New rules challenge takeover ‘aggression’

THERE IS NOTHING like a good merger to liven things up in the boardroom. Business as usual gets pushed to one side as the ideas begin to flow, and the cloak of secrecy thrown over the talks creates its own sense of urgency.

Mergers are compelling news. You and your team – backed by a posse of bankers and lawyers – have to move fast, often in darkness, assessing the target company options, entering the virtual data room, and working through the various financial and business scenarios. And it’s no easier if you happen to be on the receiving end of the bid, welcome or otherwise.

But merger teams, whichever side they’re on, may soon be confronted with additional challenges that might tip things over the edge. We all remember the public outcry as Kraft backtracked on some of its commitments to the Cadbury board, employees and shareholders once the takeover deal was done.

Some of Kraft’s subsequent actions perhaps weren’t that surprising to people experienced in these things. Due diligence conducted at speed, with an unwilling partner, often increases the likelihood of a post-merger u-turn on pre-merger assurances.

The Takeover Panel, however, took a dim view of matters at Cadbury, deciding that enough was enough. As last year it began work on toughening up the existing Code, the message it sent out loud and clear was that UK plc cannot be a sitting duck for hostile bids.

Consultations are now over and the Panel is expected to announce shortly its proposed changes the Takeover Regulations – popularly known as the ‘Cadbury Law’. Of course, vigorous lobbying by the business community may dilute these changes, but what seems certain is that bidders and target businesses will now be faced with new and more onerous obligations covering bid disclosures, timelines, transparency of detail and employment rights.

They might appear innocuous in isolation, but taken together they will have a significant impact on the progress and potential outcome of any deal.

Let’s imagine you are the bidder. What will strike you first is an accelerated timeline that can be as short as 10 weeks, coupled with a forced disclosure that you are ‘in the game’.

Accurate, material speculation will compel you to make that announcement quickly and then, within 28 days, to state if you intend to proceed. Fair enough. But another 28 days later, the full force of the proposed Cadbury Law really strikes.

Unless you and your target both apply to the Takeover Panel for a longer timeline, your offer document must be published on your website. You will have to define and explain the proposition, including the long term commercial justification, the financing of the deal, the maintenance (or otherwise) of any existing trading facilities for the relevant securities, and your strategic plans for the combined business.

You will also have to go into much more detail about the impact on employment; not just the basic headcount, but any material changes to conditions, places of business and other matters that affect the security of employees.

“sharply condensed timescales, greater disclosure, more involvement of employee representatives and binding commitments could have a significant impact on acquirers’ synergy and value assumptions”

What about that old excuse of pre-deal secrecy? You are cleared to talk about these things to employee representatives, ahead of your offer going public, providing you keep those talks confidential. Silence is definitely not an option. Any commitments you make, wherever and to whomever you might make them – in the offer document or in formal meetings – will have to be honoured for the time specified.

Even if no changes are contemplated, you must say so, and you’ll be bound to that for at least 12 months. So, eight weeks in and feeling pressured? There is more to come.

Within the next 14 days, your target company board must circulate to shareholders its opinion on all of these matters. And at the same time, it must append separately, for all to see, the opinion of the employee representatives on the salient detail.

Of course, when it comes to the negotiations, ‘synergies’ are always key – property, products, liabilities, technology, management structures and employment costs will still have be considered. But with that spotlight shining much earlier and employee representatives becoming integral to the offer process, your return on investment timelines may come under real strain.

These days, unions are very cute about what to look for, and employee representatives will be able to take expert external advice – at the expense of the target company – to help them frame their opinion.

Expect pressure on pensions security, headcount, locations, employment conditions and distribution of key staff. If European experience is anything to go by, the representatives will be looking for commitments over three to five years.

So does this put UK plc closer to the European model of employment relations that, in some countries, allows unions to slow down or even overturn merger bids? Granting employee representatives a stronger role in pre-deal negotiations is obviously a nod to established practice in continental Europe.

The Government is arguably bowing to public opinion here: aggressive bids, particularly by non-UK businesses, are clearly under greater scrutiny when the domestic economy is in poor shape.

But even if this proposed new Code doesn’t mirror European regulations, the combination of sharply condensed timescales, greater disclosure, more involvement of employee representatives and binding commitments could have a significant impact on acquirers’ synergy and value assumptions.

So who do you turn to for help? Well, if you aren’t already good friends with your HR Director now is the time to get closer. Don’t wait until after the deal is done: the HR Director will be swamped by then, sorting out redundancies, executive pay, top teams, integration and communications.

Some people might suggest this will all be a damp squib. But given the political and economic landscape, don’t bank on the Cadbury Law being quietly shelved. If you are contemplating a takeover, keep your eye on the news, and make sure your HR Director is on speed dial.

Maureen Laurie is a partner at Altaia Partners

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