Richard Wolfe took on a hostile takeover bid and his company’s independent directors to complete a management buy-out. M&A reports.

When Microgen made a bid of 180p per share for rival software provider Trace Group in June, beating the buy-out offer from co-founder and chief executive Richard Wolfe by 24p, most people believed Wolfe would concede defeat.

Indeed, Trace’s independent board recommended Microgen¹s bid and put out a statement saying they expected Wolfe to accept it. Furthermore, the earlier scheme of arrangement for Wolfe¹s acquisition vehicle, Tulip, was lapsed by Trace’s independent directors just hours before Microgen’s bid was made ­ without Wolfe¹s knowledge. As a result, under the rules of the London Stock Exchange, Tulip would not be allowed to bid again for another 12 months.

Wolfe admits that he could have ended his buy-out bid at that point and sold out to Microgen ­ and as a 24% shareholder in Trace he would have pocketed millions. But he wanted to do what he believed was best for the business and its 200 employees, even if it meant losing out on a windfall.

Moreover, Wolfe and his advisers were sceptical about Microgen¹s intentions for Trace. “In our view it was clearly an opportunistic bid for an asset-rich company,” says Adam Duthie, partner at law firm Bevan Brittan and lead adviser to Tulip on the buy-out. “Microgen’s offer document provided the usual words of comfort as far as the treatment of employees went, but you didn¹t have to look too hard to read between the lines that Trace’s core assets would be stripped out and used to fund the acquisition.

“There would also be rationalisation and a lot of people would lose their jobs.” Wolfe was determined that this should not happen: “It is important that shareholders and directors recognise that the worth of the company has also been generated and increased by the staff. The trouble with a lot of acquisitions is that the interests and views of the staff are not considered to be significant compared to those of the shareholders, but we¹ve got some wonderful people at Trace who have been with us for a long time. What do they get out of an acquisition? Practically nothing. Whereas the shareholders get all the benefit and that¹s the applecart I wanted to overturn.”

Understandably perhaps, Trace’s independent directors did not share Wolfe’s idealism or concerns, and remained set against him continuing to recommend Microgen¹s bid. As a result, relations between Wolfe and the directors deteriorated quickly. “I believe nothing else mattered to the independent directors besides getting the maximum price for the shareholders,” Wolfe says. “I have some sympathy with this view, but I don¹t agree with it. It got to such an extent that they told me that unless my offer was at the same price or higher than the other bid they would not support me, which I found a bit strange.”

Best laid plans

This was a far cry from when Wolfe announced his buy-out offer via a scheme of arrangement of 135p per share back in April. At the time he never envisaged the battle that would ensue, rather expecting it would be a simple way to ease his eventual retirement out of the company and pass the business on to his staff, while also giving shareholders a healthy return.

“The deal not only offered a premium of more than 50% to the shareholders, which all accepted was a significant and acceptable increase to the then share price, but also passed the company free of charge to the staff, which is something pretty unique, especially for a publicly-quoted company,” Wolfe says.
But shortly after the buy-out announcement, Microgen said it was interested in making an offer, which duly followed at 155p per share on 1 June and Trace’s independent directors unilaterally lapsed Tulip¹s bid.

Back in the game

Nevertheless, Wolfe refused to be beaten and Duthie appealed to the Takeover Panel on behalf of Tulip. After explaining that the scheme of arrangement had been unfairly lapsed, the Panel allowed Wolfe to make a new offer for Trace. The Panel told Tulip that any offer had to at least match that of Microgen¹s and the two offers would lapse co-terminously.

Importantly, Tulip also retained the strong support of its funder, Fortis Bank, and of Charles Stanley, its financial adviser. “Fortis played a crucial role because of the flexibility of the support they provided,” Wolfe says. “Most banks look for 90% shareholder take-up before they fund an acquisition. Fortis were quickly prepared to go to 75% and had it been necessary would have gone down to 50%. They showed an on-going level of commitment, understanding and support well beyond that which one would normally expect from a major bank.”

With his bid of 156p per share for Trace ­ valuing the company at £22.2 million ­ back on, Wolfe went out to shareholders with renewed vigour. Despite a listing on the LSE, a significant percentage of the Trace Group shares were still held by a large number of individual shareholders. Indeed, these were to prove crucial to Tulip¹s success.

Through his shareholding, Wolfe and various members of his team could initially count on 39% of the share vote, but he still needed to convince holders of another 11% of the share capital to accept his bid for his offer to succeed.

Independent voice

Both offers were sent to shareholders, but Wolfe was pleasantly surprised with the reaction he received. “What amazed and sustained me was the support I got from outside shareholders,” he says. “Tulip’s offer touched a vein that I wouldn¹t have believed existed to the extent that it did. Outside shareholders voted for Tulip, even though they were giving up 24p per share because they liked what we were doing for the staff.”

“These shareholders had nothing to gain from it except that they felt accepting Tulip’s bid was the right thing to do, which was wonderful.
Investment companies won’t do that and yet they also represent their individual shareholders (many of whom presumably hold similar views) and even ethical funds have difficulties in reconciling the needs of their own performance and considering the interests of the staff in situations such as ours.”

It was these individual shareholders who tipped the balance in Tulip¹s favour ­ but only just. Duthie says the difference between success and failure was just 8,000 shares out of more than 14 million ­ about 0.06% of Trace¹s share capital.

When Tulip achieved the 50% acceptances it required, Microgen¹s bid lapsed and the buy-out was able to complete. Meanwhile, Trace’s disgruntled independent directors issued a statement to the stock exchange expressing their “extreme disappointment” that Microgen’s offer had been rejected.

In hindsight, Wolfe is unrepentant in feeling the independent directors should have conducted themselves in a different manner in trying to secure Microgen¹s takeover. “There were aspects of the transaction and circumstances that on our side gave concern and dismay about the way things were done,” he says. “There were some difficult times and challenging situations to contend with.” In particular Wolfe pays tribute to Bevan Brittan’s Duthie. “Without his and his firm’s unfailing support and understanding our offer simply would have failed. They are an example of what many legal practices aspire to but seldom achieve.”

Pass it on

Post-deal, Wolfe and Duthie continue to plan a transfer of the company to the staff. While this will be complicated ­ Trace has four subsidiaries ­ Wolfe has clear ideas of how he wants it to work. Rather than set up a co-operative, he wants to transfer shares in each business to the staff, including those who work in head office. This way, he feels, the staff will psychologically feel they own their company. As an example any decision to be made on whether an offer for a company should be accepted will be made by the staff of the company. They can decide on their own future and whether their interests are being best protected.

The deal will be funded through a whitewashing of assets and Wolfe and many others taking loan notes. Although, in keeping with the deal, he plans to be flexible about when his loan notes are paid back ­ he does not want investment in new products to suffer because of having to make repayments to him.

While passing the company on is the ultimate aim, for Wolfe the greatest moment came just after the deal¹s completion. “Meeting some of the staff the day after gave me a lot of personal and professional satisfaction; to see how much it meant to people whose jobs had been protected and who otherwise would have faced an uncertain future and who can now also receive substantial sums when they too, for example, retire,” he said. “The values held and the actions taken by the city should be transparently questioned more often and by more than mere words.”