In an era when simply getting deals done is proving ever more difficult, the implementation of new government takeover regulations was sure to attract derision and disappointment.
And so it has proved, with certain commentators speculating that the latest initiatives may well derail the tentative improvements in the M&A sector.
The Takeover Panel’s changes (see below), will come into force on 19 September 2011 with the aim of bringing clarity, transparency and speed to the takeover process. However, the mid-market is likely to feel the effects of many unintended consequences.
Main changes to the Code:
Naming – Bidders to be publicly identified by prospective target at an early stage, removing the ability to ‘stalk’ targets.
28-day bid period – Potential buyer has four weeks after its name becomes public to formally declare intention to make offer or not (‘put up or shut up’ period). If bidder withdraws then target cannot be pursued for six months.
Transparency – Disclosure of finance arrangements: source of funds, terms, interest payments, debt refinancing as well as advisory fees to be published. Buyers also held to account on commitments made in bid process.
28 TRANSPARENCY DAYS
Maureen Laurie, a partner at HR consultant Altaia Partners, reckons forcing bidding companies to announce who they are, and to submit a formal, binding and transparent bid within a 28-day period, will put additional strain on deals and change the overall ‘tone’ in which takeover negotiations are conducted – which is not to be welcomed.
‘Increased requirements for disclosure will apply to all deals – more detail, to more people and much earlier than before.’
Laurie adds that the new regulations mean that any commitments made in the initial 28 days will be binding, unless acquirers want to limp back to the Takeover Panel to negotiate a post-deal amendment.
As well as adding more strain to already fraught negotiations, many market professionals reckon the changes could actually throw up profound stumbling blocks to deals completing.
Simon Horner, public affairs manager at the British Private Equity & Venture Capital Association (BVCA), says that the pre-existing system was a very functional way of doing things.
He adds, ‘Stipulating that any bidder, particularly private equity, has to get all their agreements together in 28 days is going to prove very difficult.’
Horner believes that the Code has the potential to detract from shareholder value by putting off bidders from getting involved [in tentative talks] because they will have to make public their intentions – and they might have to spend a lot of money on a bid process that ultimately might fail.
He notes that while the Panel has agreed, in principle, to grant extensions to the 28-day period if presented with the request by the two parties in any deal (useful if two friendly companies wish to take a more calm approach to deal making), this option is not included in the Code and is therefore creating a degree of uncertainty regarding the 28-day period.
While wary of the implications that the changes could have on M&A, Steven Turnbull, a partner at law firm Shepherd and Wedderburn, feels that if a deal is worth doing from a commercial point of view then it seems unlikely that the amendments will stand in the way of a ‘determined’ and ‘confident’ bidder.
Turnbull adds, ‘I think they are likely to operate as some kind of a deterrent to particular kinds of players – the private equity community in particular – who may consider that the risks of reduced due diligence, and the absence of deal protection, increases the odds against a successful and profitable deal.’
Nowhere to hide
Steve Tudge, managing partner at private equity firm ECI, says that the new Code is a ‘frustrating’ development that will limit the number of public-to-private deals in which he is involved. ‘What they have decided to do, which is a fairly political decision centred on the Cadbury issue, is take the opportunity to make a difficult situation worse,’ he explains.
Looking at the AIM market, Tudge believes there are a lot of companies that listed in better times, when there was more access to capital, that are now languishing with a dead share price, illiquid stock and little to no interest from investors, and shouldn’t really be in the public sphere.
However, the changes announced by the Takeover Panel are set to make public-to-private deals increasingly difficult, Tudge adds, with the added naming of prospective acquirers another issue that he believes will stymie private equity involvement.
Tudge adds, ‘Private equity can’t afford to be named with deals that don’t work, as often a first announcement is too early in the process to know if the deal is worth pursuing.’
Pressure from the BVCA has led the Takeover Panel to announce a review of the Code in a year’s time, when the real impact of the changes can be analysed. But at a time when the middle market is in need of a long-awaited boost, the arrival of increased regulation threatens a lot of the hard work already put in.