Second installment from 'The Intelligent Investor'Takeovers – a...

Second installment from 'The Intelligent Investor'

Takeovers – a practical guide: Part 2

The bids are flying for your favourite investment, but when should you actually accept?

In Part 1 of our practical guide to takeovers, on 26 Mar 07, we learned that, despite the initial flurry of activity, takeovers can be drawn-out and convoluted affairs. And, as an investor, the best thing to do initially is just sit on the sidelines and watch the goings-on.

So at what point do you stop playing the waiting game? After all, once a company is on the receiving end of a bid and is ‘in play’, it’ll generally end up being acquired by someone, though it isn’t always the initial predator that ends up with the prey. (Interestingly, though, a larger than usual number of takeovers seem to be failing at the moment, with Flight Centre’s scheme of arrangement falling over, Rebel Sport’s going down to the wire, and Qantas’s in some doubt.)

One of the main roles for the directors, then, is to extract the best possible price from the existing bidder or a new one. To support their view, the directors will often commission a so-called ‘independent expert’s report’, which involves an accounting firm or similar coming up with a ‘valuation’ for the company. We don’t tend to set much (or indeed any) store by these valuations (see our criticism of Flight Centre’s expert’s report on 30 Jan 07), but they seem to carry a lot of weight with regard to whether the directors recommend you accept a bid or not.

Wait for the directors’ recommendation:
So this is the first thing you’re waiting for – a directors’ recommendation. Returning to our example from Part 1, Sitting Duck’s board needs to decide whether the $2.50 being offered by InMySights is sufficient.

While some bidders end up acquiring a large chunk of the target without the directors recommending acceptance of the offer, it’s pretty rare. Until the directors recommend you accept – usually with the caveat ‘in the absence of a higher offer’ – you don’t really need to do anything at all. But that doesn’t mean you should send off your acceptance form as soon as the directors capitulate.

For one thing, others might still think the bid is undercooked. And if enough shareholders still aren’t happy with the price, as turned out to be the case with Flight Centre, the takeover might still end up failing in spite of the directors’ recommendation.

A directors’ recommendation can also stimulate a higher offer. Strategically, it can make sense for a counter-bidder to wait until the directors recommend some other company’s offer. The counter-bidder can then jump in, knowing that the directors are duty-bound to accept its even higher bid.

Increased bid:
Let’s assume that InMySights increases its bid to $2.80 a share and declares it ‘final’. No other bidders have emerged, and Sitting Duck’s directors believe the price is sufficient, so the board issues a recommendation to accept InMySights’ offer. Under the ‘truth in takeovers’ rules, InMySights cannot increase its offer price after declaring it final (but watch out for qualifications such as ‘in the absence of a higher offer’).

Once it reaches this stage, the takeover process is well advanced. All regulatory hurdles should have been cleared, counter-bidders have had adequate time to appear, and the directors have deemed the price sufficient and have therefore recommended acceptance. Only now is it time to start thinking about what you’ll do.

You have two main options. The first is to sell your Sitting Duck shares on market. By this time, the market price will be slightly below the bid price, but not by much. If you sell on the market, you’ll incur brokerage, but you are assured of getting your money after three days. Selling on the market may be a good idea if you prefer certainty over the last few per cent, or you already have the cash earmarked for something else. Or, in the case of bids that involve receiving shares in the acquirer, such as Bank of Queensland’s recently announced bid for Bendigo Bank, you’d prefer cash.

Nearing the finish line:
Otherwise, you’ll be looking to send in your paperwork to accept InMySights’ bid by the closing date, which can be extended numerous times (unless it’s a scheme of arrangement, where you must send your paperwork back by the set deadline in time for the shareholder meeting).

Once the directors have recommended acceptance of the takeover bid, acceptances will usually start trickling in. By this time, you should have noted the closing date, and be keeping an eye on the ‘Change in substantial shareholding’ notices. You’ll also want to remain aware of the conditions of the bid because, while most bids are conditional on 90% acceptance, some have a lower threshold. The recent bid for brake maker Pacifica, for example, was conditional on Bosch achieving 50% of the shares.

It’s important not to worry too much about the closing date, at least while acceptances are only trickling in. Our experience is that it is not uncommon for the closing date of the takeover to be extended half a dozen times or more.

Crux of the matter:
Now we’re getting to the crux of the matter. For a recommended bid that is conditional on 90% acceptance, you don’t really need to accept until the bidder is entitled to about 50% of the stock. We’ve chosen this general threshold because, by that stage, it’s pretty clear that no other bidders are going to emerge. And it’s also increasingly likely that the takeover will be successful.

About this time, InMySights probably wants to start wrapping things up. It might try a number of tactics, such as accelerating payment or refusing to extend the offer for Sitting Duck past a certain date. It’s usually a good idea to check the payment terms in the bidder’s statement or subsequent announcements before sending back your form.

It’s also worth remembering that the takeover can still fail until InMySights declares the offer unconditional (which often won’t occur until it obtains 90% of the stock). Of course, if everyone held out for the bidder to declare its offer unconditional, then it would never obtain 90% in the first place. The key point is to wait until there’s a low chance of the bid failing, and then to accept, but no sooner.

There is one other alternative to accepting: you can wait for InMySights to achieve 90% of Sitting Duck, at which point it is legally entitled to compulsorily acquire the remainder. But we generally wouldn’t recommend going through the compulsory acquisition process. Not only is there additional paperwork to fill out, but the timing of your payment becomes less certain. Most bidders aren’t usually keen on giving the remaining shareholders much latitude, as they have already been given ample opportunity to accept.

Time to send your acceptance:
So let’s assume InMySights now has 60% of Sitting Duck, and the offer is due to close in 10 days. InMySights announces that the closing date won’t be extended again, which prompts a rush of acceptances, taking its holding to 75% a few days later. As you’re now very confident the takeover will proceed, it’s definitely time to send in your acceptance form.

After another three days, InMySights announces that it has 90% of Sitting Duck, declaring that the offer is now unconditional and that it will proceed to compulsory acquisition. You’ll soon be paid your offer consideration.

All in all, you’re pretty happy. Your Sitting Duck shares, which were trading at $2.00 initially, ended up being bought for $2.80. And you waited until as late as possible before accepting, giving yourself as much flexibility as possible.

Only one problem remains. What do you do with the cash?

KIM's directors capitulated before the owners of the Co. (we, the shareholders) even knew of GEM's offer~!!

Imo, if they ever intend to run another publicly listed ASX Co., they will need to change their names by deed poll, and undergo extensive facial plastic surgery~!!