Defensive strategies to fight off unwanted takeover attempts
Paul Burns (2007) said Mergers and acquisitions are frequently used by entrepreneurs as a tool for achieving rapid growth and also as a short-cut to diversification. Kraft made a ￡10.2 billion takeover offer for the long-established British confectionery group Cadbury who makes Dairy Milk and Bourneville chocolate on September 7, 2009. After several bids by Kraft and successful defences by Cadbury, Cadbury became part of Kraft Foods finally on the February 2, 2010 by ￡12 billion. (Weardon: 2010)
This essay will describe what types of defensive strategies available to target companies when it receives a takeover offer. It will particular explain some defensive strategies that Cadbury used to fight against Kraft.
Nowadays, managers have come up with a number of defensive strategies to fight off unwanted takeover attempts. They are (Hiller, Grinblatt and Titman, 2008: p.744):
Paying greenmail, or buying back the bidder’s stock at a substantial premium over its market price on condition that the bidder suspend his or her bid;
Creating staggered board terms and supermajority rules, which can keep a bidder from taking over the firm even if he or she accumulates more than 50 per cent of the target firm’s shares;
Introducing poison pills, which provide valuable rights to target shareholders who choose not to tender their shares;
Lobbying for antitakeover legislation.
P. S. Sudarsanam (1955) said the best form of defence is being prepared. Eternal vigilance is indeed the price of independence for a company which is a probable takeover target. However, the best-laid strategic defensive plans might go awry and the company, having become a target, needs battlefield tactical plans. He also pointed out one can thus divide defensive strategies into pre-paid and post-offer categories. Each of these categories of defence encompasses an extensive range of weapons.
The best defence available to a firm is to ensure that there are efficient operations and strategies deliver cost, high profit margins and high earnings per share If a hostile bid is driven by the desire to create shareholder value. (Sudarsanam, 1995)
The firm must take part in a consistent programme of educating the shareholders, analysts and media that its policies are really value enhancing. There the company experiences setbacks because of the economic cycle or the restructuring it has undertaken, it must make a credible case to the analysts and investing institutions that the setbacks are indeed temporary. The company needs to keep a close watch on unusual share price movements or share purchases to see whether any potential shareholders are building up to accept the bid. (Sudarsanam, 1995)
In the UK, under the Code, the offer period is in most case limited to 60 days from the posting of the offer document by the bidder, adding urgency to the target’s tactics. Additional, rule 21 of the Code imposes upon the target management the obligation to get approval of their shareholders for any frustrating action, which is defined widely to include the following: (Sudarsanam, 1995: p.200)
Issue of shares, or options or securities convertible into shares.
Disposal or acquisition of assets of a material amount-normally 10 per cent of the target’s assts.
Contracts made except in the ordinary course of business.
Golden parachutes arranged at the onset of a bid or when it is imminent.
Despite the above constraints, a range of tactics are still available in contested bids. (Sudarsanam, 1995: p.201)
Description and purpose
First response and pre-emption letter
Attack bid logic and price; advise target shareholders not to accept.
Praise own performance and prospects; deride bid price and logic, form of finance and predator’s track record.
Report or forecast improved profits for past/current year to make offer look cheap.
Promise higher future dividends
Increase returns to shareholders; weaken predator’s promise of superior returns.
Revalue properties, intangibles and brands; show bid undervalues target.
Share support campaign
Look for white knight or white squire; enlist own employee pension fund or employee share ownership plan; attempt to block control.
Lobby antitrust/regulatory authorities to block bid.
To enforce antitrust rules or force disclosure of nominee shareholders.
Acquisition and divestment
Buy a business to make target bigger or incompatible with bidder; sell ‘crown jewels’; organise a management buyout; bid cost higher and bidder strategy thrown into disarray.
Enlist to lobby antitrust authorities or politicians and to attack bidder’s plans for target.
Enlist to lobby antitrust authorities or to show relations with them will be jeopardised if predator wins.
