COMMENT: A body of academic evidence provides strong proof that target company shareholders gain at the expense of bidding company shareholders.
In 1942, at the height of the second World War, most of the British guns installed to defend Singapore from a Japanese invasion were pointed in the wrong direction. Fearing an attack from the sea, the guns were aimed on the Straits of Malacca. But Singapore was invaded by land from the Malay peninsula.
That was 60 years ago, but have the guns of the takeover codes been similarly misdirected? Takeover codes focus on protecting the interests of shareholders in the target company.
It requires that shareholders in target companies have the necessary time and information to make informed decisions backed by independent advice. However, the code is virtually silent in respect of the interests of shareholders in bidding companies.
These shareholders have to rely on company law as their primary source of protection.
Company law - with its origins in the 19th century - has never fully caught up with the "institutionalisation" of ownership. It assumes that shareholders behave like owners. But institutions - such as pension funds - frequently do not.
Since the UK Takeover Panel was established in 1968, it has dealt with about 7,000 announced and 3,500 unannounced offers. This provides prima facie evidence that takeovers must be a desirable instrument of wealth creation. But for whom?
A body of academic evidence provides strong proof that target company shareholders gain at the expense of bidding company shareholders.
And a Business Week survey of takeovers in the period 1990-95 showed that half of them destroyed value for the bidding company. Only 17 per cent produced gains that were more than marginal.
It is right and proper that shareholders in the target company should be protected. But the evidence suggests that it is the shareholders in the bidding companies that need the greater protection. Why do companies and their directors persist in making takeovers when the evidence of success is poor?
The passion for takeovers has its origins in a sudden surge in institutional investment in the 1970s and 1980s - a time when exchange rate controls frustrated overseas investment. Pension funds encouraged the creation of large companies to absorb their fast-growing assets.
Executives have also encouraged this - not least because their personal interests have been aligned with takeover activity. The influence of remuneration consultants - and their focus on benchmarking remuneration to rival companies - provides an incentive to "grow" the company. They are paid more if their company is bigger. Bidding companies and their advisers may privately pre-consult with a small number of major shareholders about proposed acquisitions - but in my experience of more than 17 years as a leading British fund manager, the examples of companies withdrawing such proposals after consultation are few and far between.
Back in 1992 I remember being consulted at Gartmore by Tomkins, the engineering group, and its advisers, BZW, on a contemplated offer for Rank Hovis McDougall, the food manufacturer.
The target was outside Tomkins's competency and the proposed price was too high. Clients of Gartmore were the second-largest shareholder group in Tomkins at the time. We said we did not approve the contemplated offer and would not support the necessary capital raising. Nevertheless, Tomkins proceeded. Its share price collapsed and the company never really recovered in the eyes of the financial community.
While I believe the arguments we advanced to Tomkins were valid, it was clear that the company and its advisers had reached the "point of no return".
The only real sanction available to shareholders in a bidding company to frustrate a value-destroying acquisition is to vote against the management proposal. Yet to do so is to express a very public vote of no confidence, which can be hugely damaging to the company. Institutions are - not surprisingly - reluctant to do this.
Steps need to be taken to protect further the interest of bidding shareholders. The British Financial Services Authority has recently shown a more enlightened view to promoting investor consultation. This should be encouraged further. Fund managers should be more willing to be made insiders to protect their clients' interests.
We could borrow from health legislation. Cigarette packets tell us that "Tobacco seriously damages health".
Perhaps offer documents should commence with a preamble reciting the facts about the impact of takeovers on bidding companies' shareholder value, noting that the bidder's directors and advisers are fully aware of this evidence but indicating that, notwithstanding this, they propose to invite their shareholders to support a significant acquisition.
To this might be added a further requirement that the bidding company and its advisers each provide their best estimate of the value achieved or destroyed in previous acquisitions which they have initiated or on which they have advised.
Paul Myners was chairman of Gartmore for 17 years until he retired last year. He produced a report on institutional investment for the British Treasury in March 2001.
