Everyone loves a good takeover stoush. But what should you do when one of your stocks is in the firing line?
Remember fights back in school? Everyone would gather around, goading the adversaries, before a teacher would arrive to break it up. Well, takeovers are a bit like that. There’s a lot of action and excitement to begin with, but it generally fizzles out before too long. After that comes the hard work – getting the two parties to resolve their differences. But what should you do if a stock you own receives a bid? It’s a topic we’ve touched on before but, with a lot of aggression in the stockmarket playground at the moment, we thought it was time for a practical guide. In this first part of this two-part guide, then, we’ll look at how takeovers are structured. And in the second part, later this week, we’ll look at how to weigh up the price being offered. Of course, no two takeovers are the same. What you should do depends on the circumstances of the takeover, as well as your own situation. But the following broad principles should at least give you an idea. Let’s assume you own shares in Sitting Duck Ltd, which is trading at $2.00 a share. InMySights Ltd, an acquisitive company which has already bought three companies in as many years, makes a takeover bid for Sitting Duck at $2.50. What’s the first thing you should do?
Sit on your hands The answer, almost invariably, is absolutely nothing. This is usually what the directors will recommend anyway. And it’s why we almost always switch to a Hold recommendation once a takeover is announced. Now that Sitting Duck is ‘in play’, as they say, there’s no way to know how it will eventually play out. So there’s no need to take any action until much later in the process. It’s very rare for takeovers to be wrapped up in less than three months, and quite common for large company takeovers to take longer than six months. In short, if a takeover is announced, just sit on your hands. The next step is to wait for the official takeover documentation and accompanying forms, which will usually take at least several weeks. We suggest you read the documentation, taking note of the relevant dates and what type of takeover it is (something we’ll discuss shortly). But once again, there’s no need to do anything yet – just set the paperwork aside for later. Whatever you do, don’t accept the takeover at this stage. The reason is that, by sending your paperwork back now, you lose flexibility. If InMySight’s $2.50 bid was trumped by a $2.70 bid from the even more acquisitive Fire At Will Corporation a month later, for example, you wouldn’t be able to accept Fire At Will’s offer. Nor could you sell on the market because, once you’d accepted InMySight’s bid, your shares would have become ‘locked’ (the bidder would be legally entitled to them). Remember – at this stage you want to maintain maximum flexibility.
Two types of takeover Now, it’s worth digressing to note that there are two types of takeover. There’s the official, legally defined takeover, which is an offer made by a ‘bidder’ to buy everyone’s shares in the target company (this can be done either ‘on market’ or ‘off market’ but we won’t worry about the difference here). Increasingly common these days, though, is the scheme of arrangement. Technically speaking, a scheme of arrangement is not a takeover at all, but a shareholder (and court) sanctioned reorganisation of a company’s share structure (you can also have creditors' schemes of arrangement which reorganise a company's debt structure, but that’s another topic). This difference in structure throws up quite a few important practical differences. One difference is that a scheme of arrangement is always ‘friendly’. That is, the bidder and the directors of the target company will have been in talks before the announcement to agree the price and terms. Also, schemes only require 75% of votes cast to be approved, which is a lower threshold than under a takeover, where 90% acceptance is required. Invariably, private equity firms prefer schemes of arrangement because they’re less messy and, if successful, they result in them owning 100% of the target company. The successful bid for Rebel Sport and the unsuccessful bid for Flight Centre are recent examples of private equity firms using schemes of arrangement.
Column 1
0
Takeovers - what should you do?
1
When it is announced - do nothing
2
Wait for the takeover documentation
3
Read documentation but set it aside for later
4
Is it a takeover or scheme of arrangement?
5
Keep an eye on the media for news
6
Wait for regulatory conditions to be fulfilled
7
Consider what the share price is telling you
8
Is the bidder offering a sufficient price?
You’ll receive documentation in the mail whether it’s a normal takeover or a scheme of arrangement. In the former case, you can accept the bid by filling in and sending back the acceptance form. In the latter case, you vote on the scheme by mail or in person, so we suggest you jot down the meeting date in your diary.
Watch the conditions
Still with us? Don’t worry, it gets easier from here. Don’t forget, though, that you’re still not ready to send back either your acceptance form (if it’s a takeover) or your voting papers (if it’s a scheme). Your goal from this point is to work out what’s likely to happen. And while we’re not often fans of traditional media, reading the newspapers’ analysis of the bid should give you a good feel for what’s going on.
Most takeovers go through several stages as they proceed. InMySights may need approval from the Australian Competition and Consumer Commission, for example, before it can acquire Sitting Duck. Once again, there’s little point accepting until any regulatory conditions have been met. Indeed, bidders usually specify that a takeover is subject to certain conditions, such as ACCC approval, and if they aren’t met then the takeover will lapse.