Attack predator on peripheral matters.
Media campaign to discredit bid.
Other than Rule 21 of the Code, there are also rules of the Code are relevant to target’s defensive strategy. Rule 19 requires that each document issued to shareholders must satisfy the highest standard of accuracy, and that the information contained must be adequately and fairly presented. Advertisements must in most cases be cleared by the Panel and must avoid arguments and invective. (Sudarsanam, 1995)
required by Rule 28 to be complied with scrupulous care, and the target’s financial adviser and accountant must ensure that they are so prepared. The reporting accountant’s consent to the forecast must accompany it. The panel monitors these forecasts long after end of the bid, to see whether there was any deliberate distortion of the forecasts in the light of information available at the time the forecasts were made. Similarly, under Rule 29, asset valuations must be supported by an independent valuer. (Sudarsanam, 1995)
Defensive Strategies used by Cadbury
On September 7, 2009, Kraft made a ￡10.2 billion takeover offer for Cadbury. What Cadbury did was attack the bid price (‘First response and pre-emption letter’ described by Sudarsanam), as Roger Carr, chairman of Cadbury, said: “Kraft is trying to buy Cadbury on the cheap to provide much needed growth to their unattractive low-growth conglomerate business model. Don’t let Kraft steal your company with its derisory offer” (Leroux: 2009). And this strategy was continuous used by Cadbury in the following bids. Cadbury also advised target shareholders not to accept the offer. ‘Cadbury described the bid as hostile and told its shareholders that Kraft needs to be stopped from stealing the company with its offer’ (Weldon: 2010).
Roger Carr also said: “Kraft’s offer is very significantly below all comparable transactions in the sector; applying any of the comparable multiples would imply a price per share far above Kraft’s offer. Over half the offer consideration is in the form of Kraft shares, exposing our shareholders to Kraft’s low growth conglomerate business model, its long history of under-performance and its track record of missed targets.” (Associated Press, 2009). It was ‘Red herring’ strategy, exposed the performance and its business that Kraft always did, to attack predator on peripheral matters.
Then Cadbury reported the profits of past year and forecasted improved profits for current and future year to make offer look cheap (‘Profit report/forecast’ strategy explained by Sudarsanam). When Kraft offer the price, Cadbury’s maker of Dairy Milk chocolate and Dentyne gum, said it expected to report a 5 percent growth in business revenue for 2009 or 11 percent higher on an actual currency basis. It said it had improved its trading margin by 1.55 percentage points to 13.5 percent (Associated Press: 2009). ‘Cadbury has a few long-term targets that it would like to meet such as growing sales by 5-7 percent over the next four years as well as increasing margins to 16-18 percent by 2013’ (Weldon: 2010).
Also, Cadbury used ‘unions or workforce’ strategy and ‘Advertisement (interview by BBC)’. In an interview with the BBC World Service Mr Carr (Cadbury chairman) said he thought current takeover laws were unfair. He argued that where a hostile takeover bid is mounted and fails, the failed purchaser should be required to pay the costs run up by the target company. In this case it would mean Kraft paying Cadbury’s substantial costs in mounting its defence (BBC: 2009).
Corporate managers often react negatively to unsolicited takeover bids. One would hope that their motive in doing so is to achieve the highest possible value for the firm’s shares rather than merely exhibiting the Principle of Self-Interested Behaviour to protect their jobs. The courts have generally held that the directors of a firm have a responsibility to obtain maximum value for shareholders (Emery, Finnerty and Stowe, 2004: p.820).
In Cadbury’s case, it used some defensive strategies to fight against Kraft time by time. However, when Kraft offered a ￡12 billion bid, Cadbury stopped to rejecting it. This was because the offer gave a very high value than Cadbury can create by itself in the following year. To maximum the value for shareholders, the best way was to accept the offer rather than defence it again.
Overall, Cadbury had successfully used the defensive strategies to create a high value, to make maximum value for shareholders.