Takeovers are part and parcel of stock market investing. For shareholders, they can deliver substantial (and sometimes unexpected) windfall profits. Yet the takeover process itself is much misunderstood. Here, we answer some of the main questions about the bid process as it relates to UK publicly traded companies.
What's the difference between mergers and acquisitions?
If two companies are of a similar size, it is common to see any combination of the two described as a merger, rather than a takeover of one by the other. ‘Merger’ sounds more diplomatic and avoids the impression of one management riding roughshod over another management and its workforce.
The usual mechanism of a merger is that the two companies will pool their assets into a new company, whose shares will be held in some predetermined proportion by shareholders in the two. Until recently, another attraction of mergers was the use of merger accounting, which removed the sometimes-awkward problem of goodwill (see below). However, under International Financial Reporting Standards (IFRS), ‘pooling of interest’ mergers have effectively been outlawed. There will always be hunter and hunted, and there will always be goodwill.
What is meant by goodwill
Goodwill is the price a company pays for another business over and above its book value. It is a kind of down payment on expected future profits. Goodwill is held as an intangible asset on the balance sheet. Takeovers involving 'asset-light' companies like software developers or support services groups can result in substantial amounts of goodwill. Under IFRS, it need no longer be ‘amortised’ year by year, but must be regularly reviewed. If an acquired business is no longer judged capable of generating the returns that were expected of it when purchased, its value must be impaired. A portion of the goodwill must be written off through the profit and loss account (although this is an accounting procedure and does not affect cash).
What is a reverse takeover?
Reverse takeovers are fairly common among smaller companies. Broadly speaking, it is when the target is bigger than the bidder. A reverse takeover usually requires approval from the bidders' shareholders at an extraordinary meeting.
What is a mandatory offer?
Under the City Code on Takeovers, if a company, individual or group of individuals acquires enough shares to take their interest in a target to more than 30 per cent, then that group or individual must make an offer to all shareholders under the same terms. A mandatory offer must have an acceptance condition of not less than 50 per cent, and generally has few other conditions.
What are recommended and hostile offers?
A recommended takeover is one where the directors of the target company recommend that shareholders accept the offer. If members of the management team are involved in the offer, quite a frequent occurrence these days, then it is customary for the remaining independent directors to form an ad-hoc committee to consider the merits of the bid. A hostile offer is where management at the target company advise against acceptance. They tend to drag on longer than recommended deals.
What is a scheme of arrangement?
Many takeovers, especially recommended ones, are implemented via a scheme of arrangement. A scheme of arrangement is a court procedure proposed by the target company to its own shareholders, whereas an offer is proposed by the bidder to shareholders in the target. Therefore, takeovers via scheme of arrangement are always recommended. The involvement of counsel generally makes a scheme of arrangement more expensive to administer than a takeover, but this extra cost is usually offset by the fact that the bidder does not have to pay stamp duty on acquired shares. This is because, technically, it is not acquiring any. The target cancels its own share capital, then issues new shares to the bidder. Three-quarters of eligible shareholders in the target have to vote in favour for the scheme of arrangement to be passed, but once they have done so, the decision is binding on all shareholders. So schemes of arrangement can often be closed out quicker than takeover bids.
Who regulates takeovers?
"The takeover business had become an arena of complete lawlessness inhabited by cowboys who habitually kicked, punched and shot their opponents." So said the first director-general of the Takeover Panel, Sir Ian Fraser. The Panel was set up in 1968 by the Bank of England and the Stock Exchange. It draws up and amends the City Code on Takeovers, and arbitrates in the case of disputes between bidders and targets. At the moment, it is not a statutory body - its rulings carry no legal force. But the reputational damage that would ensue from disregarding its authority means that few are prepared to defy it. In 2006 when the European directive on takeovers is implemented, it will move to a statutory footing. You can find out more about how the Takeover Panel is governed on its website: www.thetakeoverpanel.org.uk.
