The U.K.’s updated Takeover Code was supposed to make acquisitions of British companies more transparent. Instead, it’s having the opposite effect.
The stricter rules, in place since 2011, sowed confusion among traders and analysts during Pfizer Inc.’s $117 billion play for AstraZeneca Plc this month. Conflicting explanations from the companies caused shares to swing as investors tried to figure out just what could actually happen under the guidelines.
Some traders were puzzled again this week after Pfizer said it wouldn’t make a formal bid for AstraZeneca, ruling itself out of doing so for six months. While that so-called Rule 2.8 statement and the standstill period are both required under the takeover code, just how firm the moratorium is quickly became a subject of debate. In fact, there are two scenarios under which Pfizer can bid for AstraZeneca again before November.
“People were super confused,” said Mark Schoenebaum, an analyst with ISI Group LLC in New York. And there were consequences for traders looking to allocate their bets on when Pfizer could try to revive the deal, he said. “It’s highly relevant to a risk-arbitrager if they could raise their bid.”
After three months have elapsed, the British company may invite Pfizer to re-enter discussions, or Pfizer can make its own approach with a single knockout offer it feels sure AstraZeneca would be able to recommend to its shareholders. If that’s rejected, Pfizer must wait until the full six months have expired before making a renewed approach.
A representative for the Takeover Panel, which administers the code, declined to comment.
Even before this week’s statement, a debate over the rules moved AstraZeneca shares as the companies issued dueling statements with their conflicting interpretations of what could happen after Pfizer issued what it called its “final” offer.
On May 19, “in response to enquiries from market participants,” Pfizer said it was permitted -- in certain circumstances -- to raise that bid above 55 pounds ($92) a share. AstraZeneca disagreed, putting out its own statement with a different interpretation “following some questions from shareholders.”
Traders who bid AstraZeneca’s New York-listed shares up 1.8 percent after Pfizer’s statement, then saw the stock price swing in the opposite direction after AstraZeneca’s.
The updated rules owe their creation to the 2010 hostile takeover of Cadbury Plc by the U.S. company known at the time as Kraft Foods Group Inc. Then, a takeover battle lasting months sent Cadbury shares on a roller-coaster trajectory and prompted politicians including Vince Cable, the U.K.’s Business Secretary, to call for a more regimented system.
The Takeover Panel has said its rules are in place to keep target companies from coming under extended siege by hostile acquirers, and to impose order on what can be an unruly M&A market. With dealmaking subdued since the global financial crisis -- until this year, many foreign investors haven’t had much opportunity to get acquainted with the code’s provisions.
Making them intelligible to foreign observers means first of all explaining that they aren’t law in a conventional sense. The Takeover Panel is a voluntary organization, with a small permanent staff and bankers and lawyers joining on temporary rotations.
The most severe penalty the panel can impose for violators of its rules is “cold-shouldering,” a sort of financial scarlet letter that would prevent London dealmakers from doing business with the offender for a specified period.
“The panel has some sanctions at its disposal which make people pay attention to it,” said Leon Ferera, a partner at Jones Day in London who also served on the Takeover Panel for two years. “They include so-called cold-shouldering and public criticism, which can be embarrassing particularly for professional advisers. Companies and their advisers generally also tend to follow the rules because they realize that they make for a more orderly market which benefits everyone.”
Among other provisions of the regulations: companies must put out a statement clarifying their intentions at the first hint of an impending deal in the media, and act on those intentions within 28 days thereafter -- known as a “put-up or shut-up” period -- or “PUSU” among M&A insiders.
During the PUSU period, an acquirer who’s been outed needs to either make a formal offer, or step away for six months unless the target consents to an extension.
British retailers Carphone Warehouse Group Plc and Dixons Retail Plc confirmed they were in talks to merge, after being forced to reveal their discussions by a M&A-focused blog in February. After the 28-day period, they extended the deadline once before reaching a deal this month.
More recently, Stryker Corp. was forced yesterday by the Takeover Panel to issue a statement denying plans to bid for Smith & Nephew Plc after the Financial Times reported the U.S. firm was preparing an offer. Stryker Chief Executive Officer Kevin Lobo later told Fox Business News that the company was in the early stages of evaluating a purchase. The media speculation and surge in Smith & Nephew’s shares led the Takeover Panel to request a statement, he said.
It’s not hard to understand investors’ confusion. Take, for example, the section of the takeover code that lays out exceptions to the mandatory cooling-off period after a failed bid. It does not make for easy reading.
“The Executive may set these restrictions aside in the circumstances set out in paragraphs (b) to (d) of Note 2 on Rule 2.8.,” the code says, referring to the panel. “The Executive may also, at the request of the offeree company, consent to the potential offeror recommencing active consideration of an offer, but such consent will not normally be given within three months of the dispensation having been granted.”
The system doesn’t count Pfizer Chief Executive Officer Ian Read among its fans. In an interview with Britain’s Telegraph newspaper on May 27, he said the rules “are not very conducive to getting to the right solution for shareholders.”
“Some investors felt that it would have been desirable for the negotiations to proceed beyond this week, so the takeover panel did constrain the takeover process,” said Colin Mayer, a professor of management studies at Said Business School at Oxford. “As in any transaction, it’s difficult to make everybody happy.”