August 23, 2017
The Rundown: Communications can hold the winning formula for unsolicited takeovers
Despite the best intentions to be a great owner, the board of the target company might take a different view. How do bidders ensure they win the day?
1. Don’t expect a red carpet – be realistic about the target’s response
Time and again, companies making an unsolicited takeover offer for a European company are surprised at the level of hostility they receive. This is especially true for foreign bidders, but by no means excludes bidders from the same market. If you make an offer, be realistic: the target company may not view you as the best owner for their business.
They may have strong and rational reasons to pursue a stand-alone strategy. More importantly, board members will often be emotionally attached to their independence, headquarters, brand and not least their individual positions. Even a high premium won’t necessarily win the hearts of these people. The more realistic you are about potential resistance, the better you can prepare for it.
2. Engage but show you mean business
Most bidders will prefer a friendly deal over a hostile takeover battle – not least because hostility usually comes at a price in terms of a higher premium, as well as increased antitrust and integration risks. Bidders should first give the target a chance to engage. However, it often makes sense to be clear that you will follow through with an offer even if the target does not cooperate.
Once it is clear that you will only go for a friendly transaction, the target company has a much better negotiating position or can just wait until you withdraw.
3. Be prepared for a leak
A well-advised CEO of a target company will not directly close the door when you first signal your takeover plans. However, don’t be fooled by an amicable atmosphere in talks. In many cases, the target company will leak the approach or even go for an official disclosure – often pointing out why they are undervalued or why the transaction doesn’t make strategic sense.
In a situation like that, you as a bidder have an interest to tell your story as quickly as possible. The easiest option to tell your story is to advance your official announcement. So make sure you are ready to announce before you first approach the target company. The prerequisites for that may be different in each country and may include boxes to tick beyond communications, such as the incorporation of the bidding vehicle or the financing confirmation from the lenders.
4. Make their investors your friends
There is one group that should be your natural ally in case the target company does not want to engage: their investors. If you offer them a decent premium, they have a clear interest that you do not walk away. The more pressure they exert on the target’s board, the higher the chance that they sit down with you at the negotiating table. If the premium you pay is deemed unattractive, a dialogue with the investors will also help you to understand how much you have to increase the premium to win their support.
5. Keep other stakeholders in mind
In many European markets, the board in a defense situation doesn’t only have to cater to their shareholders, but is also legally obliged to act in the interest of all stakeholders including employees and customers. It is usually fairly simple for a management team to mobilize these stakeholders for defense purposes.
Bidders are often at a substantial disadvantage because the target management has usually built trust among their local communities over many years, if not decades, whereas you are the intruder. However, employee representatives are usually pragmatic enough to at least listen to their potential new boss – the same is true for local politicians interested in you as a tax payer or local employer. Bidders should establish a dialogue with these groups sooner rather than later.
6. Be aware of the tightening rules for foreign investors
An additional challenge for non-EU bidders is the trend towards a more rigorous screening of foreign takeovers in the EU and a number of individual member states. While currently only 13 of the 28 states have formal systems in place to screen and potentially veto foreign takeovers, some of these states have been looking to introduce new regulation or are tightening their existing rules. In Germany, for example, the existing system was only amended in July 2017 and is now effectively applicable to such diverse industries as energy grids, telecommunication networks, airports, financial services, high-tech industries, and even hospitals.
Moreover, the President of the European Commission, Jean-Claude Juncker, is considering measures that could provide some reassurance to Members States concerned over their ability to adequately screen takeovers by foreign entities, including on national security and reciprocity grounds.
In the UK, despite talking tough on adopting a more active approach to scrutinising foreign acquisitions, Theresa May’s Government has been largely absent from debates over transactions involving major UK businesses and most observers have given up waiting for substantive reform of the UK merger control regime, as promised over a year ago.
In theory, post-Brexit the UK will have the opportunity to develop their own merger review regime that could be more rigorous or politically-motivated than is possible at present when major transactions are under the jurisdiction of the European Commission. But like much of the post-Brexit environment, there is virtually no clarity on how this might look when the UK is outside the bloc.
Foreign investors facing such scrutiny are well-advised to actively reach out to the key decision-makers to make their case and ensure that they get more than the biased view from a target company in defense mode.
7. Show your human side and win trust
Especially when you are from a foreign country, it is easy for the target company to label a foreign bidder as an aggressor with ruthless motives. To mitigate that, bidders should consider showing the local constituencies a human face and to be as transparent as possible about their motives and plans for the target company. Media, politicians and employee representatives alike will find it a lot more difficult to believe negative stories when they have met a real person.
8. Tune into local best-practices
Engaging personally will also give you a good impression of what it takes to convince people on the ground. Depending on the country, expectations may differ greatly. In Germany, for example, a number of high-profile unsolicited takeovers have been solved via a so-called investor agreement.
In such agreements, the bidder typically makes some commitment on jobs, sites and governance issues, often in combination with an increased offer price. In exchange for these commitments, the target’s board can drop its resistance and support the offer.
In short: When in Rome, do as the Romans do. Or at least, know what they expect from you to avoid being surprised by local habits that might endanger a takeover for a company for which you are the best owner.