When is a company in an ‘offer period’?
This is not the same as being the target of a bid. Companies are said to be in an offer period if they have disclosed that they have received an approach that might reasonably lead to a bona fide bid. Various paragraphs of the Takeover Code restrict what they can do during such a period without first seeking authority from shareholders, and are to prevent ‘frustrating actions’ designed to make life difficult for a potential bidder. Such frustrating actions could include issuing large amounts of new shares or selling assets. Once a takeover has formally been announced, the formal bid process starts.
How does the 'bid clock' work?
This is what governs the takeover process. It’s designed to bring takeovers, especially hostile ones, to a swift conclusion and avoid undue stalling and delaying. It’s important to remember that the bid clock doesn’t start ‘ticking’ until the offer document, which sets out the terms and conditions of the offer, has been posted to shareholders in the target company. This must usually happen within 28 days of an offer being announced via a stock exchange (RNS) statement. The day the document is posted is day zero. All days, including weekends and public holidays, are counted as the clock ticks.
If it is a hostile bid, the target company must publish a formal response and send it to shareholders within fourteen days of the offer document being posted. The first closing date of a bid must be at least 21 days from the posting of the offer document.
The next significant date is Day 39. This is the last date by which a target company may publish any price-sensitive information, such as comments on current trading or expected profits. Day 46 is the last day on which the bidder may revise its bid.
A bid has effectively succeeded when it is declared wholly unconditional. This is not the same as being ‘unconditional as to acceptances’, which means only that conditions regarding acceptance levels have been fulfilled, but other conditions remain outstanding. Bids are usually all over by Day 60.
In the event of a competitive situation (two bidders and one target) the bid clock is reset when the second bidder posts its offer document. Both bidders then follow the reset clock.
What are irrevocable undertakings?
Often, not as irrevocable as they sound! In the case of a recommended offer, directors of the target company will frequently be asked to tender their individual shareholdings to the bid. Other major shareholders may also be consulted, and agree to do likewise. Watch out for the wording of such acceptances, though. Frequently, there are clauses that allow major shareholders to change their minds if someone else submits a higher bid.
What are the conditions commonly attached to bids?
Most of the significant conditions attached to bids relate to acceptance levels, of which there are several key thresholds. Attaining 50 per cent acceptance gives a bidder control of its target, and allows it to dismiss or appoint directors. Attaining 75 per cent acceptance enables the bidder to delist the shares of the target. Reaching 90 per cent acceptances allows the bidder to invoke the ‘squeeze-out’ rule, and compulsorily acquire the remaining shares in the target. Acceptance conditions are important, because once the acceptance condition is satisfied, shareholders in the target company may no longer change their minds and withdraw their shares from the offer.
Another condition relates to competition clearance. Any bid will lapse if it is ‘referred’ to the Competition Commission for investigation before the first closing date, or before the acceptance condition is satisfied.
Bidders will usually insert a ‘material adverse change’ clause, allowing them to withdraw in the event of the target’s financial position or prospects worsening during the bidding process. In practice, invoking a MAC provision requires the assent of the Takeover Panel, and it is difficult to obtain. Advertising giant WPP attempted to do so in 2001 after bidding for Tempus. It argued that Tempus’ prospects had deteriorated after the terrorist attacks on the World Trade Center. But its request was denied and it had to proceed with the bid.
What is meant by 'put up or shut up'?
This is a ruling sought by a target company and issued by the Takeover Panel in cases where a phoney bid battle is being conducted in the pages of the financial media. Bidders frequently want the directors of the target company to recommend a bid, and put pressure on them to come to the negotiating table by leaking information to national newspapers. Such stories are easy to spot: "X prepared to offer 500p a share for Y, sources close to company X said last night" is a typical form of words. In such cases, the Takeover Panel can require the bidder to declare its hand by a certain day. If it fails to put together an offer, then it may not bid for the target again within 12 months, unless another company does so first.
