Unwanted Attention

Bid fever took hold of many European markets towards the end of last year. From retail to steel manufacturing, and even the London Stock Exchange itself, a surge in high-profile M&A activity pushed stock markets to increasingly dizzy levels.

The scale of takeover activity in 2005 was a sharp increase from recent years, reminding many of the heady days of the dotcom bubble early in 2000. The trend continues unabated in 2006 and is bolstered by European regulatory changes aimed at opening up markets, such as energy, telecommunications and gaming, to more competition.

Looking at these numbers across all sectors, it has become evident that 2006 is shaping up to be another strong year for M&A activity. Eager sellers of businesses have been the main beneficiaries of the strong M&A market, with competition for high-quality acquisition opportunities pushing up the sale prices. But what of the unwanted attention, the more 'unfriendly', hostile bids?

M&A fever is felt in both recommended and hostile bids; according to analysis by Thomson Financial, the combined value of unfriendly or hostile takeover tenders in Europe has reached $195bn in 2006 to date, compared with $12bn in the US.

With heat in the market, it is important that companies are wary of potential hostile bids and the negative consequences of lack of preparation.

SEARCHING QUESTIONS

The most important question to ask has to be 'Is my company at risk?' Research into hostile takeovers conducted by Deloitte and Cass Business School has outlined a number of key characteristics of companies likely to receive a takeover bid.

Firstly, lower turnover growth was present among companies targetted for takeover by a rival organisation. Stagnating employee growth is another indicator, suggesting hesitation among the board to take on new staff and expand.

Thirdly, the members of the board own fewer shares in their own company. Last, but not least, a low ratio of tangible assets to market capitalisation is another factor in attracting potential bidders for these asset-rich companies.

INITIAL RESPONSES

Once a bid is received, Takeover Code obligations require an initial response within fourteen days. This is insufficient time to prepare a robust response. An inappropriate response to a hostile bid can damage share price, investor sentiment and management credibility, so it is important that companies are alert to predatory acquirers.

It is for these reasons that a bid defence plan is increasingly becoming part of large companies' corporate governance plans and we are even seeing insurance companies offering protection against the cost of defending a hostile bid.

However, there are a number of preparations that can be made in advance to avoid frantic number-crunching as soon as a bid is received. Above all, a company can prepare itself for a takeover bid by keeping the appropriate data in place and updated, which creates an air of confidence, efficiency and control.

BE PREPARED

A proper review of a company's track record will include digging up data, analysing trends, defending errors and justifying broken promises.

Bidders will not just have spent a long time examining financial performance; they will also have analysed what the directors have promised and failed to deliver, to expose any weak points. Taking all these steps into consideration will help justify any changes and modifications made to the corporate strategy or procedures.

The bidding process is kicked off by announcing the bid along with the basic terms of the bid and the conditions. The bidder then has 28 days to release the formal offer document. The defence document then has to be issued within a further 14 days.

However, if the bidder makes an announcement and posts the offer document at the same time, a company only has a fortnight to prepare a defence response. If the bidder's offer includes an offer of shares, then the defence team needs to make a similar analysis of the bidder in order to persuade investors that their current holding is better.

WHO IS PREYING ON WHOM?

Sometimes a bid can come from the least expected source. Nevertheless, there are a number of indicators company directors can look for. If, for instance, the directors suddenly stop dealing in their own shares, it might indicate that a bid is planned and the directors are therefore legally prevented from trading their shares.

Keeping in touch with investors' views will explain whether they think a company has a strong position or whether it has come to the end of its cycle.

When the defence strategy is prepared, the target company should be thinking about the weak spots in a likely bidder's track record and prepare suitable defence arguments. This in turn strengthens a company's position in the face of a takeover bid.

PROFIT FORECASTS

A profit forecast may be helpful, especially if it has been a long time since the most recent results announcement, or if there has been a significant change in growth rate. It is important to note, however, that during a bid process, forecasts are deemed sensitive information and, consequently, members of the board must not say anything that could be construed as a profit forecast.

If a bidder considers that a profit forecast has been made, the bidder may approach the Takeover Panel to demand substantiating evidence or a retraction. The same applies to valuations of the property portfolio or of a 'crown-jewel' subsidiary that seems to be undervalued.

GET YOUR DATA TOGETHER

It is vital to choose the right adviser. Having a 'beauty parade' during a live bid is not ideal. Next, make sure you have lists of phone numbers, fax numbers and emails close to hand for all the executive and non-executive directors, the auditors, the financial advisers and stockbrokers, the lawyers, the PR people and any other relevant experts needed in a hurry.

Pulling together a cold room of financial information, key commercial contracts and banking documentation, especially on covenants or property deeds, avoids criticism and looks more professional and speeds up response times.

In addition, a company should serve notices on any nominees with new holdings to find out who the ultimate beneficial owner is.

Even if the bid never materialises, like insurance, it is better to pay the premium and never make a claim. An impartial review of the management's track record should stiffen resolve to perform better in future. It is always surprising what comes to light when you go through these processes.

By anticipating arguments that a bidder may raise, the board has to stand back and objectively consider the position of the company and the way it is going forward.

Bid activity to date in 2006 highlights that the surge late last year has not run out of steam. Now is the time to be observant, aware and, above all, prepared.