The Weekend Australian for 16-17 June has an interesting piece...

The Weekend Australian for 16-17 June has an interesting piece by Alan Kohler entitled "Unfair Takeover Tactics". In it, Kohler decries the increasing trend for takeover offers to start out as indicative non-binding proposals. These allow a bidder to get into the data room and find out things about the target which even its owners, the shareholders, do not know.

Kohler cites the recent cases of APA Group and Gateway Lifestyles (GTY). APA's share price jumped from around $8 to around $10 on news of a bid for what becomes an $11bn company, while GTY's price jumped from $1.80 to $2.15 for what becomes a $600m company. These bids are neither firm nor binding, same as with Blackstone's bid for the best part of AMA. The difference is that AMA's price, unlike the prices of the other targets, fell in the wake of the bid.

Kohler characterizes the making of an indicative non-binding proposal as "a costless key to the door marked Insider." He says that this way of doing business, the favoured tactic of "jack of all trades" private equity funds, has become "ridiculous and should be stopped."

He makes the valid point that the targets are public companies, not private companies. Everything material about them is supposed to be disclosed continuously so that equality of information is enforced - that is, no insider trading. So why would a bidder want to get into a private room and look at stuff which ordinary shareholders don't know? Ostensibly it's because they need to be sure that nothing is amiss before they commit, or not, depending on how they view it.

But what happens when the bidder is already in the same game as the target? In the case of AMA, the bidder already runs a large scale smash repair business in the United States. The metrics of AMA are known to anyone who can read a report. Blackstone doesn't need to know how smash repair operations run. They know already. So what is it about AMA (or any other target where the bidder already runs a similar operation) that must be uncovered, at no cost or obligation to the bidder?

Kohler says it is "material and secret" information about specific contracts with suppliers and customers, and employment contracts of the principal officers and staff, that the bidder seeks. Maybe it is reasonable for a bidder to want this information, but the same detail is not something the owners of the target - i.e. its shareholders - can ever know. And the bidder gets this access without making a firm bid or being bound to proceed with a purchase afterwards.

Kohler asks whether it is reasonable for a funds trader to get "much more information than an individual who is investing a large part of his worldly wealth". His conclusion is that accounting and disclosure rules are not enough to prevent this form of "insider trading", as he describes it. He says that, if publicly disclosed information on a company is inadequate for a bidder who is already in the same line of business, then maybe it is not good enough for someone who wants to invest in the company either.

In the case of AMA, the company (i.e. the shareholders) paid Blackstone the million dollar cost of its due diligence. On the timetable foreshadowed in the 13 April documents, shareholders will be asked to make up their minds about the proposed demerger and acquisition on 24 August, before the company releases even its draft accounts for the past financial year. The shareholders will have nothing on which to base an informed decision, let alone anything approaching the detail available to the maker of the indicative non-binding proposal.

Every other target in recent times has seen its share price spike on news of a takeover bid from one of these corporate raiders. The price of STO fell when the directors called the offer for what it was, but the company is still on a good trajectory and will go on without being taken over. Unlike all the other targets, AMA's share price tanked in the wake of the announcement and nowl languishes, yet bizarrely the AMA directors calculate that the proposal is a good thing and are recommending it to shareholders. I can't see it.

The draft scheme booklet is due to go to ASIC in a couple of weeks for approval and shareholders are supposed to see the final thing a month later. I still don't know what to make of the whole thing but, after reading The Australian today, my opinion of this proposal has soured.