Bankers Chafe Under U.K. Takeover RulesAaron Kirchfeld and Matthew Campbell
Investors in U.K water utility Severn Trent Plc were anticipating a windfall when news leaked in May of an impending takeover bid by a Canadian-led consortium. The next day, the stock jumped as much as 19 percent.
A month later, the proposed acquisition was dead. Severn Trent’s management, which deemed the bid too low, benefited from new takeover rules, unique among major economies. It refused to enter into negotiations while a 28-day deadline for the acquirer to make a fully financed bid came and went. Since then, Severn Trent shares have dropped 12 percent.
The aborted deal shows how the rules, introduced by the U.K. Takeover Panel in 2011, are strengthening the hand of target companies and, critics say, holding back some U.K. transactions even as global deals rebound, helped by Verizon Communications Inc.’s $130 billion buyout of Vodafone Group Plc’s stake in their wireless venture. The most controversial provision of the directives requires companies to disclose talks at the slightest sign of a leak, triggering the 28-day timeline for a formal bid.
“The consequences of a leak are pretty significant under the new rules, which can make buyers more cautious and lead to a dampening effect on M&A,” said Tim Gee, the London-based head of global mergers at law firm Baker & McKenzie. “Buyers now have to do a lot more blind work before initiating contact to make sure they’re ready to go.”
The Takeover Panel, the world’s oldest acquisition oversight body, introduced the tougher regulations a year after the hostile takeover of chocolate maker Cadbury Plc by Kraft Foods Group Inc. in 2010 sent Cadbury shares on a roller-coaster ride.
They come amid other changes to rein in the perceived excesses of London’s financial sector that have been encouraged by politicians including Business Secretary Vince Cable. After a series of scandals, U.K. regulators are making it more difficult for companies controlled by overseas billionaires to list on the London Stock Exchange and are taking a harder look at the foreign operations of natural resources firms.
The so-called Cadbury Law stipulates that any hint of a transaction involving a U.K.-listed target -- unusual stock movement, a news article based on anonymous sources, or even a tabloid market column that cites stock-trader chatter -- can force a company to issue a press release confirming or denying the existence of negotiations and identifying any potential bidder.
At that point, an acquirer has 28 days to “put up or shut up” -- either making a firm, fully financed bid or walking away for six months, unless the target requests an extension. M&A insiders call it the “PUSU” period.
Underscoring how practices have changed, earlier this month Vodafone twice issued press releases confirming media reports on its talks to sell its stake in Verizon Wireless -- even though bids for assets aren’t the focus of the new rules.
The regulations are meant to discourage so-called virtual bids that send stocks on a speculative tear, putting target companies in a defensive position and harming shareholders and employees if the bid never materializes, the Takeover Panel has said.
The U.K. rules stand in sharp contrast to the U.S., where companies aren’t subject to disclosure requirements and can simply refuse to comment on speculation or stock moves.
“The 2011 reforms have achieved the Takeover Panel’s aim of swinging the balance of power in an offer situation away from the bidder in favor of the target,” said Charles Jacobs, an M&A partner at Linklaters law firm in London.
For some bankers and lawyers, the directives have shifted too far in favor of targeted companies. Once talks are announced, the management of a stalked company holds most of the cards. Since a target company must consent to an extension of the 28-day deadline, executives can run out the clock if they choose.
A spokeswoman for Severn Trent declined to comment, referring only to earlier statements that the company gave “careful consideration” to all proposals and the bidder wasn’t able or willing to “bridge the value gap.”
Management at Kentz Corp., a U.K.-listed oil-engineering company that’s fighting a takeover offer from rival Amec Plc it views as too low, may also end up benefiting from the rules. So far, it has refused to enter into talks or allow access to its books before a Sept. 16 deadline that kicked in after news Kentz was approached broke on Aug. 18. Amec’s offer was at a 22 percent premium to Kentz’s share price before the leak.
“It’s good to give management at the target company the tools to say no, but there are many practitioners who believe the pendulum has swung too far,” said Selina S. Sagayam, a London-based partner at law firm Gibson, Dunn & Crutcher LLP, who has worked at the Takeover Panel.
