Ask Colin

How do you handle takeovers and potential takeover situations?

Takeovers are a rather different situation to normal. This is because there are some very specific laws which govern them. There are also two basic types of takeover and the situation for each is different.

One type of takeover is where the bidder offers to buy all the shares. There may be a level of acceptance the bidder sets before the takeover is unconditional – i.e. the bidder can walk away if it is not met. There is also provision to later declare the bid unconditional before that level is met. Unconditional means you get your money by accepting the bid, no matter what happens afterwards. The other key issue is that 90% acceptance is critical. Once it is reached the bidder can compulsorily acquire the remaining shares. So, a 10+% holding is a blocking stake and can be used to extract a higher price. Note too that the definition of 90% is not a simple one.

The other type of takeover is more a merger. It is done by a Scheme of Arrangement. It is easier to effect if there is a blocking stakeholder, because it only requires a 51% vote of the target shareholders. If it passes the vote it is a done deal. There are some conditions on who can vote, though, that disallow some parties who have a conflict of interest of various kinds.

 My tactics are to take each situation on its merits. The issues as far as laws and procedures are concerned are usually well canvassed in the AFR. They will also discuss tactics of bidders and targets plus potential bidders. There are some broad guidelines I use, but I stress that each situation can be different:

If the deal is accepted by the target board and they sell their shares, and there is little likelihood of a competing bid, I will sell into the market and move on. An exception might be if there was a large tax advantage in accepting the bid, in which case I may sell into the bid. As I say, take each situation on its merits.

If there is some reasonable likelihood of a competing bid emerging or if the target is playing hard to get and may negotiate a higher price to get its approval, I may wait and see. A good guide in this situation is if the market is paying more than the bid price, a higher bid is the expectation of the smart money. They may be wrong, of course, but that is where they are putting their money.

One reason I get involved in these situations from time to time is that I focus on buying undervalued companies. They are also attractive to predator companies. It is frustrating sometimes to buy a good company cheaply and find you get taken over before the potential is realised in the price. A pity, but that is how the world works.

The final situation is the trickiest of all. Where a bid is foreshadowed, but does not yet exist – e.g. Coles, Multiplex and Qantas (before the Qantas board forced their hand). Here the decision is a tricky one because if you don’t hang in there, you may miss a bid at even higher prices that the initial spike on the rumours/news. On the other hand, it may all come to nought and the bid never eventuates as happened with Coles. My inclination is to read all the comment and watch the price. If your judgement is that there is much doubt the bid will emerge and the price is sliding down from the spike, it may pay to take the money and run. You have to make a choice between the bird in the hand and the bird in the bush that may be bigger, but you may not catch it. Regret is a powerful emotion when you act too soon and miss an opportunity that always looks far more likely in hindsight than foresight. My philosophy is that you make your best call and know that you will never catch them all perfectly, no matter how good you are.

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