Clinching mergers or acquisitions ‘too slow’

Bidvest’s hostile bid to buy Adcock Ingram will affect the market, writes Alistair Anderson

INTERNATIONAL services, trading and distribution group Bidvest’s plan to buy SA’s second-biggest drugs maker, Adcock Ingram, will again throw the spotlight on the difficulty of expediting mergers and acquisitions in this country.

If Adcock was reluctant to hear bids from Bidvest and other companies, it would lose out financially and lose the faith of shareholders, stockbroker David Shapiro says.

The number of mergers and acquisitions last year caused some disappointment, falling as much as 20% in the last quarter compared with the same period in 2011 because of political uncertainty and labour unrest, says Norton Rose director Stephen Kennedy-Good.

Mr Shapiro, however, hopes there will be various big “good deal attempts” such as Bidvest’s bid for Adcock Ingram. However, he says regulatory slowness could limit the number of deals in SA.

Bidvest CE Brian Joffe sent Adcock a letter late last month offering to buy 60% of the drugs company for R6.2bn. The Adcock board refused to consult shareholders and the bid subsequently turned hostile.

Mr Joffe says he has been canvassing shareholders for weeks in any case, but he will now be moving on a more aggressive path as he looks to obtain the approval of the many institutional shareholders who have stakes in Adcock.

Mr Shapiro says lawyers will slow down the process. “It’s now a battle of the lawyers’ egos. Adcock should have gone to shareholders. The company had underperformed and proved it lacks entrepreneurial muscle. Bidvest is that muscle. I’m not a regulatory and legal expert, but this whole deal would have gone quicker if Adcock’s board went to the table immediately.”

Mr Shapiro says deals already take a long time in SA when compared with the US and other developed and sophisticated markets. Bidvest’s hostility will cause the market to agonise over a long process. “Deals where respected companies buy strug- gling companies can be done overnight in the US. The shareholders there are more active and work so that their needs are adhered to.

“We have such a close-knit club of big business that this hostile bid, which is unusual in SA, is set to take a long time to work through the system,” he says.

The deal could take about four months to conclude, says Mr Kennedy-Good. But he is less critical of the process being prolonged because it highlights good corporate governance in SA.

“There is a long period in which shareholders can respond to the offer. Hostile bids often take longer because our corporate governance rules are good and part of their role is to protect shareholders. The Takeover Regulation Panel will work carefully to ensure no shareholder, including minorities, is treated differently,” he says.

However, Mr Kennedy-Good admits Adcock and Bidvest will face a protracted process and growing legal costs, which could hurt Adcock, especially if it does not take up an offer. “Hostile takeovers take a while and many have not worked. I would expect the process to be more expensive than a peaceful process,” he says.

Mr Shapiro says the longer the process, the worse it will be for Adcock. “I think it is clear that Adcock has disappointed for years. Shareholders will recognise this. Adcock needs a big company to help it make a large improvement.” He says that in other countries a management team that has underperformed as badly as Adcock’s has, since it was unbundled from Tiger Brands, would have been “kicked out a while ago”.

“Jonathan Louw initially did well as a CEO, backed by his team. But since Adcock was moved out of Tiger Brands, the team’s performance has lacked. American shareholders would have removed them and moved fast to get a buyer for Adcock. We are just very nice here,” he says.

However, Mr Shapiro believes a more important issue is how Bidvest shareholders will react to a deal if it happens and how much will be expected of Bidvest in the near future.

“Brian (Joffe) is going into the drugs business, an industry in which he has not worked. He is speaking of exposing Adcock shareholders to Bidvest profits by making a bid, so he needs to prove to his shareholders that he won’t dilute them,” he says.

An analyst who asked not to be named says other buyers for Adcock may have been put off by the regulatory changes in the pharmaceutical industry. Also, labour unrest and political uncertainty from last year could affect foreign investor perceptions of SA.

Bidvest has been criticised for not putting enough detail of what it wants to do with Adcock into its bid, which may have prompted Adcock’s board not to entertain Mr Joffe’s offer in the first place.

Parts of the market have backed Adcock’s decision.

“We hope to see a bid from Bidvest that is clean and straightforward and recognises the value in control. Similarly, we hope to see both parties make some attempt at constructive engagement, and that the Adcock directorate will ensure that a crystallised bid from Bidvest is put to a shareholder vote,” financial services group Imara SP Reid said on Friday.