In comparison to more mature markets such as the UK and the USA, hostile transactions have never been a major feature of the South African mergers and acquisitions landscape. But according to Soria Hay, executive director of equity and debt specialists Bravura, this is in the process of changing.
Historically, South African companies have perceived hostile transactions as particularly risky and so have tended to shy away from them. High-profile failures such as the Nedcor bid for Standard Bank have served to entrench this perception. The resultant effect is that South African companies lack experience both in defending themselves against such actions and in conducting themselves during hostile transactions. In the UK and the USA, on the other hand, hostile actions are considered part of the normal course of merger and acquisition activities, with the result that the basic principles are well understood and crystallised.
Hay believes that current market conditions will continue to spark an increase in hostile or uninvited corporate actions. To begin with, companies are trading at low values, which make them more vulnerable and more appetising for bidders. A relevant example is the recent iProp transaction, on which Bravura advised. The transaction started out as a friendly management buy-out, but niche financial services player Mettle recognised an opportunity and made an uninvited counter-bid. "Mettle`s bid could be expected because the original management bid was at a huge discount to net asset value," Hay explains.
Secondly, the comparatively low P:E multiples at which South African companies are trading, combined with the relative weakness of the rand, make local companies vulnerable to international players with deep pockets. The recent counter offer by UK software group Sage for SA accounting software specialists Softline is a pertinent example. Following its due diligence process, Sage offered shareholders R2.00 per share, a substantial increase over the original offer by management of R1.30 a share. A further international player, Dutch software company Exact Holdings, also entered the bidding war at the behest of a previous Softline manager. As at the date of writing, the Sage offer has been provisionally accepted by the Softline board.
Increased competition is another factor. "When companies are struggling to grow their businesses organically in tight markets, acquisitive growth (even when unwelcome) is one way of achieving the growth rates that analysts expect."
When there are competing bidders for a transaction, Hay says the Securities Regulation Panel (SRP) rules provide that all bidders have to be treated equally and given the same information timeously. The company also has to treat all shareholders equally and may not, for example, give management shareholders information about the competing bid before other shareholders have access to such information.
Another principle is that an offer should be finally implemented within 60 days of the first circular being posted to shareholders. The offeror may then not make another offer for a period of 12 months. "This is to protect companies from a protracted hostile price war," Hay explains.
The question is now what companies can do to defend themselves against a hostile bid. The SRP rules bar companies from obviously unfair tactics such as issuing more shares to themselves, selling material assets, or changing their line of business.
One of the options available to companies is simply to ensure that the company`s house is in order. "Had Standard Bank been performing appropriately, it would have been more expensive and thus less of a target," says Hay. Improving its performance after the Nedbank bid makes it less vulnerable to similar actions now. For the same reason of perceived under-performance, Sanlam has been mentioned as a possible take-over target. Companies that have large cash-piles are also vulnerable. "When companies have more cash than their market capitalisation, they are particularly attractive, and should be paying this cash out to shareholders to avoid a take-over."
Further, companies and their individual managers can, before an offer is launched, acquire their own shares on the open market to reduce their vulnerability. "However," Hay points out, "managers are not allowed to act in concert to thwart a bid. If they do so, they have to make an offer to minorities."
`Throwing mud` is another legitimate tactic, provided that it has a factual basis. Companies can make a case to shareholders that the bid is not in their best interests. They could also point out that more jobs will be made redundant than the offeror would like the public to believe. They can also lobby for staff support, as Standard Bank did. "Most companies know that a merger is virtually worthless without an incentivised management team," Hay remarks.
Finally there are less obvious defensive strategies, such as poison pills. "This is where you include in your contracts with key management a clause that, should a change of control take place or the assets of a company be sold in terms of section 228 of the Companies Act, management are entitled to substantial pay-outs," Hay says. Often used overseas, this tactic can make a deal far more expensive than the offeror bargained for.
In conclusion, Hay says that by far the most important defense tactic is for companies to build blocks of loyal shareholders. "This isn`t always easy, and requires an ongoing, pro-active investor relations programme, but when the crunch comes it can make all the difference."
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