Volatile market conditions, languishing share prices and favourable C$:£ exchange rates have made many companies on the London markets increasingly attractive takeover targets for cash-rich Canadian trade and financial buyers. It will therefore be interesting to see how the recent changes to the UK Takeover Code will impact such takeover activity in 2012.
Inspired by the public outcry of Kraft Foods’ hostile bid for Cadbury last year, the Code was significantly revised in September with a view to reducing the perceived tactical advantage it provided to hostile bidders and redressing the balance in favour of the target company. Among the principal changes were (i) requiring prospective bidders to be named at the earliest opportunity (ii) shortening the time frame within which an offer must be made – the “put up or shut up” rule – to 28 days from the bidder being named; (iii) a general prohibition on “break fees” for initial bids and (iv) greater transparency and disclosure of advisory costs, financial information, financing arrangements and the bidder’s intentions in respect of the target and its employees.
The most obvious impact of the changes will be increased secrecy and attention to due diligence and financing considerations both before and after approaching the target to avoid being publicly named and starting the clock ticking on the offer timetable. The break fee prohibition may also lead to fewer bidders coming forward at the outset, particularly private equity and pension funds, who may be reluctant to be exposed to paying transaction costs of an unsuccessful bid without the benefit of a break fee – they may be more inclined adopt a “wait and see” approach where target companies are believed to be “in play” and secure a break fee with their competing bid. That said, in the absence of break fees, bidders may seek deal protection in other ways, such as hard irrevocable undertakings from shareholders or via strategic stake building.
While it is too early to comment on the effect of the new rules in practice, what is clear is that potential bidders will need to spend more time preparing to ensure they are in as strong a position as possible to launch a takeover offer within the reduced timeframe, particularly where the offer is not likely to be welcome by the target board.
In the longer term, as the markets become accustomed to the revised Code, the changes should not act as a significant barrier to bids by Canadian companies that have a strong financial and commercial rationale for progressing.