The takeover conditions, which you’ll find in the bidder’s statement, are an important part of any bid – so make sure you review them. For example, it’s common for bidders to want full ownership of the target company, so they will often specify a 90% minimum acceptance condition (upon achieving 90% of the target’s shares, the bidder then has the right to compulsorily acquire the remainder). Unless this 90% threshold is met or waived by the bidder, then the takeover will also lapse. Waiving some or all conditions is a common negotiating tactic employed by bidders as the takeover progresses.
If a bid is hostile, and they don’t come much more hostile than Toll Holdings’ hard-won battle for Patrick Corporation last year, a bitter war of words may develop between bidder and target. Appeals to the regulatory authority, the Takeovers Panel, are also pretty common.
What the market expects
You can usually get a rough idea of what the market thinks will happen from the share price of the target company. If it’s above the bid price, then the market is expecting a higher bid. If it’s about 2–3% below the bid price (a few months before it’s due to complete), then the market is expecting the bid to proceed at the bid price. But if it’s more than 5% below the bid price then the market is factoring in a chance that the bid won’t proceed (perhaps because the ACCC might knock the deal on the head, for example). While this method isn’t foolproof, as we saw with the surprise failure of Flight Centre’s scheme of arrangement (which the market was expecting to proceed), it’s usually fairly accurate.
By now, you should be getting the idea that takeovers can be complex affairs. And they can also drag on for months on end without a resolution in sight. But when all is said and done, there’s only one question that really matters. And that is: ‘Is the bidder offering a sufficient price for control of the target company?’ If it is, then you should accept the bid. But if it isn’t, then you shouldn’t.
Determining whether the price is sufficient is usually pretty simple. We’ll reveal all in Part 2, so look out for it soon.
Takeovers – a practical guide: Part 2
The bids are flying for your favourite investment, but when should you actually accept?
In Part 1 of our practical guide to takeovers, on 26 Mar 07, we learned that, despite the initial flurry of activity, takeovers can be drawn-out and convoluted affairs. And, as an investor, the best thing to do initially is just sit on the sidelines and watch the goings-on.
So at what point do you stop playing the waiting game? After all, once a company is on the receiving end of a bid and is ‘in play’, it’ll generally end up being acquired by someone, though it isn’t always the initial predator that ends up with the prey. (Interestingly, though, a larger than usual number of takeovers seem to be failing at the moment, with Flight Centre’s scheme of arrangement falling over, Rebel Sport’s going down to the wire, and Qantas’s in some doubt.)
One of the main roles for the directors, then, is to extract the best possible price from the existing bidder or a new one. To support their view, the directors will often commission a so-called ‘independent expert’s report’, which involves an accounting firm or similar coming up with a ‘valuation’ for the company. We don’t tend to set much (or indeed any) store by these valuations (see our criticism of Flight Centre’s expert’s report on 30 Jan 07), but they seem to carry a lot of weight with regard to whether the directors recommend you accept a bid or not.
Wait for the directors’ recommendation
So this is the first thing you’re waiting for – a directors’ recommendation. Returning to our example from Part 1, Sitting Duck’s board needs to decide whether the $2.50 being offered by InMySights is sufficient.
While some bidders end up acquiring a large chunk of the target without the directors recommending acceptance of the offer, it’s pretty rare. Until the directors recommend you accept – usually with the caveat ‘in the absence of a higher offer’ – you don’t really need to do anything at all. But that doesn’t mean you should send off your acceptance form as soon as the directors capitulate.
Column 1
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Takeovers - what should you do?
1
Consider independent experts' report
2
Wait for directors' recommendation
3
Watch out for higher offers
4
Take note of when offer is declared final
5
Expect closing date to be extended
6
Consider whether to sell or accept
7
Wait for bidder to achieve about 50%
8
It's time to accept!
For one thing, others might still think the bid is undercooked. And if enough shareholders still aren’t happy with the price, as turned out to be the case with Flight Centre, the takeover might still end up failing in spite of the directors’ recommendation.
A directors’ recommendation can also stimulate a higher offer. Strategically, it can make sense for a counter-bidder to wait until the directors recommend some other company’s offer. The counter-bidder can then jump in, knowing that the directors are duty-bound to accept its even higher bid.
Increased bid
Let’s assume that InMySights increases its bid to $2.80 a share and declares it ‘final’. No other bidders have emerged, and Sitting Duck’s directors believe the price is sufficient, so the board issues a recommendation to accept InMySights’ offer. Under the ‘truth in takeovers’ rules, InMySights cannot increase its offer price after declaring it final (but watch out for qualifications such as ‘in the absence of a higher offer’).
