Companies re-examine takeover defences

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Companies across the globe are re-examining their takeover defences in the face of an anticipated surge in unsolicited bids from predators while share prices remain low.

Such reviews come at a time when the vulnerability of companies to hostile bids has increased over recent years in response to corporate governance activists who have criticised traditional takeover defences such as poison pills.

“The rapid and significant decrease in the share prices for almost all companies from 2007 means that unsolicited bid concerns are greater than they have been in a decade, yet boards have less takeover protections to defend against these,” said Frank Aquila, mergers partner at international law firm Sullivan & Cromwell.

Currently, just 18.2 per cent of the S&P 500, or 91 companies, have a shareholder rights plan in place, according to FactSet SharkRepellent, which tracks corporate takeover defences.

Even more worrying, out of a total of 207 shareholder rights plans which were due to expire this year, just 34 per cent have so far been renewed.

“Boards are reluctant to renew their shareholder rights plans unless the company is in play, since institutional shareholders oppose such provisions. Institutional shareholders want the ability to buy and sell their shares freely and view rights plans as potential impediments,” Mr Aquila added.

Poison pills aim to deter a hostile bidder by making the proposed transaction prohibitively expensive.

The pill, in the form of a shareholder rights plan, triggers the issuance of new shares or allows investors to sell at a premium.

Their popularity as an anti-takeover measure increased in the early 1980s as traditional companies such as TWA, Unocal and USX moved to repel takeover bids from corporate raiders including T Boone Pickens and Carl Icahn.

However, such mechanisms are not designed to prevent hostile takeovers so much as give the target’s management time to evaluate alternatives and maximise value for shareholders.

According to analysis by Citigroup into unsolicited and hostile M&A activity in the US, companies with a shareholder rights plan in place received an average final premium of 38.3 per cent to their share price.

This was almost twice the average final premium of 21.5 per cent for companies without shareholder rights plans in place.

When PepsiCo made an unsolicited $6bn cash-and-stock bid to acquire Pepsi Bottling and PepsiAmericas earlier this year, Pepsi Bottling quickly adopted a poison pill provision barring PepsiCo from acquiring any more shares. Three months later, PepsiCo reached an agreement to buy the outstanding shares of its two main bottlers for $7.8bn – representing a 24 per cent premium to Pepsi Bottling’s share price from the initial price it offered.

Takeover defences for European companies, however, are much less clear-cut than in the US, largely because of the lack of common rules between the region’s countries.

Despite the European Union’s efforts, the EU Takeover Directive is not unified and member states still have room for manoeuvre on crucial issues such as poison pills.

“All the takeover practices in Europe create a prisoner’s dilemma in the minds of investors since the offers do not stay open for subsequent acceptance after they are declared unconditional,” said Carlo Calabria, head of European M&A at Bank of America Merrill Lynch.

“This is contrary to the UK, which is much more democratic and where a hostile bid is effectively a referendum for share-holders.”

Schaeffler’s €11.35bn ($16.9bn) hostile bid for rival Continental – one of the most daring Germany has seen – was facilitated by exploiting a legal loophole.

The privately owned industrial group was able secretly to gain control of 36 per cent of Continental by using cash-settled equity swaps which did not have to be disclosed.

“Relative to the US, Europe can be characterised by re-emerging nationalistic protectionism and less scope for company-specific defence measures, especially of a legal nature,” said Wilhelm Schulz, head of European M&A at Citigroup. “Once a company is under offer, effective defence measures are limited to traditional tools such as the search for a white knight or playing the value card unless shareholders have pre-approved more aggressive action.”

The recent rise of hedge funds on share registers has also weakened company takeover defences.

Historically, chief executives would spend their time with traditional long-term investors to convince them of the merits of a deal.

Now, merger arbitrageurs, who simultaneously purchase stock in a target company and sell stock in its potential acquirer, are dominating share registers.

They have become the decisive factor in takeover battles, which can make it harder for companies to control their own destiny when under siege.

Takeover defences such as shareholder rights plans can clearly increase the price a target can get from a bidder.

But as Mr Aquila points out: “Ultimately the best defence has to be a strong share price.”

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