There can be after-effects for takeover prey that get away.
When a hostile takeover bid has been successfully repelled, how do the bruised incumbents shape up? Not very well, according to recent research. Back in the summer of 1986, when Standard Chartered Bank escaped a hostile bid by Lloyds, its share price went on to underperform the market by 33%, 47% and 50% over the next three years. This is an extreme example from a study published by Scottish Amicable Investment Managers earlier this year. But the figures illustrate the underlying conclusion of the report: that the vast majority of UK companies which have succeeded in fending off hostile takeover bids in the last decade have underperformed by a considerable margin in the following years. 'History suggests that shareholders are better to accept the offer on the table,' concludes the report.
Most fund managers claim to treat hostile bids on a case-by-case basis, but Kevin Fenelon, investment director at Scottish Amicable, concedes that his company's actions tend to carry through the logic of its research findings. 'In the heat of the battle people say things that they simply cannot deliver ... when they have escaped the predator,' he remarks. While this doesn't mean that Scottish Amicable automatically backs new blood, 'typically we have accepted the would-be new management's offer more often than not'.
Richard Hughes, joint managing director of M&G Investment Management, thinks otherwise. 'In broad terms we have not accepted a hostile takeover bid in the 10 years since I have been here. We have, however, accepted an offer once more than 50% of shareholders have already done so.' Hughes argues that investment managers 'must look beyond three years' when deciding where their funds will be best served. Standard Chartered shares, for example, 'are now storming ahead after a very long period of pain'. He adds, however, that although M&G is loyal to incumbent managers, rejecting a new management does not mean blind support for those remaining in the hot seat. 'We sometimes attach conditions to backing incumbent managers, such as requiring a strengthening of the board, a different emphasis on organic growth versus acquisitions or a splitting of the roles of CEO and chairman.'
Over at Standard Life, head of UK equities Graham Wood agrees with Fenelon that it's difficult to generalise, quoting two recent bids which brought different in-house assessments. 'We supported Rentokil's bid for BET, for example, because we thought Rentokil could extract more from the assets than BET could. However we did not back Farnell's bid for Premier earlier this year because we though Premier was too big and too expensive.' On the whole, he admits, 'I would be more in Amicable's camp than in M&G's'.
Of course, many companies become takeover targets precisely because they are underperforming in the hands of the current management. A failed contested bid can sometimes - and in spite of Scottish Amicable's findings - produce a beneficial effect, Wood suggests. He cites other research which concluded that, out of nearly 100 abandoned (although not necessarily hostile) bids in the period 1977-86, two-thirds of the target companies went on to outperform the market within five years. The remainder were acquired before the five years were up.
Nor should the track record of the predator be forgotten, Wood points out. He cites the example (which is featured in Scottish Amicable's research) of Dixons, which bid for Woolworth in 1986. Dixons found the compliment returned when Woolworth's successor, Kingfisher, launched a bid for the electronics retailer three years later. A case of the hunter hunted.