Finweek English Edition - - INVESTMENT -

Merg­ers and ac­qui­si­tions, bet­ter known as takeovers, are mostly se­date af­fairs with lots of agree­ment from all par­ties. But oc­ca­sion­ally they turn messy and we’ve seen a fair share of that on the JSE re­cently with the Ad­cock/Bid­vest and the Protech/ Eqstra deals. Rather than delve into the de­tails of th­ese par­tic­u­lar deals, we want to have a deeper look at the process when a listed com­pany at­tempts to take over an­other listed com­pany and, im­por­tantly, how mi­nor­ity share­hold­ers are pro­tected.

For a start, we need to un­der­stand who the reg­u­la­tory role play­ers are. The Com­pe­ti­tion Com­mis­sion of­ten plays a role, ve­to­ing takeovers if they would re­duce com­pe­ti­tion or give the com­bined par­ties too much inf lu­ence in a par­tic­u­lar sec­tor or in­dus­try. Ob­vi­ously the JSE also plays a role with its rules and reg­u­la­tions, and then, lastly, we have the Takeover Reg­u­la­tion Panel.

The Takeover Reg­u­la­tion Panel is the first stop for a com­pany want­ing to take over an­other one. The ac­quir­ing com­pany (the bid­der) has to lodge de­tails and im­por­tantly pro­vide guar­an­tees that it has the fund­ing for the pro­posed deal. The key pur­pose of the panel is to en­sure the fair treat­ment of mi­nor­ity share­hold­ers and that the bid­ding com­pany ad­heres to the takeover process.

Once a com­pany has sat­is­fied the Takeover Reg­u­la­tion Panel, the next step is to con­tact the com­pany tar­geted for ac­qui­si­tion to in­form the board not only of the pro­posed deal but also of the terms be­ing of­fered. In most cases the com­pany be­ing ac­quired has al­ready had talks with the bid­der, but the pro­posal may still be a sur­prise de­pend­ing on how those talks pro­gressed.

Once the board of the com­pany be­ing ac­quired has re­ceived the terms it needs to no­tify share­hold­ers of the deal via SENS, it needs to ap­point an in­de­pen­dent team to eval­u­ate the deal and make a rec­om­men­da­tion to share­hold­ers.

But be­fore this hap­pens, things can get messy, as hap­pened with the Bid­vest/ Ad­cock deal. The is­sue here is that all the con­di­tions in the pro­posal must be met be­fore the board is re­quired to ap­point the in­de­pen­dent ad­vis­ers. If the con­di­tions are not all met then the com­pany be­ing ac­quired can de­cline to for­ward any rec­om­men­da­tion to share­hold­ers.

As­sum­ing con­di­tions are met, then the in­de­pen­dent board will make its rec­om­men­da­tion, which will be com­mu­ni­cated to the share­hold­ers, who would then be able to vote on the pro­posed takeover. If the bid­der does not meet their re­quired lev­els of sup­port af­ter the share­hold­ers have voted, they have the op­tion of ac­cept­ing the re­duced sup­port or they can walk away. This is es­pe­cially im­por­tant if the bid­der only wants a por­tion of the com­pany. For ex­am­ple, it may only want to ac­quire 70% of the com­pany be­ing taken over and if it gets only 55% sup­port, it could just walk away or it could agree to go ahead with the deal but with less shares un­der its con­trol.

An im­por­tant level is at 90% sup­port – if the bid­der is aim­ing for 100% con­trol and 90% or more share­hold­ers agree to the deal, the re­main­ing hold-out share­hold­ers can be com­pelled to sell their stakes. This may seem un­fair but the the­ory is that one can’t let a very small mi­nor­ity of less than 10% de­rail a process the vast ma­jor­ity want to go for­ward.

There is of course then the hos­tile takeover, which is what we’re po­ten­tially see­ing with Bid­vest/Ad­cock. The Ad­cock board claims that the con­di­tions in the pro­posed takeover were not all met so it does not have to put to­gether an in­de­pen­dent board to de­ter­mine the fair­ness of the of­fer. The bid­der can then go hos­tile by go­ing di­rectly to share­hold­ers of the com­pany be­ing ac­quired. Those share­hold­ers would then not have a rec­om­men­da­tion from the com­pany be­ing ac­quired but would be able to vote for or against the pro­posed deal.

The Protech/Eqstra deal is not hos­tile in that the Protech board has put the deal to share­hold­ers with their rec­om­men­da­tion – but in one sense it is hos­tile as the Protech board are very much against the deal – how­ever as the con­di­tions were all met, it has had to get a rec­om­men­da­tion and give it to share­hold­ers.

Simon Brown is a Fin­week con­trib­u­tor and heads ju­s­tonelap.com, a free re­source of f inan­cial in­for­ma­tion and in­vest­ment ed­u­ca­tion.

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