Takeovers, whether successful or not, are enjoying the kind of immense popularity not seen since the '80s. And, given that it's possible to insure against almost anything, it was only a matter of time before someone came up with the bright idea of hostile takeover insurance. This is exactly what its name suggests: a company insures itself for an agreed sum (paying annual premiums of between 3.5% and 6%), which can then be spent defending itself should a hostile takeover bid arise. The claim is payable shortly after the hostile bid has been 'successfully defended' and, presumably, before the lawyers, bankers and advisers start chasing for their fees.
'The main advantage,' says Adrian Blackshaw, a director, of the 'insurance boutique', TOI Corporate Services Limited, is that, 'irrespective of the size of the company, you're protecting shareholders' funds. Particularly if it's a small-cap company, defending against a hostile bid can devastate the balance sheet and weaken the company physically. So, even if the bid fails the first time around, the company will find itself far more vulnerable in the future.' Thus far TOI has insured around 6% (by number not value) of the UK's 2,400 publicly listed companies.
Maybe, but who says takeovers are such a bad thing? After all, a publicly quoted business' first responsibility is to its shareholders and when a bid, hostile or otherwise, is mooted, share prices usually rise. But, says William Staple, a director of Rothschild's, when a predatory business approaches a relatively small company with an undervalued bid, a decent war chest can allow the target company to rebuff the predator and hold out for a better offer. Otherwise, the target will find itself using shareholders' funds to try to get a better price, a strategy that can have savage repercussions should it fail. Staple doubts, however, that such insurance would be all that useful for much larger businesses: 'For a FTSE company, the sums would either be uninsurable or the premiums huge - it's more attractive to smaller companies.'
Andrew Marsh, a director of Lloyds' Brokers Prentis Donegan and Partners is rather more effusive. 'Any publicly traded company ought to be buying it. It's a very useful management tool. Look at the cost of defending against hostile bids, it can have a severe effect on earnings and can wipe out dividend coverage.' Moreover, continues Marsh, a company that knows it has cover can get 'better and higher profile advisors and lawyers on its side before the event happens.' Whatever happens, says Marsh, whether it be a better offer or a successfully defended bid, 'the board comes up smelling of roses'.
Floral-scented directors or no, this type of insurance probably isn't for everyone. But the nature of takeovers has changed since the '80s and many predators in the corporate jungle are now snapping up their smaller brethren for strategic reasons. The target company may, for example, be a hi-tech one which has come up with a particularly attractive technological breakthrough. Depleting funds in a defence bid could seriously hamper its future research. So, while businesses need to consider how appropriate this insurance will be to ensure their survival, they should not remain oblivious to the potential threat of a hostile takeover. As Staple points out, 'Takeovers are like car accidents - everyone assumes they won't happen to them.'.