US and the UK also differ in a small but important variation in phraseology when it comes to these types of share issue. A US open offer might be expressed as a five for four issue, signifying that shareholders will have an entitlement of one extra share for every four already owned, so ending up with five shares. In the UK a rights issue in the same proportions would be expressed as a one for four issue of nil-paid rights. [23]
In some countries (including the UK) shareholders electing not to exercise their rights will receive a cash premium when the rights lapse. An arrangement like this is at the issuer’s discretion. European practice is for the issuer (or lead manager) to tender lapsed rights automatically with the proceeds going to the initial holder of the right. Sometimes shareholders will use the money raised from the selling on of some of the rights to pay for the take up of the remainder.
Takeover bids
Potentially, a takeover bid for a company in which you have a shareholding is the most significant corporate action of all. It can also be one of the most complicated and drawn out of corporate events, especially in instances where the bid is unwelcome to the directors of the prey or where a takeover battle develops with two (or more) predators fighting over the target company.
In the UK the regulating body is the Panel on Takeovers and Mergers, normally referred to as “The Takeover Panel”, and takeovers have to abide by “The City Code on Takeovers and Mergers” (The Code).
‘Triggers’ along the way to a takeover
1 The first hint of a takeover bid could be a stock exchange regulatory announcement that shares in the target company had been acquired by a rival or a private equity firm.
2 Once the predator company (or companies acting ‘in concert’) have acquired 30% or more of the shares of the target company, the code requires them to make a ‘conditional offer’ for all of its shares. This offer is conditional upon enough other shareholders agreeing to sell their shareholdings for the predator to gain a controlling interest. Note that the offer must value the target company’s shares at no less than the price paid by the predator in its most recent purchase of those shares.
3 Once the predator has more than 50% of the shares, they have the power to out-vote any other shareholder. This is the point when, object achieved, their offer can become unconditional. However, the acquirer may postpone making the offer unconditional until they have agreements to sell that would bring their interest to as much as 75% of the voting shares or more. The predator company has a deadline of 60 days after the offer was announced for it to be made unconditional.
4 Once the predator has 90% of the shares the predator can buy up the remaining shareholdings compulsorily. At this point the target company’s stock exchange listing ends.
While takeovers are often an opportunity for investors to make a profit on their investment, there are a number of potential drawbacks. A successful takeover could mean saying goodbye to a company with an excellent record for dividends. Indeed directors sometimes play on just that fact to foster shareholder loyalty, or they may decide to pay a special dividend in an effort to thwart a takeover (as happened in the takeover bid by MAN of Germany for the Swedish truck maker, Scania). If an acquiring company pays for the takeover by offering its own stock to the target company’s shareholders, they may lose out if the merged companies fare badly after the takeover and the share price declines.
Where the shareholder may see pros and cons for the takeover bid, for the directors of the target company the situation is bound to be clear-cut and unwelcome. A hostile takeover bid can be an explicit or implicit claim that management of the predator company would make a better job of managing the target company than its current directors, who will, if the bid is successful, almost certainly be voted off the board. [24]
A takeover bid presents the shareholder with three basic choices: [25]
1 Accept the offer
2 Reject the offer
3 Sell their shares on the open market in the course of the bid. This option may be attractive in a situation where the shareholder is doubtful that the bid will be successful but wishes to take advantage of the (temporarily) increased share price that the bid has brought about. Alternatively, the offer may consist wholly or chiefly of shares in the acquiring company and the shareholder prefers to have cash straight away.
Takeover bids tend to be preceded by a period when rumours of bids abound and a subsequent stage when the intention to bid may be clear but the terms have not yet been announced. [26] Speculation about the price the predator may put on the target company’s shares will be reflected in a higher (and possibly more volatile) share price at this time.
Poison pills
In some countries, it is common practice for companies to have “poison pills”, which are designed to make hostile takeovers more difficult. Typically, this might mean that once a shareholder acquires as much as 15% of the voting shares in a company, all the other shareholders are able to buy new shares at a big discount to the stock market price. Poison pills have been upheld by the Supreme Court of Delaware until recently but this may be beginning to change. They also occur in Japan.
In recent years the idea of “chewable pills” has grown in favour. These are poison pills with features to make them more acceptable to shareholders, such as shorter lifespans or a triennial review of poison pills by independent directors.
Reverse Takeovers
A reverse takeover can mean the acquisition of a larger company by a smaller one, or the acquisition of a listed company by an unlisted one. [27]
Agreed takeovers
This kind of takeover (or merger) accounts for some of the most important takeovers, such as the acquisition of mobile phone operator O2 by Telefonica of Spain.
Although an agreed takeover has a good chance of success, the shareholders should consider the reasons the target company’s directors have for recommending the offer. For example, an agreed offer may arise where several predators are interested in the target but there is one that the directors of the target company prefer. Also, the acquiring company may have gained the support of (some of) the target’s directors through offers of directorships in the merged company.
De-mergers
A de-merger occurs when a company spins off a business it owns into a completely separate company. This result is often achieved through an issue of shares in the de-merged entity to the shareholders of the original group (in proportion to their shareholdings). [28] The rationale for a de-merger may be that it permits each of the businesses to focus on their core activities or that the market capitalisations of the separate companies will become more than the market capitalisation of the original group, thus increasing shareholder value. To put it another way, it becomes clear that the original group is less than the sum of its parts.
For companies that are active in more than one kind of business, de-merger rumours can be a staple of comment by analysts and the financial press. This has been the case with Pearson, for example, which has divested itself of Royal Doulton, Madame Tussauds and its stake in Lazard Brothers and whose Financial Times subsidiary is a perennial favourite of de-merger speculation.
Severn
