The receipt of a takeover proposal is a critical moment for any listed company. A company’s response in the days, weeks and months that follow may have a profound impact on the value received by the company’s shareholders. Often, the surprise element of a takeover proposal leaves the target board on the back foot and losing valuable response time. For this reason, any listed company – whether big or small – should be aware of the steps it should take to be prepared for a potential takeover bid.
The view from the top
In a survey of non-executive directors of ASX companies conducted as part of our new book, Towns Under Siege, almost half of the respondents indicated they did not consider that most companies were adequately prepared for an approach by a potential bidder. One respondent added: “I suspect that many board members do not really know what being ready entails until they are in the thick of things,” while another raised the difficulty of convincing fellow directors to prepare for a possible bid in advance, particularly in preparing and updating a company valuation model.
Strategy vs tactics
An effective takeover response requires strategic and tactical preparation. Tactics can be said to refer to the short term day-to-day elements of the response, such as preparing a crisis response team, a response manual and a plan for managing key stakeholders. By contrast, strategy refers to the longer term themes of the response.
While tactical preparation is very important in responding to a potential takeover, arguably the most important preparation is the long-term strategic preparation taken by the directors and target company. Additionally, the conduct of the board in the period leading up to the receipt of any takeover proposal will significantly impact any contest for control that may develop.
It is possible for a target to be tactically prepared, in the sense that it has a response team in place along with draft ASX announcements, but at the same time be strategically unprepared. A strategically unprepared target would be one that does not have a firm sense of its own value or a thematic response that demonstrates the future value that the bidder must pay to earn a recommendation or control. Of course, the ideal combination is a target that is both tactically and strategically prepared, as demonstrated in the diagram on page 53.
The core elements of strategic preparation
a. Demonstrating business performance and value
There is no better preparation for a takeover approach than a company performing well, having a plan to deliver further value to shareholders and having the market aware of, and on board with, both the performance and the plan.
Sustained performance over time diminishes the risk that a bidder will obtain control for less than full value. It also drives board and management credibility – vital commodities in a takeover scenario. Having shareholders on board with plans that deliver further value is important too.
Plans that mysteriously emerge only once an approach is made may be perceived differently to those known and explained beforehand.
b. A view on value
One of the most important things a board can do, both as a matter of good corporate practice as well as takeover response preparation, is to have a view on its existing value. The timeframes in takeovers can be relatively tight. If a bidder launches a hostile takeover and simultaneously lodges its bidder’s statement, then a target has roughly one month to compile its target’s statement (including an expert’s report, if one is used). That is a short period of time.
Further, it is in fact probably the wrong period of time to focus on developing a view of the company’s value; a board that does not have a clear view on value will not be confident in its response to an initial approach. It is near impossible for a board to delay saying something about its views on an approach until the target statement. A view on value is important to all of these things.
Because of its role in the value question, a board should also consider whether it would be likely to retain an independent expert and, if so, have that expert retained and familiar with the business. It is important to be mindful, however, that the expert must be, and must appear to be, independent when preparing an expert report.
c. Register composition
Monitoring trading and register composition is important, including from a strategic perspective. It is well settled law that a company cannot issue shares for the purpose of destroying an existing majority. However, there is nothing improper about a board making sure that investors who are likely to appreciate the value in the company are made aware of, if not encouraged to take a position on, the register.
The board of a target company has a vital role in determining the outcome of any approach for a change of control proposal or the takeover that may eventuate from that.
Boards can make a material contribution to the achievement of a superior result for shareholders, while also maintaining the reputation of the company and individual board members. This is achieved through strategic and tactical preparation, a knowledge of and comfort with the parameters within which a takeover response must operate, and a preparedness to navigate imaginatively the issues and challenges that inevitably arise throughout the course of the takeover.`