Mergers: the practicalitiesIt is not common for bidders to acquire a large proportion of the required shares by
buying them in the capital market. Once investors realise that there is a large buyer in
the market, the share price will tend to rise in anticipation of a formal offer, making it
uneconomical for the bidder to proceed further in this way. The formal offer to each
shareholder becomes cheaper at the point where the capital market quotation reaches
the proposed formal offer price. Of course, all capital market purchases have to be
paid for in cash, which may be a disincentive to a bidder who wishes to finance the
merger in some other way. The formal offer document, which is usually communic-
ated to shareholders by post, contains the precise terms of the offer and a statement
explaining why, in the view of the bidder’s management, it should be accepted. The
offer document must be submitted for the approval of the Director General of Fair
Trading and of the City Panel.
Usually, offers are made on condition that they are accepted by the owners of
a specified percentage of the shares concerned. In this way the bidder can ensure
that, in the event of insufficient acceptances being forthcoming, it will not end up
being forced to buy shares that it may not want. If, for example, the bidder wishes
to obtain a minimum of 60 per cent of the shares of the target, it would probably pre-
fer not to be forced to buy, say, 25 per cent if the owners of the other 75 per cent decide
not to accept the offer. The proportion of 90 per cent is often stated on offer documents
because UK company law gives any business that owns that percentage of the equity
of another business the right to acquire the remaining 10 per cent, with or without
the consent of their owners, on the same terms as those on which the others were
acquired.
A question that the target shareholders must consider on receiving the offer is
whether to accept this particular offer or to hope for an improved one. While the fail-
ure of an offer can cause the bidder to withdraw, frequently the bidder’s reaction is to
make an increased offer. This can be a difficult question for the shareholder because
withdrawal by the bidder will probably result in the quoted share price of the target
dropping back, from the high figure that it will probably have reached in the light of
the offer, to the pre-offer price. On the other hand, rejection of the first offer is quite
likely to result in a better one. Perhaps, though, this is no worse than the dilemma that
all shareholders experience when they see their shares quoted at a high price: should
they sell and take advantage of it or should they wait, in the hope that the price will
go even higher?
The management of the target is most unlikely to react passively to advances made
by a bidder to the target shareholders. Quite often the bidder will seek the support of
the target management in advance of its formal offer. If the management supports the
offer, perhaps because it feels that there is commercial logic in such a merger, it is
likely that the offer document will include a statement by the target’s management to
that effect. In this case, were the offer to be accepted it will lead to a friendly merger.
Frequently, however, the target’s management will be hostile to the offer and will
oppose it with some vigour. Typical tactics employed by hostile target management
include:
l issuing statements countering the claims of the bidder and putting forward the
arguments for remaining independent;
l revaluing the target’s assets in an attempt to show that the bidder’s offer undervalues
them; and
l releasing other information relevant to the target’s future as an independent business.