Successfully defending against a hostile bid can be very expensive. Adrian Blackshaw suggests that insurance can be an ally.
The true value of a company is often not reflected in its market capitalisation or share price. Managements of quoted companies are increasingly putting hostile bid defence strategies in place, believing that they are best equipped to deliver shareholder value through independence.
Companies employ a mix of tactics. Retaining key advisers with impressive track records is one. Another is taking the onerous costs of a successful defence off the balance sheet. Such costs can reach 2% of a company's market capitalisation. Even highly capitalised companies consider insuring or laying-off part of these costs, for fiduciary rather than financial considerations, to protect shareholders' funds.
Takeover insurance (TOI) has been available in the UK and US for 10 years. It provides annual insurance cover for quoted companies for their costs if they defend a hostile bid successfully. It covers external expenses (investment banking, legal,
accounting, public relations, etc). It can include an additional 10% compensation payment to reflect internal management time.
Assessing a company as a risk involves analysing balance sheets, profit and losses, share register composition, gearing, key ratios, historic sector activity and other aspects. These are scored to determine the cost of the premium. As a guide, annual premium costs range between 3.5% and 6% of the sum insured.
Companies who buy cover must wait for three months before they can claim. After that, they can renew the policy every 12 months. Six per cent of the UK's quoted companies market have TOI. There is no particular weighting towards size or sector.
A seven year analysis of UK hostile activity shows that 70% of companies with TOI cover successfully defended hostile bids, compared to a 33% average success rate in the entire market.
Continuing consolidation
Market share is a global issue. Consolidation is likely to continue in almost every sector, as quoted companies can rarely generate compounding earnings per share growth by organic means alone. Buying market share will continue to be the preferred option for many companies. The predator usually has the advantage of surprise; its intention may be unknown until it's too late. Where there is a potential target, there is always a potential bidder.
Size does not deter hostile bidders. Companies are rarely acquired when they are cheap. According to US investment bank JP Morgan, 37% of hostile bids were successfully defended worldwide in the last three years. In 1999, we experienced six of the largest 10 hostile bids in history.
Directors of a target company have a fiduciary duty to evaluate the terms and price of an offer and determine what is best for the shareholders. If the predator is offering a good price, they may not be able to justify a defence.
TOI is designed to provide a fighting fund for a bid defence. If the price is not right, having the cover gives a company a much better chance of mounting a successful defence.
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Adrian Blackshaw is a director, TOI Corporate Services Ltd.
