The cut and thrust of a hostile takeover bid makes an excellent spectator sport, but what's it like on the inside? James Graham reports
Everyone loves a good hostile takeover.
It represents the true spirit of business, a buccaneering fearlessness in pursuit of even greater wealth and influence.
There is something attractively reckless about these bids - conducted without proper due diligence - that appear to put an entrepreneurial spirit ahead of the measured response of the accountant.
Better still, most high-profile cases are led by larger-than-life commercial swashbucklers like Philip Green, who threw £39bn on the table in exchange for British institution Marks & Spencer in 2004.
The bids are often surrounded by the associated war of words, refreshingly frank exchanges in the age of the glossy, bland corporate sound bite.
But unfortunately they are relatively rare because most parties want to avoid a hostile takeover at all costs.
For those at the heart of the process, it is expensive, risky and can be damaging to both businesses involved because all eyes are on the bid.
These are all qualities that add to the attraction for the impartial bystander.
The fact that such bids are rare makes them more interesting - illustrated by the coverage of Pendragon's hostile bid for Lookers earlier this year.
Days after sewing up its £3506m acquisition of Reg Vardy, Nottingham-based car dealer Pendragon turned its attention to Lookers, which also bid for Vardy.
It was an all-share take-it-or-leave-it offer, valuing the company at £3258m.
Manchester-based Lookers rejected it outright, insisting it was a poor deal.
In April 2006 the offer lapsed with a shareholder acceptance level of just 21 per cent, far lower then the 50.1 per cent required. "The timetable and the fact it was a paper offer made it quite easy to defend," says Michael Birchall, a corporate partner at Addleshaw Goddard who worked for Lookers on the deal. "Lookers knew the value couldn't increase.
It would have been far harder to defend a cash offer." But the 21 per cent doesn't tell the whole story.
Pendragon would have been far closer to the tipping point if it had persuaded GE to sell its 24.4 per cent stake, which eventually went to former CD Bramall owner Tony Bramall for £355.7m.
By pulling off this last-minute twist, Lookers had performed one of the classic hostile defences - the use of a white knight.
This is one of a handful of tactics, such as the poison pill.
But the best defence is a strong and effective management team.
Many hostile bids are prompted by the view that a company is underperforming.
If the board is doing a good job it stands a much better chance of winning the support of its shareholders. "The key is to run the business well," says Colin Gillespie, corporate finance partner at PricewaterhouseCoopers. "You must manage the City well, communicate regularly, speak to the shareholders, the analysts and have proper corporate governance.
If you've got those things in place it makes it more difficult for the bidder." Gillespie cites the example of construction group Amec, which found itself under siege from the Norwegian shipbuilder Kvaerner in 1995.
Certain Amec's board would reject an offer, Kvaerner didn't seek a recommended offer and instead acquired 10 per cent of Amec's shares and launched a hostile bid. "Amec's chairman and chief executive Sir Alan Cockshaw did all the classic things," says Gillespie. "He tackled the shareholders first, then the customers, suppliers, MPs and unions building a base of support." It worked and Kvaerner's bid stalled at 26 per cent, a stake the company sold two years later for a £322m profit.
More recently, the hotel group De Vere successfully fought off a partial offer from a rebel investor that had been on its heels for some years.
The Guinness Peat Group (GPG) last made a bid in 2004, with a strategy of returning cash to shareholders by selling off assets.
Warrington-based De Vere rebuffed the plan as "unsolicited and unwelcome" and GPG failed to galvanise wider shareholder support, allowing its offer to lapse.
De Vere's defence cost the business around £31m.
It now looks as if it is weighing up a more friendly approach.
In two previous statements the group has admitted it is in talks that "may or may not lead to an offer for the company".
This time the interested party is thought to be a private equity house rather than Guinness Peat launching another attempt.
But what if you are on the other side with a target in your sights? Phil Adams, managing director at investment bank Altium Capital, has led several hostile bids. "You need the element of surprise," he says. "It's the ability to strike quickly with the right degree of shareholder support.
If you don't have the support, you face a higher degree of risk." He put this theory into practice in 2004 while acting for building materials producer Ennstone on its £348m hostile bid for Surrey-based construction group Johnston.
Adams bypassed the board and went straight to the Johnston family, which had just over 50 per cent. "They agreed, then we rang the chairman at midnight telling him we would put out a statement in the morning, so they had no time to defend," he says. "The key is to try and get support upfront to increase your chance of winning.
You have to hope your conversations stay confidential.
But the average institutional shareholder is pretty discreet." The element of surprise can be elusive and if a plan to slowly acquire shares is noticed, it will push up their value, perhaps making the bid less attractive.
Malcolm Glazer was stalking Manchester United very publicly for more than a year, with each share acquisition feverishly reported in the press.
The surprise element was the successful persuasion of Irish racing tycoons John Magnier and JP McManus to sell their 28.7 per cent per cent stake.
Within hours of their decision, Glazer held nearly 75 per cent and the board had little option but to recommend the remaining shareholders sell up.
But whether you are attacking or defending, it is important not to get caught up in the fog of war.
While testosterone is flowing and pride is at stake it is possible for a board to forget its primary obligation to shareholders.
The offer may be an affront, but it might also represent a great deal for investors. "When I sit down with clients we always try and define what a win means," says Gillespie. "If you're a bidder and you've paid much more than you wanted to is that still a win? If you write off an absolutely cracking offer and the share price takes years to get back to that level, is that really a win?"
Also in: June 2006
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