MANAGERS ON MANAGEMENT:HOSTILE TAKEOVER bids used to be a relative rarity. With publicly-listed companies languishing nowadays at unedifyingly low share prices, however, there are plenty of opportunities for the well-funded predator.
But for hostile takeover targets it need not be a matter of rolling over and being acquired. They can defend themselves – if their senior managers and directors are prepared.
“Not alone is it prudent, it’s essential for the board of every public company to have a corporate defence strategy in place in the current climate,” says Eithne Fitzgerald, a partner and head of corporate finance at law firm AL Goodbody, which is acting for Ryanair in its takeover bid for Aer Lingus plc.
“Plcs are under pressure from a combination of factors: a fall in demand for their products, the credit squeeze, and particularly declining share prices.
“And in that situation they have to realise that a hostile takeover bid can come with very little notice.
“Under the Irish takeover rules, the company making the bid is obliged to notify the target. If you’re running that target company, you may get a phone call half an hour before an announcement is made. It can be that tight and dramatic. So you have to be prepared and quick on your feet.”
Ideally, being prepared means, first off, having a defence pack or manual drawn up. “Typically, that pack would include the contact details of the company’s various professional advisers.
“It might also have a draft response prepared for situations where time is of the essence.
“There would probably be an analysis of your company’s major shareholders, a list of potential predators and even a preview of any competition law issues that might arise if the bidder and the target are competitors.”
Crucial to the target company’s broader defence strategy would be a thorough critique of its strengths and weaknesses – and a detailed valuation in comparison to other companies in the same sector.
“Profit forecasts and asset valuations can be used to support the directors’ view, for instance, that the bid is opportunistic and undervalues the company,” explains Fitzgerald.
“But there are very specific requirements in the takeover rules in relation to producing those profit forecasts and asset valuations. So there have to be systems in place to ensure that they can be produced in compliance with the rules and within the required timeframe. That’s very important.”
The takeover rules provide for a timetable to be put in place to ensure that the target company is not left in play interminably.
There’s a strict prohibition too on “frustrating action” by the company that’s the subject of the takeover bid.
“It can’t allot shares or make material acquisitions or disposals, nor can it enter into contracts outside the ordinary course of business without the consent of its shareholders and the Irish Takeover Panel, which has a considerable supervisory role.
“So, for example, you could not, during the course of an offer or even when an offer might be imminent, have senior managers or directors negotiating themselves a very favourable package to kick in, in the event of a takeover.”
Private companies – with some very limited exceptions – are not subject to the takeover rules. They defend themselves differently.
“A private company with a diverse shareholder base may have provision, for instance, in its articles of association for pre-emption rights on transfer. In other words, if one shareholder wants to sell, the shares must be offered to the other shareholders – so the possibility of a third party coming in is severely limited.”
So to what extent are managers and boards of directors really prepared?
“Well-established plcs with strong management and good processes and procedures in place do tend to be well-prepared,” says Fitzgerald.
“Though even here you’ll have people who say ‘yes, we did that’ – and it turns out they did it two years ago . . .”
Name: Eithne Fitzgerald
Company: AL Goodbody
www.algoodbody.ie
Job: Partner and head of corporate finance management
Next week: International management guru Prof John Bessant, of Imperial College Business School in London, on how to think innovatively.
petercluskey@yahoo.fr
Advice: “Have your corporate defence strategy in place to help combat a hostile takeover bid.”
