Are British companies too easy to take over?

Kraft's hostile takeover of Cadbury made many question whether the UK's businesses are too easy prey.

by Tim Smedley
Last Updated: 17 Feb 2017

Has the UK's love affair with foreign takeovers of British companies finally run out of oomph? For decades we've welcomed the Americans, Germans and Spanish to our corporate boudoir, flashing our wares for their delectation. That the UK still has a car-manufacturing industry is a minor miracle for which we have the corporate gods of Japan and India to thank. But when Kraft made a lecherous pass at Cadbury in 2009, did the passion for our uniquely liberal takeovers market suddenly go cold? When even a giant like BP can be spoken of as a possible takeover target, is it time for the Government to call for the end of the affair?

Foreign acquisitions of British businesses have outpaced UK purchases abroad by over £160bn in the past six years. And when in February the then business secretary Lord Mandelson took a peek into his box of chocolates, he realised his Curly-Wurly had gone. Someone had nabbed Cadbury without asking. Mandy wasn't happy, nor were the press or the public. Even the Takeover Panel, custodian of the Takeover Code (which it meekly describes as 'an orderly framework within which takeovers are conducted'), was riled, taking the highly unusual step of initiating a public consultation to consider whether the Code should be changed. The resulting 'framework for discussion' was published last month (see panel, p56).

At the heart of the Cadbury takeover storm was Todd Stitzer, its then CEO, who now supports a rethink of the Code. Amiable and immaculately dressed, he is all too aware of the risk of sounding bitter in his first interview since leaving Cadbury in April - although his £40m payout has no doubt helped sweeten the ordeal. 'There is a balance of interests that needs to be considered in any corporate action, whether it's a takeover or a decision about marketing investment,' he says, picking his words carefully. 'Naked capitalism needs an intelligent balance, a check in the system that recognises long-term financial interest. The system as it's currently constructed directs you only to maximise current value for the shareholder.'

Since Kraft pitched its hostile bid direct to Cadbury shareholders in late 2009, Stitzer received daily reports on the changing nature of his shareholder register. Trades were happening at a blistering pace, many of which were down to hedge fund opportunists. From first to final bid, some 30% of Cadbury shares came under new ownership. It's a problem that highlights the decline of long-term investors in UK equities. The risk-aversion of pension funds, in particular since the Maxwell scandal, goes some way to explaining why fewer than half of FTSE 100 companies shares are owned by UK institutions and why there are so many shares available.

One proposal made by Cadbury's ex-chairman, Roger Carr, is for the shareholder voting majority in takeover scenarios to rise from the present 51% to 66%. Removing the right to vote from investors who buy shares after a bid has been announced has been called for by many, as has requiring the bidding company to put its plans before its own shareholders for scrutiny: at the moment the shareholder may be paramount, but only on one side of the deal (a rare and intriguing exception being Prudential shareholders' successful rebellion over the proposed acquisition of AIA last month).

Accusing Stitzer of a Damascene conversion would be unfair. He acknowledges that even these proposed 'checks in the system' would not have saved Cadbury: 'Kraft was willing to pay a 50% premium. What rational shareholder would not take that?'

Yet he would still have preferred a 66% rule in place. 'At least the decision would have been made by a group of people who were familiar with the company and its long-term strategy. If you couldn't convince that group the long-term value was greater, then fine ... You'd at least have slept better.'

Another proposed change to the Code is an updated 'public interest test', whereby the government could intervene in the national interest - the previous incarnation was scrapped by the Enterprise Act 2002. Most countries have one. When Pepsi-Co made a hostile bid for French damsel Danone, President Sarkozy came to its rescue with a brusque non (compare that with Mandelson's ineffectual 'tut' in the direction of Kraft).

In Germany, the only hostile foreign takeover in living memory was (British) Vodafone's conquest of Mannesmann in April 2000. Such was the public outcry about the proud German conglomerate subsequently being hacked up and sold off that it set back German liberalism indefinitely. Go out of Europe and you find the US is a defensive web of regulation and 'poison pill' traps; China and Russia tout their own brands of what business secretary Vince Cable has described as 'authoritarian, nationalistic capitalism', with the larger emerging economies following suit. In comparison with the protectionism that surrounds it, the UK has willingly smeared itself in crab paste and jumped into the crocodile enclosure.

In Britain, a minister can step in only if questions are raised over competition, public security, media pluralism or financial stability (the last hastily tacked on to rush through Lloyds TSB's takeover of HBOS). However, an extension of ministerial mandate isn't favoured by all. Richard Lambert, head of the CBI, remembers a time when 'the government minister would determine "public interest" based on whether or not the sale was in a marginal constituency'. But a rejigged public interest test could be governed by an independent body, tasked to look purely at the long-term interests of the companies involved - thus closing the gap left by shareholder primacy. Cable, a long-time proponent of an updated public interest test, has given every indication that he remains so as business secretary. In a speech to Cass Business School in June he welcomed the Takeover Panel's review and backed the need for reform: 'Too many takeovers in the UK fail even by the limited criterion of shareholder value,' he said pointedly.

But it is in the interest of many to keep the UK wide open, especially as the economy is so dependent on its financial sector. Gargantuan fees are extracted by investment bankers (and accountancy, law and PR firms) from M&A activity, whether their client wins or loses. The City provides the fuel that keeps takeover activity burning, and any increase in regulation would snuff the flames that it prefers to fan.

Laments Will Hutton, executive vice-chair of the Work Foundation: 'Money is simply redistributed within the shareholder community and boosts the economy of the financial sector. You need to believe in good ownership, in productive entrepreneurship, in innovation: if you think anybody in the hedge fund world has any understanding about how to own a company - well, you need your head examining.'

