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12. Takeover Activity, Investor Behaviour and Stock Market Data

Introduction

Like any investment, corporate takeover activity should be premised on shareholder wealth maximisation underpinned by rational profit motives. Before moving in on its prey, what the predator requires is a bid price per share. An offer based upon a comprehensive market valuation of the target company.

The following objective strategies based on long-run future earnings potential should be considered prior to takeover.

Business; Resource; Influence.

All too often, however, short-term subjective managerial motives determine acquisitions that frustrate the pursuit of shareholders' wealth, notably satisfying behaviour based on:

Growth; Prestige; Security.

History reveals that takeovers also have a tendency to destroy future returns and hence value. So much so, that it usually pays investors to cash in any price gain on a target company's shares, once the deal is completed, if not before. Predator firms often take a price-hit after acquisition from which they may never recover.

So, why is their a resurgence in takeover activity when so many indicators suggest that rational companies should not be empire building? Geo-political uncertainty, commodity prices (notably oil) unemployment, interest rates and inflation are all rising.

12.1. The Current Takeover Scene

One answer is that acquisitions were so few after the 2007 financial crisis. Companies adopted policies of introspection, shedding labour, reducing debt, cutting costs and dividends wherever possible. However, with a recent revival in trading fundamentals many are now awash with cash, which can be supplemented by new share issues or borrowing. With costs of borrowing (real interest rates) still so low, debt-financed takeovers of listed companies by overseas rivals are both cheap and much less risky than any other form of expansion. But is this good for a country's economy and sovereignty?

Many governments around the world (with France leading the way) protect their corporate sector from foreign predators through strong legislation on "public interest" grounds. However, in 2002 the UK rejected this policy, except for monopoly considerations. Since then it has been a free market for overseas investment, which is instructive to analyse.

Figures published in October 2006 by the United Nations Conference on Trade and Development (Unctad) revealed that Britain was the preferred global location by far for foreign investors. Moreover, their takeover targets were not small obscure companies "neglected" by the market but large "blue chips". Throughout 2004-5 you could identify UK household names listed on the London Stock Exchange that fell into foreign hands. Leading up to the 2007 financial meltdown, half the top UK 100 companies were vulnerable to acquisition, which meant the FT-SE100 (Footsie) would polarize between "the big six" headed by BP and the remainder.

Of course, British companies were also searching for investment opportunities. The London Stock Exchange itself bid for the Borsa Italiana. Barclays and the Royal Bank of Scotland (RBS) were also in competition for the Dutch bank ABN Amro (with RBS winning, thereby ensuring its downfall and government rescue post-2007). However, much activity was domestic with UK companies pursued by UK predators.

Today, many global analysts believe that the deregulated UK stock market (where cash is king) should be the first to experience a rise in share prices, driven by a takeover spree. However, opinions vary on the likely outcome.

Being a preferred destination for investment may have a beneficial effect on UK employment, job skills and growth. On the other hand, the ongoing takeover of UK plc may be catastrophic.

Apart from the political implications (loss of control) and economic consequences of essential and iconic interests disappearing, the opportunities for sterling investors (private and institutional) to avoid risk through a diversified portfolio of investments will be constrained.

At home: many utility companies and most top brewers are under foreign ownership. In the wake of the Pilkington takeover, when ICI came under Dutch ownership half of the UK paint market was monopolized, leaving little choice of shares in building and related materials, or several other domestic sectors.

Abroad: foreign bids that targeted UK companies with valuable international networks, such as O2 and P&O, deprived UK stock market participants of global, low-risk investments in telecommunications and shipping. Cadbury, hardly a significant component of the domestic infrastructure but a global brand name nevertheless, is the latest in a long line of confectioners to fall into foreign hands.

Of course, global takeover activity is still not one way. Unfortunately, by 2011, UK predators were still spending less than twice overseas than their foreign counterparts were investing in Britain.

Overall: there is no shortage of acquisition specialists who advocate globalization through corporate takeover. But it can affect the domestic capital market adversely by restricting the supply of shares (unlike new issues that expand the supply). If stock prices rise as a consequence of restricted supply and increased demand, this may also camouflage underlying fundamental, domestic economic problems until it is too late.

In financially difficult times, overseas companies are also more protective towards their own domestic market, when it comes to efficiency savings, cost cutting, shedding labour and factory closures. They may well depart the host country as quickly as they entered it. This is why in 2010 the UK's regulatory body, the Takeover Panel, began introducing new rules designed to restrict hostile foreign predators targeting British companies.

 
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