In the first half of 2015 there were 40 launched by U.S. companies alone, twice the number seen in the same period of 2014, according to Thomson Reuters. These unsolicited bids accounted for the lion’s share of the $240 billion worth of hostile bids seen worldwide, according to a report in Forbes Business.
It appears the atmosphere has changed and companies are renewing their ambitions and hunger for growth. They are also sitting on unused cash piles and as a result we can expect to see the number of hostile bids continue to rise.
The large share premium often associated with hostile bids—sometimes bids are 40% more than the target’s recent share price—can tempt shareholders into a deal. So if a board and management are to mount a successful defense it is imperative to shift the focus from the size of the premium being offered by the hostile suitor to the value of the bid in wider terms. The bidder must be made to make more than a financial argument while winning over all the stakeholders.
A good defense against an unsolicited bid will research the personalities involved in the hostile attack, their track record after previous deals, investment levels, growth prospects, research and development expenditure, redundancy records, compliance and corruption records and even their environmental impact and the use of sweat shops. This information can be fed into a defensive public relations campaign to demonstrate that the values of both sides do not align.
The board should also aim to understand what is important to their shareholders and try to find weak spots in the bidder’s reputation that will help to strengthen shareholder opposition to a deal. For example, companies with a strong ethical investor base might find it easier to stymie a hostile bid from a company with a patchy human rights record.
Wider stakeholders might also help a defense. If the bidder’s track record after mergers is aggressive—moving jobs offshore for example, or closing plants—then stakeholders such as governments and regulatory bodies may urge rejection, even if there is a sizable premium.
Intelligence gathering need not wait until a bid has been received. In an ideal world, a target company will have done the research on possible suitors and have a pre-planned strategy for dealing with each likely bidder.
A manufacturer, for example, should have a dossier on each of its largest three competitors. This may compile different sets of intelligence, details that are usually hard to obtain and analyse regarding company X’s sanction busting; the story behind company Y’s fine for regulatory breaches; and Z’s poor record in equal opportunities and at industrial tribunals.
But if a bid does come out of the blue, as some inevitably do, speed is of the essence. Delay is costly and intelligence gatherers should be called in on day one, along with the lawyers and financial advisers.
A good example of a slow, uncoordinated defense was Anheuser Busch’s failed attempt in 2008 to repel InBev’s $52 billion bid. The bid was at a 24% premium to the prevailing share price and the target’s relatively new CEO, Augustus Busch IV, had no clear plan. InBev, on the other hand, was very well prepared, hitting its target with a strategy involving several different lines of attack: personal, operational and regulatory.
Hostile bids often become aggressive and the bidder may try to suggest that their target is poorly managed, lacks value, has missed opportunities, and could even be at risk from regulators. The best way to contest these claims is to have an independent report on them. Companies regularly have financial and process audits and these can be used and supplemented to reassure shareholders, as well as well-compiled arguments surrounding reputational issues. Transparency is persuasive.
When UK high street retailer Philip Green, the CEO of Arcadia, famously bid £9.1 billion for Marks and Spencer, the M&S board successfully fought against accusations of missed opportunities. It offered a transparent strategy of cost cuts and a revaluation of the business, insisting they could create more value than Green was offering.
Similarly, offence is often the best form of defense. Again, this demands intelligence and thorough research. Any bid requires large amounts of management time and a hostile bid even more so; if the management of the hostile suitor has to focus simultaneously on internal issues then its resolve to complete a deal may diminish.
The M&S defense questioned Mr. Green’s ability to raise adequate finance, the likelihood of a competition inquiry and the ownership structure of his bid vehicle, Revival.
Finally, a defense is not just about blocking a bid, it can also be used to improve the terms. With the right information, a board can negotiate to protect key assets such as jobs, R&D locations and investments, and the location of the headquarters.
As M&A activity continues to climb, so will the number of hostile bids. Preparation is preferable, but acquiring the knowledge is only a start: it’s how you use it that is key to building a robust defense and securing a successful future.
Warning Signs a Hostile Bid Is Coming
- Share price underperformance
- Financial underperformance
- A large, long-term cash pile at the target
- Rival CEO posturing
- Sector consolidation