Once it reaches this stage, the takeover process is well advanced. All regulatory hurdles should have been cleared, counter-bidders have had adequate time to appear, and the directors have deemed the price sufficient and have therefore recommended acceptance. Only now is it time to start thinking about what you’ll do.
You have two main options. The first is to sell your Sitting Duck shares on market. By this time, the market price will be slightly below the bid price, but not by much. If you sell on the market, you’ll incur brokerage, but you are assured of getting your money after three days. Selling on the market may be a good idea if you prefer certainty over the last few per cent, or you already have the cash earmarked for something else. Or, in the case of bids that involve receiving shares in the acquirer, such as Bank of Queensland’s recently announced bid for Bendigo Bank, you’d prefer cash.
Nearing the finish line
Otherwise, you’ll be looking to send in your paperwork to accept InMySights’ bid by the closing date, which can be extended numerous times (unless it’s a scheme of arrangement, where you must send your paperwork back by the set deadline in time for the shareholder meeting).
Once the directors have recommended acceptance of the takeover bid, acceptances will usually start trickling in. By this time, you should have noted the closing date, and be keeping an eye on the ‘Change in substantial shareholding’ notices. You’ll also want to remain aware of the conditions of the bid because, while most bids are conditional on 90% acceptance, some have a lower threshold. The recent bid for brake maker Pacifica, for example, was conditional on Bosch achieving 50% of the shares.
It’s important not to worry too much about the closing date, at least while acceptances are only trickling in. Our experience is that it is not uncommon for the closing date of the takeover to be extended half a dozen times or more.
Crux of the matter
Now we’re getting to the crux of the matter. For a recommended bid that is conditional on 90% acceptance, you don’t really need to accept until the bidder is entitled to about 50% of the stock. We’ve chosen this general threshold because, by that stage, it’s pretty clear that no other bidders are going to emerge. And it’s also increasingly likely that the takeover will be successful.
About this time, InMySights probably wants to start wrapping things up. It might try a number of tactics, such as accelerating payment or refusing to extend the offer for Sitting Duck past a certain date. It’s usually a good idea to check the payment terms in the bidder’s statement or subsequent announcements before sending back your form.
It’s also worth remembering that the takeover can still fail until InMySights declares the offer unconditional (which often won’t occur until it obtains 90% of the stock). Of course, if everyone held out for the bidder to declare its offer unconditional, then it would never obtain 90% in the first place. The key point is to wait until there’s a low chance of the bid failing, and then to accept, but no sooner.
There is one other alternative to accepting: you can wait for InMySights to achieve 90% of Sitting Duck, at which point it is legally entitled to compulsorily acquire the remainder. But we generally wouldn’t recommend going through the compulsory acquisition process. Not only is there additional paperwork to fill out, but the timing of your payment becomes less certain. Most bidders aren’t usually keen on giving the remaining shareholders much latitude, as they have already been given ample opportunity to accept.
Time to send your acceptance
OK, digest that and think about the situation before you do anything.
Be aware that much of what the bidder puts in his statement re all the bad scenarios that might happen if you do not accept the bid are primarily designed to scare you into selling. Eg, if the bid fails, the sp will likely quickly revert to around 3 cents...but the bidder will be left holding 19.66% minimum at 5.5 cents, so they'll be hurting a bit as well. There'll be very little liquidity etc, etc.
Our directors (I will not afford them a capital letter) are backing the bidder up on these scaremongering tactics....why not, with all the freebies exercised and the bidder indicating that they are "doing a good job" (heaven forbid) and will be kept on to run the new co., why wouldn't they throw in with the raider?
It is my firm opinion that the sp over the last ten months was kept down purposely (with whatever tactics the big boys use to control a sp, and there was one entity with enough shares to do this) in order to make the current offer "look good"....for any longer term shareholders , it does not look good at all...they will have lost millions. I know of one top 20 s/holder with an average of 25 cents.
Since 2 July 382,121,821 shares have been traded. That's less than 19% and includes around 38M sold between 2 July and the Baragatan P&A notice given on 7 July. Interestingly, 11.876M were turned over on 2 July opening at 3.3c to low of 2.9c to close at 3.1c....funny that...leaky old ship Nido again.
It is my firm opinion that Nido shareholders have been well and truly stitched up here on a collaborative basis, so if you want to get "our" way, you should hang onto your shares....but then I guess we'd be left with that management team that's "doing a good job"! If that scenario came to pass I'd expect to see some resignations.
I certainly hope the ASX and ASIC are having a good look at this, but do I expect them to do something about it....pigs might fly!
I also hope that some of our larger s/holders from the top 20 are bringing events to the notice of those with some teeth....wouldn't it be ironic if in the end Mr Pope would've been better off on the board....from their point of view!
NDO Price at posting:
5.1¢ Sentiment: Hold Disclosure: Held
