By Michael Kemp February 2016 7min read
There is something innate in the makeup of most CEOs, as if it’s embedded deep within their DNA: they want the company they head to keep getting bigger.
Author and investment great, Ben Graham, called this characteristic aggrandisement. It’s an effort to extend one’s power, influence and reputation; to build an empire. Sometimes the empire is strong but sometimes it’s built on sand.
The main vehicle for this aggrandisement is the corporate takeover, and the fuel of takeovers is bank-supplied credit and shareholder-supplied equity. Beneath all this corporate activity there is something you, as a shareholder, need to realise: it might be the CEO playing the game, but it’s the shareholders who are placing the chips on the table.
This article looks at the takeover process: what should you do when a takeover looms and, most importantly, when is the takeover in your best interests or is it simply a CEO’s folly? The takeover process
In common usage, takeover means acquiring control of a publicly listed company. Control typically describes when a bidder acquires all or a majority of the voting shares in the target company, with the target then becoming a subsidiary of the acquirer.
Takeovers can be friendly or hostile and are typically undertaken via a takeover bid or a scheme of arrangement. Let’s look at the differences.
Takeover bid
This is where individual offers (to each shareholder) are made in order to purchase the target securities at a specified price. Bids can be friendly (where the acquired is happy to be taken over) or hostile (where the target usually resists). A bid can be made off-market (not using the sharemarket) or via a market.
Most takeover bids are made off-market because this allows conditions to be included in the offer. When a bid is made, shareholders of the target company will receive a written offer to buy their shares.
Scheme of arrangement
This is where all shareholders vote on the offer first and their shares are acquired only if the resolution is passed. Therefore schemes of arrangement are used only for friendly acquisitions and are often used where 100 per cent of the target is being acquired.
All shareholders in a scheme of arrangement must singularly abide by the vote, because it ultimately becomes a court-approved statutory arrangement and is therefore binding by law.
Regulatory requirements
Takeovers in Australia are regulated by a combination of legislation, government policy and stock exchange rules. The main takeover rules are spelt out in the Corporations Act and are administered by the Australian Securities and Investments Commission. If a dispute arises, it is managed by the Takeovers Panel. There are many rules covering takeovers but let’s look at one of the main ones — the 20 per cent rule.
This states that a person cannot acquire more than 20 per cent of a company unless via a specified exception, which includes takeover bids and schemes of arrangement. So when the 20 per cent threshold is hit, the takeover machinery is triggered. Response to a hostile takeover
When an off-market bid is launched for shares you own, you will receive letters from both sides of the battle. The first, describing the details of the offer, will be from the bidder. The second will be from the directors of your company, who are obligated to respond to the bid by issuing a target’s statement.
The directors’ statement will usually advise that the offer significantly undervalues your shares and you should reject it. This will be backed by an “independent valuation” from a financial house acting on your company’s behalf. Company valuations are pretty rubbery beasts at the best of times, so the “independent valuation” can be any figure the appointed adviser wants it to be. A financial house employed to defend against a hostile takeover is unlikely to conclude the initial offer is a fair one.
Cynicism aside, the directors, in rejecting the initial offer, are usually acting in the best interests of the shareholders – they are seeking a higher bid from the initial bidder or new offers from elsewhere.
That said, sometimes management’s judgement about the adequacy of the initial offer can be clouded because, price aside, they are usually defending their jobs and their pride.
AML Price at posting:
34.0¢ Sentiment: Buy Disclosure: Held
By Michael Kemp
(20min delay)
