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Why hostile bids are rare (or not allowed at all)

ARE THE GLOVES about to come off? It’s a question many are asking, as interest around the proposed takeover of UK-based AstraZeneca by Pfizer intensifies following another rejected offer from the American pharma giant.

Will the bid now go hostile, despite the fact that very few do? Recent comments from Pfizer suggest that, perhaps wisely, it will not pursue a hostile bid over the heads of the AstraZeneca board. The merger has to be welcomed on both sides, or not take place at all.

The UK is one of the few countries in the world that allows hostile takeover bids – bids which do not have the approval of the directors of the target company – as part of corporate life. It is seen as a key discipline that underpins governance; the stick that keep directors on their toes and perform to their best, or face the consequences.

Compare the markets

Compare this with the USA. By any yardstick this is a market-driven economy, but one where a hostile takeover boom 30 years ago was blamed for a growth in ‘short-termism’ and a need to ‘manage’ corporate earnings to fend off unwelcome advances. This led to the creation of the poison pill defence by companies, something which describes a number of mechanisms, the most common being the issuing shares to existing shareholders to dilute the shareholding stake of the bidder (a so-called shareholder rights plan).

US activist shareholders, not surprisingly, have attacked the use of poison pills in recent years, although their implementation has been deemed lawful by the courts. In the UK, poison pills are outlawed by the Takeover Code. An enforced reduction in a shareholder’s stake is also prohibited on the basis of pre-emption rights, which seek to ensure that shareholders can maintain a proportionate share of the ownership of a corporation on the occasion of new share issuance.

Other countries in Europe and elsewhere employ implicit government disapproval to oppose hostile takeovers. In 2005, Pepsi Co. invoked strong nationalist feelings when it attempted to takeover French company Danone. The French viewed this family-managed company as something of a national treasure and political leaders mobilised to protect it and ultimately stymied the bid.

And only last year two of the beleaguered Spanish banks, Bankia and Caixabank, attempted to find buyers for what was effectively a 35% stake in struggling local olive oil producer Deoleo. The sale of more than 30% of the shares of a listed company in Spain automatically triggers a bid for the entire company unless a waiver is provided to the bidder by the regulator. In the case of Deoleo, foreign investors sensed an opportunity but the Spanish government effectively vetoed any suggestion of non-Spanish ownership.

Not surprisingly therefore, companies across Continental Europe tend towards agreed mergers rather than hostile takeovers.

Countdown for the conundrum

Coming back to AstraZeneca and the conundrum facing the board over the Pfizer bids, it has to be remembered that there is of course a requirement for directors to deliver success over the long-term under UK company law. The board must take into account the impact of the takeover on a range of stakeholders, including employees and the community, but if directors continue to feel that AstraZeneca has a stronger future as an independent company, as it did when it rejected the recent bids, then the AstraZeneca board is right to continue to advise shareholders to ignore Pfizer’s advances.

If the bid does go hostile, the takeover will be placed in the hands of shareholders, understanding that any deal would involve part payment in shares of the combined company – not something you want to be left holding if you think Pfizer’s management and board are unlikely to deliver long-term value creation. And all parties might want to reflect on the fact that most hostile takeovers succeed only in destroying value, not delivering it.

As Lucius Annaeus Seneca (4BC-65AD) once advised: “For many men, the acquisition of wealth does not end their troubles, it only changes them.”

Dr Roger Barker is director of corporate governance and professional standards at the Institute of Directors (IoD)

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