Deals

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

(Corrected )

When a company rolls over and accepts a takeover it has vigorously resisted, the directors always look a bit awkward as they eat their words.

For a model example of a company choking on its earlier rhetoric, look no further than a $2.7 billion deal agreed on Monday.

Why do directors put them themselves through such humiliation? Because they are scared of shareholders.

Back Where we Started
Elis's £12.50 takeover bid restors the value lost in two profit warnings since October
Source: Bloomberg

Berendsen Plc, a laundry firm, has set out why it accepted a 12.50 pounds-a-share bid from French rival Elis SA. The offer, it says, delivers the British firm's "medium-term value potential," all the more so given that shareholders will get to keep their imminent 11 pence dividend.

All this sounds like it's being said through gritted teeth. Berendsen was only able to wring about 6.5 percent more out of Elis since the buyer made its ambitions public. The company said Elis's pitch of 11.73 pounds-a-share "very significantly" undervalued the company's prospects and a deal posed "substantial" risks because of the leverage involved and the difficulty of integrating two companies with opposing business models.

Patient Value
AstraZeneca shares have outperformed the FTSE 100 since Pfizer's failed approach in 2014
Source: Bloomberg

It's hard to avoid the impression that Berendsen's managers believed they too could deliver that "medium-term value potential" if given enough time -- say, 18 to 36 months -- and shareholders might be a lot better off in the long term by not diluting their exposure to Berendsen's potential recovery through sharing ownership with Elis.

So why cave in? The unspoken explanation is that shareholders didn't want to lose a deal. In the U.K., directors face a shareholder vote every year, and can be ejected sooner by a special meeting. Ignoring shareholders is to lose one's job and put oneself at risk of not getting another one.

Contrast this with Akzo Nobel NV, the Dutch paintmaker that just fought off an offer from PPG Industries Inc. against its will. Dutch directors aren't so easy to eject.

In the U.K., memories of AstraZeneca Plc still weigh. Three years ago, the drugmaker rejected an offer from U.S. peer Pfizer Inc. at 55 pounds a share, a 47 percent premium to the undisturbed stock price. Some investors were furious that management resistance got in the way of a deal.

Yet AstraZeneca is starting to vindicate boards that show some spine. The shares are now around 53 pounds. With dividends reinvested, shareholders are sitting on 61 pounds a share, according to Bloomberg data. Much of this came from a big boost last month. You have to be patient in pharma. The value comes in big dollops with success in the lab.

Shareholders might think they would have still been better off by taking Pfizer paper. The cash and Pfizer stock on offer would be worth around 75 pounds per AstraZeneca share today, including dividends paid. The snag is that the takeover probably would never have materialized even if AstraZeneca management backed it. Subsequent changes to U.S. tax laws undermined the basis of the transaction -- a risk AstraZeneca cited in rejecting a deal.

Elis may have been able to buy Berendsen by going hostile with its first offer. Alternatively, Berendsen's share price would have tanked had Elis abandoned its pursuit. Management would then have come under huge pressure and might have been ejected. We'll never know.

But it would be good to see more British bosses willing to their defend long-term view against shareholder pressure -- and see what happens.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Corrects fifth paragraph to remove reference to offer being Elis's first.)

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net