January 20, 2021
January 20, 2021
Management teams and their boards can expect another disruptive year in 2021. In that vein, public companies should anticipate a meaningful uptick in hostile takeover bids—in some cases, with activist investors teaming up with the aggressor in lieu of taking their issues directly to the target.
Why? Record highs in the major stock market indices can mask the fact that many companies have not participated in recent expansion of their price-to-earnings multiples and remain oftentimes undervalued, particularly from highs prior to March 2020. Couple that with an overabundance of undeployed investor capital and challenges in some industries to find meaningful levels of organic growth (at least during the COVID-19 pandemic), and this creates optimal conditions for hostile takeover bids, suggesting that corporate boards and their management teams should be prepared for the possibility of unsolicited bids and related efforts.
The motives behind unsolicited bids are varied. An inability to generate organic growth, as mentioned above, and untamed egos are two of the most common culprits. Regardless, shareholders will need to determine whether a bid could serve them well through the prospect of growth at a possible newly formed company or, alternatively, whether they are willing to take cash that is offered for their shares in favor of the long-term prospects offered by the current management and board.
With many traditional legal defenses, such as poison pills, out of favor as a matter of good governance, the board should look carefully at the potential buyer and its business. In many hostile bids, the potential buyer may recognize its own inability to generate meaningful organic growth and therefore look for inorganic options to mask this issue. In some cases, this is done in the name of cultural synergies; in others, it is done in the name of banding together complimentary products, services, or technologies that will result in improved operating performance and multiple expansion. The issue is that companies that would resort to a hostile bid are often, in our experience, the same kinds of companies that present their disclosures in a manner designed to cloak their own organic growth challenges.
So, what can the board and management team of a targeted company do to prepare itself and maintain an informed position with respect to the pursuer, while also learning the risks and vulnerabilities of the bidder?
Boards and management should monitor the company’s largest shareholders or known groups of shareholders to avoid surprises, such as the filing of an unexpected Schedule 13D with the US Securities and Exchange Commission (SEC). As SEC filings can substantially lag shareholders’ changes in holdings, watching the company’s stock and its holders using a stock surveillance service is very prudent. Stock surveillance services provide real-time knowledge of the shareholder base, which is of the utmost importance when a company is concerned about the potential of a contested merger and acquisition situation.
In these instances, aggressors oftentimes will buy a toe hold in the target company’s shares as a first step in the process. Shareholder “wolfpacks,” usually sharing a common link, have been known to coordinate efforts in favor of aggressors. Tracking real-time updates on shareholder movements gives the potential target of a hostile bid the “first mover” advantage and allows targets to estimate how many voteable shares an investor holds within its portfolio. Knowledge of derivatives strategies and hedge fund accumulations in the early, non-public stages of a proxy fight can be valuable in developing an effective game plan.
Once a company believes a takeover event may be occurring, business intelligence and forensic accounting can be used to discover the backgrounds, leadership history, and successes of aggressor-nominated board members (or the lack thereof) at their current and in prior roles with other companies. Claims of organic growth and successful integration of a previous merger can be examined, and in many cases, debunked with empirical evidence and data, which in turn provide shareholders with a historical manifest of what can be expected from the new leaders should the bid succeed. In the words attributed to General George S. Patton Jr., “Prepare for the unknown by studying how others in the past have coped with the unforeseeable and the unpredictable.”
Boards must also make sure that their actions to defend their companies do not inadvertently give fodder to the hostile acquirer. Shareholders often look unfavorably at a targeted company that summarily dismisses an offer at a substantial premium. Additionally, the targeted board’s response to a potential buyer’s offer is a key factor considered by proxy advisors, such as Institutional Shareholder Services, when they decide voting recommendations for shareholders in these situations. As proxy advisors have substantial influence, targeted boards can benefit if they understand early in the process how proxy advisors view the hostile takeover attempts at their companies.
There are many things about the future that remain unclear, but an informed history of new investors and potential board members as well as the detection of early buying activity are two valuable early warning indicia that will timely alert management and the board to possible takeover aggressors on their horizon.
Jay Frankl is senior managing director, David Farkas is managing director, and Robert Kueppers is senior advisor at FTI Consulting.
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