Market report (2/5)

Written on the 17 June 2009

LAST month we looked at how to recognise a potential takeover bid and strategies to keep hostile bidders at bay. But if it’s too late for that, it’s time to learn how to really play chess. No doubt many readers would have heard exotic jargon such as ‘corporate raiders’, ‘white knights’, ‘black knights’, ‘poison pills, ‘neutron bombs’ and the like. The reality is that takeover activity is tightly regulated in Australia and many of the elaborate defence tactics used elsewhere (particularly in the US) are either difficult or impossible to employ within the bounds of Australian law (or simply aren’t suited as they have developed as a response to conditions which don’t exist in Australia). Consequently, much of this jargon just clouds out the real options. To demystify what works in Australia, Here some pointers for target boards:

Assemble your defence team – You must have an effective communication and media strategy and a team with the ability to respond quickly with positive messages. It’s also important to anticipate potential negative publicity and to have advance strategies to adequately address and respond to it.

Focus on value – As a director of the target, your job is to demonstrate the highest underlying value of securities possible. Regular communication about value and any external factors that may result in company shares or assets being undervalued is important to properly set expectations, for both shareholders and bidders to understand the company’s true or potential worth. Don’t accept a bidder’s proposed price as being a true indication of worth and remember that listed entities are being discounted for reasons unrelated to their actual performance or asset base. Board members need to have a genuine understanding of value and if you don’t, make sure you have an independent expert close at hand as they will be required to compliment your value position. Continuing to create value (e.g. by speeding up projects and new developments in the pipeline) will also demonstrate the ability and competence of current management. If responsible management allows, consider increasing your leveraging or revaluing assets upwards. Leveraged targets are likely to be less attractive and erode the bidder’s ability to use surplus borrowing capacity either in financing its bid, or carrying out its stated business plans post-acquisition, while asset revaluation will ensure that shareholders hold out for the best value.

Assess and scrutinise the bidder’s management strategy post-acquisition – Have a good understanding of your opponent’s strategy. Look for flaws in their proposed management plan and assess the bidder’s motives. If there is a lack of industry experience, an intention to sell off strategic assets that may affect long-term business prospects, or the likelihood of canabilising one another’s market share, your shareholders need to know. On the positive side, listen to and learn from the bidder. If you can successfully implement the bidder’s proposed strategies, your pre-emptive strike might pay off as shareholders’ incentives to accept the deal will be eroded.

Create loyal or strategic shareholders – ‘Friendly’ shareholders with strategic parcels is a key defence strategy. While things like employee share plans can create a pool of loyal shareholders, it is generally larger shareholders with some special relationship to the company that can add the most stability and value. If seeking to raise equity, consider your trade partners and think how you may be able to structure the deal to offer arrangements which may terminate on a takeover event occurring. For example, key licence or distribution arrangements, or off-take arrangements will be commercially valuable and shareholders with these rights will be keen to avoid events that whittle them away. A share-buy back may also increase relative voting power of friendly or loyal shareholders whilst bolstering EPS.

Asset redeployment – Use of assets has a significant impact on value. If resources are stretched, selling off non-core assets or entering into joint ventures may unlock and positively impact value. Spinning-off assets into affiliated companies may also decentralise operations so as not to create one very attractive target.

Make your own takeover play – As a defence strategy, making a play for another entity has 2 major benefits. (1) Generally, creation of a bigger and better entity will decrease vulnerability to takeover; and (2) Due to its increased size, complexity and/or asset base, it may be more difficult or costly for the bidder to proceed. Making a play for the raider (known as the ‘Pacman Defence’) may also radically change the playing field, as the bidder’s initial move was probably provoked by potential synergies between the two entities.


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