Tighter rules urged for takeover bids

It ended with a whimper but the legacy of the takeover of Pacific Insight Electronics by Chicagobased Methode Electronics Inc. — a deal approved by shareholders on Tuesday in Vancouver — will live on and may serve as a reminder of the slew of issues facing companies that operate in the public markets.

Indeed it may lead to some companies preferring to stay private — a trend that seems underway given the slowdown of initial public offerings in North America.

“It could have been disturbing or benign,” noted one of the estimated 40 people who attended the Pacific Insight meeting, that became benign given that another interested party, the Chinese-based public company Shenzhen Kaizhong, withdrew its interest in acquiring Pacific Insight the day before.

Three weeks back that company announced it had made “a binding superior proposal to acquire all of the shares of Pacific Insight for $24.35 a share,” or about 25-per-cent above what Methode had agreed to pay.

The binding proposal was highly conditional — depending, for example, on receiving approval from its own shareholders at a meeting yet to be arranged and on arranging the necessary loan to fund the $189.5-million acquisition. In the end there was no follow-up conversations with the Chinese buyer — though shortly after its plans were announced, the stock rose above the $18.50-a-share Methode had offered on Aug. 1, a price also agreed to by Pacific Insight. Those who bought above $18.50 would have lost on that part of their investment.

“The meeting lasted seven minutes, there were no questions from the floor and ended when the chairman read out the votes,” said one shareholder shortly after the meeting. And the support was overwhelming: the plan garnered 97.33 per cent of shareholders who voted as well as a majority of the minority.

But the process and the way that an agreed-upon takeover could have been disrupted, has upset this shareholder, who feels that unless some stronger terms and conditions are imposed, the situation may be repeated.

“That such an unusually empty, outrageous and unsubstantiated offer is allowed to be made, with fictitious flim-flam,” is disturbing,” noted the shareholder.

“It’s such a pity and another reason why companies may not want to be public in Canada,” he said.

“The life of public companies in Canada is a nightmare,” noting that for him, the real story is not the minutiae of the takeover but how such potential deals, which come at the last minute and which are not properly funded, can make their way to the public markets — and be given credence.

This shareholder points to structures and processes used elsewhere. Britain, for example, has a strict set of rules and according to recent reports is planning to get even tougher.

Closer to home, a good policy requires balance, though the fundamental objective must require that shareholders be offered the highest price available. (Without them there is no company.)

For a company wanting to be sold, one way to achieve that goal is to hire investment bankers, run an auction and canvass the market for potential buyers. But there is resistance to that approach because of the time taken, because it may not work and because interested buyers may want an exclusive.

If a buyer wants such a deal the board can agree but insist a so-called goshop period be included. Sometimes they work: over the summer a higher offer emerged for Sandvine Corp. when U.S.-based Francisco Partners outbid an agreed upon deal with Vector Capital. In the end shareholders were 16-per-cent better off.