Yet there are defenders of the open market, including those who have been at the receiving end of a hostile bid. Neil Gillis, chief executive of Blacks Leisure Group - owner of the Blacks outdoor leisure chain - comes across as a man who would remain calm in the middle of a hurricane. From a private equity background, his faith in the market is absolute. Earlier this year, Gillis rode out a storm of his own. Having joined Blacks with a turnaround mandate in 2007, Gillis always knew a bid for control from Mike Ashley's Sports Direct, which owned a 29% stake, was a threat. In early 2009, Sports Direct tabled an offer that was swiftly rejected. Little was heard again until March this year, when Sports Direct blocked Gillis's proposed fundraising initiative for the last stages of restructuring, coming in instead with a new takeover offer. This bid was rejected as 'wholly inadequate' and another one withdrawn before the Takeover Panel's 'put up or shut up' date.

Gillis is sanguine about the attempts. 'There is no such thing as a hostile bid; there's only a hostile price,' he says. 'When you've spent time in private equity, it's drilled into you from the start that everything is for sale.' He has no hard feelings about the delay caused by Sports Direct's blocking of the fundraising. 'If you want to buy the business on the cheap, then blocking the fundraising is a pretty good way of trying to cap the value of the business.'

However, he's bemused by detail that came out later. At the time of the initial 2009 bid, Mike Ashley did not even own his shares - they were held by Ernst & Young. He bought them back to make the March 2010 bid, but arguably had no need to go in hostile - Gillis has never seen Ashley at a shareholder meeting before or since. There was no apparent attempt to win hearts and minds. 'One thing I've learnt is that, in general, you should never let personality or ego get in the way, because it's bad for business,' says Gillis. Withdrawal of the offer came when key suppliers said they would refuse to supply a Sports Direct-owned Blacks.

For some, hostile action is a necessary tactic; for others, it's a short-sighted bypassing of essential dialogue with the incumbent management team when an agreed takeover bid would be much more fruitful. The difference between an agreed acquisition and a hostile takeover is both wide and nuanced. A hostile bid - about 15% of all bids in recent years - leapfrogs the management team and lands straight in front of the shareholders. A friendly bidder goes to the trouble of winning the management team's approval first. In both cases, the ultimate decision rests with the shareholders, and the board of a target firm should not take steps to frustrate bids that are in the shareholders' interest - employees have no direct say. Ultimately, if the price is right, a company will be sold.

Richard Cuthbert, CEO of engineering and infrastructure firm Mouchel, would choose a friendly bid over a hostile bid any day. His organisation may be large, with some 12,000 employees, but it's low profile. From December 2009 to April 2010 it suddenly became big news, as rival VT Group swooped with a hostile bid, only to itself come under the unwanted (and ultimately successful) advances of Babcock International, thus saving Mouchel.

'We've done 10 acquisitions ourselves in the last seven to eight years, and every one of them has been about hearts and minds,' says Cuthbert. 'You need some mutual respect. It's all about the working relationship.'

In contrast, the only direct contact he had with VT's CEO, Paul Lester, was a phone call in December asking for his chairman's number. 'Why do you want it?' Cuthbert asked. 'Because we're going to make a bid for your company tomorrow,' he replied. 'Well, in that case, I'm not going to give it to you,' balked Cuthbert, warning: 'Whatever you bid, by the way, it won't be enough.'

Cuthbert knew that his stock price was undervalued. The true worth of the company, he felt, was out of VT's reach. In the event, he acknowledges, it may have been only the bigger shark Babcock's arrival that allowed Mouchel to swim away unscathed. A friend texted him: 'White knights come in all shapes and sizes.'

During his time as CEO, Stitzer was a veteran of more than 40 to 50 acquisitions of his own - none of which, he says, was hostile. At pains not to criticise Kraft's Irene Rosenfeld, he becomes philosophical: 'Look, Adam Smith would say the invisible hand is always working behind the scenes to moderate, but Keynes would say animal spirits sometimes get out of whack. Is capitalism a self-regulating system that countries and communities can deal with? I think not. The Great Depression proved that they couldn't, that some regulation was required. Those lessons wore off and all of a sudden you got smacked over the head with the credit crunch. There's a natural cycle of regulation and deregulation, response and counter-response.

'You would never want to remove the threat of takeover, because unproductive management shouldn't be allowed to feather their own nests and not deliver good shareholder returns. If that's the one good reason for takeovers, then if there's not unproductive management, if there are already good shareholder returns, should there really be a takeover?'

Will the renewed appetite for change following the general election be embraced by the Takeover Panel? Last month, St Vince said the takeover process he seeks is not one of 'protectionism or strategic industries' but rather about 'changing the way in which unfettered shortterm speculation can have damaging long-term consequences ...

This issue captures something simple and important about the economy we want to build.' Perhaps the time has come to forget the titillating flings and settle down instead on marriage for life.


  • Should the '50% plus one' minimum acceptance condition threshold for a takeover offer be raised?
  • Should voting rights be withheld from shares in an offeree firm acquired during the course of an offer period?
  • Should the 1% trigger threshold for disclosure of dealings and positions in relevant securities under the Takeover Code's disclosure regime be reduced?
  • Should offerors be required to provide more information in relation to the financing of takeover bids and their implications and effects?
  • Should shareholders in an offeree company be given independent advice on an offer?
  • Should the 'put up or shut up' regime be re-examined, and should the 28-day period between the announcement of a firm intention to make an offer and the publication of the offer document be reduced?

Image source: Health Gauge/Flickr


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