Bid fever spread across many European markets last year. 2005 saw the scale of takeover activity increase sharply over previous years, affecting sectors from retail to steel manufacturing, and even the London Stock Exchange itself. This reminded many of the dotcom bubble days of 2000. The trend continues today, bolstered by European regulatory changes aimed at opening up markets to more competition. Looking across all sectors, 2006 is turning out to be another strong year for M&A activity. With such levels of activity, it is important that companies are wary of potential hostile bids and the negative consequences of ill preparation.
Questions in need of answers
With this in mind, the most important question to ask has to be 'Is my company at risk'? Research into hostile takeovers conducted by Deloitte and Cass Business School has outlined four key characteristics of companies likely to receive a takeover bid.
Firstly, lower turnover growth is highlighted as a key characteristic of companies receiving a hostile bid from a rival organisation. Secondly, stagnating employee growth points towards hesitations among the board to take on new staff and expand. Thirdly, comes members of the board owning fewer shares in their own company. Additionally, a low ratio of tangible assets to market capitalisation is another factor in attracting potential bidders to these asset rich companies. The research further reveals that companies are most susceptible to a takeover bid 86 days after their accounts have been published.
Once a bid is received, Takeover Code obligations require an initial response within 14 days. Given the short amount of preparation time, an inappropriate response to a hostile bid can damage share price, investor sentiment or management team credibility. It is important that companies are alert to predatory acquirers. For these reasons, a bid defence plan is increasingly becoming part of large companies' corporate governance plans.
Having observed the target company, and taking into consideration the weaknesses mentioned above, a hostile predator can spend months analysing a company's financial and competitive position before launching a takeover bid when it is least expected and the organisation is at its most vulnerable. However, there are a number of advance preparations that can be made to avoid frantic number crunching as soon as a bid is received.
Be prepared
A proper review of a company's track record is one of the most important considerations and can span the previous five years. This process will certainly include digging up data, analysing trends, defending errors and justifying broken promises. Bidders will have spent a long time examining not just financial performance, but what directors have promised but failed to deliver. Reviewing the track record will help justify the changes and modifications a company has made.
The bidding process is kicked off by announcing the bid along with the basic terms and conditions. The bidder then has 28 days to release the formal offer document - the defence document then has to be issued within a further 14 days. However, if the bidder makes an announcement and posts the offer document at the same time, a company only has a fortnight to prepare a response.
Keep an eye out
Sometimes a bid can come from the least expected source. Nevertheless, there are a number of indicative factors to look out for. If, for instance, the directors suddenly stop dealing in their own shares, this might be an indication that a bid is planned and therefore they are prevented from acting in the market. Keeping in touch with investors' views will explain whether they think a company has a strong position or whether it has come to the end of its cycle.
When the defence strategy is prepared, the target company should be thinking about the weak spots in a likely bidder's track record and prepare suitable defence arguments. These will strengthen a company's position in the face of a takeover bid.
Profit forecasts
A profit forecast may be helpful, especially if it has been some time since the last results announcement, or if there has been a significant change in growth rate. These forecasts are time-consuming processes, so should be started sooner rather than later.
It is important to note, however, that during a bid process, forecasts are deemed sensitive information, and therefore members of the board must not say anything that could be construed as a profit forecast. If a bidder considers that a profit forecast has been made, the bidder may approach the Takeover Panel to demand substantiating evidence or a retraction.
Stay in touch
It is vital to have chosen your adviser in advance. Having a beauty parade during a live bid is not ideal. Make sure you have lists of everyone's phone numbers, fax numbers and e-mails close to hand - that includes mobiles and home numbers - and also for all directors, auditors, financial advisers, stockbrokers, lawyers, PR people and other relevant experts needed in a hurry. Having these contact details to hand avoids delay.
Keep it filed
Pulling together vital financial information, key commercial contracts and banking documentation, especially on covenants or property deeds, avoids criticism, looks more professional and speeds up response times. In addition, a company should serve notices on any nominees with new holdings to find out who the ultimate beneficial owner is.
Sound preparations
Even if the bid never materialises, like insurance, it is better to pay the premium and never make a claim.
An impartial review of the management's track record should stiffen resolve to perform better in the future. It is always surprising what comes to light when you go through these processes. By anticipating arguments that a bidder may raise, it is helpful to stand back and consider objectively the position of the company and the way it is going forward.
Bid activity to date shows that last year's activity has not run out of steam. Now is the time to be observant, aware and, above all, prepared.
- Penny Avis is corporate finance partner, Deloitte, Tel: 020 7936 3000.
