Back in the summer of 1988, I wrote a Diary describing what it had been like as the chairman of a public limited company to fight off an unwanted takeover bid. I ended the piece by saying that although in the opinion of some stockmarket buffs the company’s shares might in due course be valued at double the price of the unsuccessful offer, I did not think that my readers would necessarily be wise to reach for their stockbrokers at once. But they would have been. In April of this year, anyone who had bought the shares at the unsuccessful cash offer price of £3.28 would have received a circular letter from me saying that the Board recommended shareholders to accept a cash offer from a Swedish company which worked out, if you include the grossed-up dividend retained by the offerees, at £7.03.
What had happened was this. The Swedish company bought the 28.5 per cent stake still held by the failed predator of 1988 at a price of £4.25 and launched a bid for the rest at £5.20 – the price in the market at that time being £4.47. We immediately pushed out a circular to shareholders dismissing the offer as laughably inadequate. But our advisers, whose kindest word for the tactics of the failed predator of 1988 had been ‘childish’, took an altogether more serious view of the Swedes. They had a big bank behind them; they had first-class London advisers; and they had good reason to pay a hefty premium for a foothold in the EC in advance of 1992. We knew that £5.20 would only be a sighting shot, and that however vigorous our defence we might have to consider seriously the level of price at which it would be our duty to our shareholders to accept. The ritual exchange of arguments in successive circulars followed its course as laid down in the rules in a spirit which was combative but clean. The financial press gave us a fair hearing, and our advisers skilfully timed our release of material information to maximum advantage. But we knew that the company’s fate would in the end be decided by the attitude of one Scottish investment institution which held a now critical 8.5 per cent stake, and which would, however happy with our performance, have a price in their minds at which they would be bound to say yes. In an atmosphere of eerie calm, therefore, we waited to see what the Swedes’ real offer would be and how the Scottish institution would respond to it.
Normally, an institution in this position asks the chairman of the target company to come and talk to them before they make up their mind, and I was accordingly standing by with my well-honed arguments in my head and my shuttle ticket to Glasgow in my pocket. But it didn’t work out like that. The Swedes fired their second shot at £6.25, which was enough to make us sit up and pay attention but not enough to make us feel that our shareholders should be recommended to accept. But suppose this wasn’t their final offer? £6.25 or even £6.50 might not be enough. But at £7.50, say, we would have to be hanging out the bunting and composing hymns of gratitude on our shareholders’ behalf. My prospective interview with the Scottish institution was starting to take on a different hue.
Vol. 13 No. 3 · 7 February 1991
From Lawrence Beyer
I hope your readers do not uncritically swallow the W.G. Runciman account of corporate takeovers (LRB, 22 November 1990). You would never know from that account that the typical takeover is driven by the perception –often accurate – that a relatively incompetent management team is not making the most of the assets of the corporation. Indeed, the Swedes who took over Runciman’s company may well have made an accurate judgment of this type. (Thirty per cent compound growth in earnings per share over five years is not necessarily something to brag about – perhaps it could have been substantially higher, perhaps profit in future years had been insufficiently provided for.) And if unanticipated economic events, like war or severe global recession, cause the Swedes to lose their shirts, it won’t prove anything about the competence of the earlier Runciman managerial team.
Particularly revealing in this context is Mr Runciman’s predominant concern for the fates of his top executive directors. If they really did do a fine job of managing, they should have no serious trouble finding new jobs. If they did not reap great benefits from the sale of stock during the takeover, it is either because they chose not to become significant shareholders in the company or because they had no funds to invest (unlikely for all but the most prodigal of top corporate managers, whose remuneration tends if anything to be too handsome). Nor can their treatment be said to be ‘unfair’ if in fact they were not the best people for their jobs (something neither I nor Runciman can determine, though I do think it unfair to those who are relatively competent if they get thrown out because to outsiders they are insufficiently distinguishable from the bad apples in the boardroom).
It’s amazing, therefore, that Runciman’s solicitousness extends only to these people, to the total exclusion of those employees lower down in the corporate hierarchy who may face wage reductions, relocation, or even the axe (either during the transition, or later on if the company’s new debt becomes too burdensome). But maybe it’s not so amazing after all: for it is just such chumminess, and sympathetic identification among those within the business élite, that too often causes managers not to pursue their companies’ best interests.
Yale Law School, New Haven
Vol. 13 No. 5 · 7 March 1991
From W.G. Runciman
Lawrence Beyer, writing from the ivory (or, as I recollect them, granite) towers of Yale Law School (Letters, 7 February), tells your readers not to swallow uncritically my account of a corporate takeover (LRB, 22 November 1990). His strictures don’t, as it happens, apply in practice to the particular instance which I described. But they raise some interesting points which deserve a rejoinder.
1. Does a takeover mean that the previous management was incompetent? Yes, sometimes. But as Mr Beyer implicitly recognises, it’s all about perceptions. A predator who thinks he can do better may persuade himself that the target company is undervalued and other investors that they would do well to take a short-term gain. But that doesn’t make it true. My first predator, whom we saw off in 1988, has just resigned from the company in question, leaving it to write off £21 million of non-core investments he took them into. My second predator won by the simple tactic of paying the asking price for the controlling stake: it was a bad deal on realisable (by him) values, even apart from the subsequent economic downturn, but some people have to learn caveat emptor the hard way.
2. Do executive directors who lose their jobs after a takeover deserve any sympathy? No, not always. But the critical variable here is age. In my case, the two people who suffered were both in their fifties, and the consultants they went to were unanimous in telling them how easily they could move into similar positions, given their track record, if only they were ten years younger (and they also lose out badly in terms of pension rights).
3. Do the employees lower down suffer more? It depends. The chances are that some will gain and some lose. But on Mr Beyer’s view, anyone made redundant by a new management must be presumed lucky to have been featherbedded by the old. In my case, those who have done worse are in a division of the company where they were already at risk for reasons which would have held for its old just as much as its new directors.
4. Is the ‘business élite’ too ‘chummy’? Perhaps its members are more polite to each other in Britain than the United States, but we’re all playing hardball. No doubt Mr Beyer will regard it as a symptom of ‘chumminess’ that I have, since I wrote my piece, been offered the chairmanship of a company four times the size of my old one. But (if he will allow me to switch from a baseball to a cricketing metaphor) I reminded my new employers when I met them that a batsman who scores a century in the first innings can score a duck in his second; and if I do, I shall undoubtedly meet the fate which Mr Beyer seems to think I deserve already.