The deadline played a role in the collapse of merger discussions between Airbus owner European Aeronautic, Defence & Space Co. and BAE Systems Plc. After a story by Bloomberg News last Sept. 12, the two companies were forced to confirm the talks the same day, sparking a flurry of political controversy in Germany, France and the U.K.
When the talks fell apart a few weeks later, some advisers blamed the leak and subsequent mandatory announcement for hurting the deal, as discussions had to be rushed with the German government to meet the timetable.
“The likelihood of getting the deal would’ve been higher if there had been more time to educate the capital markets and politicians,” said Stefan Maichl, an analyst at Landesbank Baden-Wuerttemberg in Stuttgart, Germany. “Whether the deal would’ve gotten done in the end is impossible to say, but it would’ve helped.”
Private-equity firms are especially critical of the new regime. The time limit for conducting due diligence increases the risks of getting a deal done, making buyout firms more hesitant to pursue public companies, said one London-based private-equity executive, who asked not to be identified because he didn’t want to be seen publicly criticizing the Takeover Panel. A ban on breakup fees, which can cover a firm’s costs if a deal craters, has also upset private-equity firms.
“Our anecdotal conversations suggest various aspects of the changes are proving difficult for our members,” said Simon Horner, the director for policy and public affairs at the British Venture Capital and Private Equity Association.
Some U.S. companies have voiced concern about being identified if they pursue a U.K. target, said two lawyers who have worked on transatlantic deals and asked not to be identified discussing client issues.
“The takeover code can be off-putting to non-U.K. buyers looking at the U.K. for the first time,” said Andrew Bell, head of European and Asian M&A at investment bank Jefferies Group LLC. “The timetable and real possibility of your name being disclosed before a deal is agreed can be intimidating. So, when advising non-U.K. clients, we work hard to ensure they take a well informed and balanced view of the code.”
With many factors affecting the frequency of deals, it’s difficult to prove the rules are directly to blame for discouraging takeovers, M&A experts said. In a study released in November 2012, the Takeover Panel said the number of firm bids was roughly the same as the year before, around 80.
There have, however, been fewer U.K. hostile offers this year and last -- 5 in 2013 and 4 in 2012 -- than in any year since 2002, when there were 3, according to data compiled by researcher Dealogic.
The Takeover Panel also rejected complaints from private-equity firms that 28 days isn’t long enough to arrange and finance a transaction. Only 15 target companies requested an extension, and in all cases it granted them, relieving pressure on buyers to secure a deal quickly, the Panel report said. A spokesman for the Takeover Panel declined to comment.
The takeover rules, along with a crackdown by the U.K.’s markets regulator on insider trading, have been factors in keeping more deals secret in London, which a Cass Business School study showed is the world’s leakiest M&A market.
The value of U.K. deals that showed significant pre-announcement stock trading fell to 13 percent of the total between 2010 and 2012 from 22 percent between 2004 and 2007, a steeper decline than in any other market, according to the study. The most recent global average was 9 percent.
In another study, the Financial Conduct Authority regulator found abnormal share-price movements before the announcement of 15 percent of deals in the year to March, down from as high as 31 percent in 2009.
In a city once known for cozy relationships between dealmakers, public relations firms and journalists, “the stricter rules and enforcement have led to a cultural shift,” said Scott Moeller, director of the M&A unit at Cass and a former investment banker at Deutsche Bank AG. “Leaks have definitely gone down since the changes.”
The most important test of the Panel’s new approach will come as merger volume picks up. Although the first eight months of the year were on track to be the slowest in a decade, with about $82 billion in transactions, M&A volumes are rebounding thanks to the Verizon-Vodafone transaction and Microsoft Corp.’s agreement to buy Nokia Oyj’s handset business for $7.2 billion, both announced this week.
A more robust business environment may mean a higher proportion of leaks, as dealmakers get more bullish about their chances of completing transactions, said Philip Whitchelo, vice president of product marketing at IntraLinks, which operates electronic data rooms for M&A transactions.
“If markets start to recover and people feel more confident about getting deals done, then there may be a pick-up in leaks,” he said in an interview. “But I don’t think we’ll return to the pre-2007 levels. Regulators will ensure that doesn’t happen.”