.