FOCUS POINT: TRENDS IN TAKEOVER ACTIVITY

Written on the 18 August 2011

FOCUS POINT: TRENDS IN TAKEOVER ACTIVITY

AN increase in takeover activity in 2011 looks set to continue with the recent increase in hostile takeovers at significant premiums to recent closing prices, both domestically (see ASX codes: MCC, QML, CAH, EQN, AZX) and internationally, see the April 4 offer for NYSE listed NSM by fellow NYSE listed TXN at a 75 per cent premium to NSM’s then current share price.

In the energy and resources sector, this may be partially attributed to the historic lag between commodity prices and equity prices for entities within those sectors. However, ongoing concerns over the US and European debt crises continue to provide a favourable platform for cash-rich suitors to take advantage of opportunities in any sector.

With this in mind, it is important to consider whether you and your board of directors are fully prepared for a hostile takeover. This article contains a high level overview of some of the key issues to consider in preparing for, or responding to, an unsolicited offer.

Rally the troops - assemble your response team

Identify in advance who the key people are within your organization that have the skill, capability, authority and capacity to appraise and respond to the offer on your behalf.

Response team members need to be ready and reachable at all times during any approach or bid period and will need to have a good grasp of legal and commercial considerations that will impact on both the bidder’s and the company’s strategies.

Your response team should also include external advisers to guide the company through complex takeover law and procedure, valuation, taxation and financial considerations, as well as advising on public relations and communications.

The response team will be responsible for managing the day to day bid response, drafting of releases, implementation of the response strategy (after the initial strategic direction is set by the Board) and preparation of key takeover documentation.

Understand your value

Value will be an integral, if not the most important, theme in any takeover response. Understanding your organisation’s value and regularly communicating value propositions to shareholders will ensure that key messages during your response are reinforced and easily understood.

Effective communication about value will involve an intimate understanding of the value of your business, its key assets and its strategic direction.

Ensure that you understand how your company generates value, what the risks to value creation and key dependencies are, as well as external factors that may impact upon the perceived value of your business by the market and how this may differ from the Board’s view on value.

Remember, in a takeover situation messages about value are highly regulated, so be certain that all ‘value’ messages can be substantiated by more than just the Board’s opinion.

Understand the value of the bid and the bidder

Ensure that you fully understand the terms of any bid, including any key conditions to the offer. Where an offer is highly conditional, this may create uncertainty as to the likelihood of the offer succeeding.

Where a bid is conditional on obtaining less than 90 per cent of the target, this may facilitate a ‘successful’ bid in circumstances that leaves the minority of shareholders locked in with reduced liquidity and limited exit opportunities.

These themes can be used to support ‘reject’ recommendations.

Where a bid includes a scrip component, you will also need to understand the bidder, the bidder’s business strategy, value and plans for the post takeover entity; again potentially providing grounds to support a ‘reject’ theme.

Set a communication plan

Establish a clear plan for all communications regarding the bid as soon as possible. Usually this will include the appointment of a nominated spokesperson for all matters concerning the bid to ensure a coherent and cohesive response.

In the case of listed entities, all communication needs to be considered in light of the entity’s continuous disclosure obligations and whether there is a requirement to disclose any specific information to the ASX first.

Where there is any discrepancy between the perceived value of the company by the market, and that held by the Board, steps should be taken to ensure that any reasons for this are addressed so that the market is valuing the issuer on a fully informed basis.

Also consider the benefit of communicating the core messages to employees and key customers to ensure stability, continuity and to instill confidence in current management.

Conclusion

Early consideration of these matters will assist you in confronting any hostile bid on the front foot, ensuring that you are in the best position to deal with any unsolicited offers made and ultimately increasing the likelihood of obtaining the best possible outcome for your shareholders.


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