There are a number of reasons why the new changes may present opportunities for Asian investors.
New protections against “virtual bids” favour buyers who can move quickly: Many Asian buyers are cash-rich and do not need (or prefer not) to rely heavily on leverage to make acquisitions. This makes them potentially more nimble in putting together an offer. By contrast, many traditional players in the public takeover market, such as private equity houses, may not be able to move so quickly, because they need to arrange finance or simply because their internal risk control procedures require fuller due diligence.
- The rule changes which impose the 28 day time limit to make a firm bid potentially discourage buyers who cannot move quickly (for example because they need to complete due diligence). If there is a leak about the deal at an early stage, the clock will start ticking and such bidders may not be able to make a firm bid in the 28 days available.
- The requirement to identify all potential bidders in the event of a leak may scare off domestic players who do not want the publicity of an ultimately unsuccessful bid. By contrast, some investors from outside of the UK market may be less concerned with this aspect. That said, there will be Asian investors who are similarly nervous about adverse publicity in connection with a possible bid which does not come to fruition.
- The above changes may make it more likely that leaks occur early in the process, either because the target board wants to force its bidders’ hands, or because better prepared existing bidders want to make life more difficult for potential competing bidders by starting the timetable as soon as possible. The protection against virtual bids potentially gives the initial bidder a first mover advantage, and reduces execution risk.
Deal protection limitations are more of a problem for “traditional” takeover bidders: Implementation agreements and deal protection tactics such as exclusivity arrangements and matching rights have not generally been seen much in the Asian public takeover markets. Even break fees tend to be more important to buyers in places such as the US. Accordingly, whilst the new restrictions on deal protection and break fees might be a discouragement to Western bidders, this may be less of a concern for Asian bidders who have been happy to proceed in their home markets without employing such techniques (although, from the perspective of execution risk, the prevalence of controlling shareholders has mitigated the need for sophisticated deal protection measures).
Increased transparency requirements may discourage leveraged bids: The enhanced transparency requirements may favour Asian bidders in two ways.
- The new requirements for bidders to disclose details of their financing, and put on display their financing documents, may discourage leveraged buyers who may be sensitive to full details of their financing arrangements being made public under the enhanced disclosure rules, although in practice leveraged buyers may simply accept this as a requirement of implementing deals in the UK and proceed as normal.
- The increased focus on the impact of takeover offers upon stakeholders other than shareholders (e.g. employees, local communities etc.) may make highly leveraged private equity bids increasingly difficult to execute due to political pressure from interest groups. Certainly, there is now a greater awareness in the UK about some of the effects of leveraged bids which seek to use target company cashflows to fund debt repayments. That said, the wider range of matters that directors are now asked to take into account, including employee representations, may be somewhat unfamiliar to Asian investors who may wish to reorganise the target’s employment structure following acquisition. Even so, these requirements are still significantly less onerous in the UK than in many other markets in Europe.
Other competitive advantages
Asian buyers may have some other fundamental competitive advantages over Western bidders at present. There has been a historic preference in takeover activity in western markets for buyers to be absolutely sure they can secure 100 per cent of the target company, and de-list it promptly. This was traditionally because it was necessary to enable a leveraged bidder to use the target’s assets to secure the bidder’s borrowings, although there is also a general perception among western bidders that it is undesirable to have minority shareholders. There is generally not such prejudice amongst Asian investors, who are more familiar with the concept of an “owner-manager” controlled listed company. Many Asian buyers actually prefer to retain the listing of a target company in order to use it as a vehicle for future growth. For example, on the offer earlier this year by Guoco Group for The Rank Group plc (where Norton Rose LLP advised Guoco), Guoco was content for Rank to retain its listing.
The fact that Asian buyers often need not acquire 100 per cent of the target gives them a possible competitive advantage because it reduces execution risk. A bidder only needs to secure statutory control or acceptances of 50 per cent + from shareholders to make a voluntary offer successful/allow the offer to be declared unconditional. Indeed, for the target board or target shareholders who do not wish to sell out, there may be some strategic attraction in having an Asian controlling shareholder, especially where the buyer is likely to be able to present additional opportunities to the business in terms of export markets or strategic co-operation.
Of course, the inability to negotiate with a single controlling shareholder potentially makes acquisitions more difficult. But this can also work in favour of Asian investors - if they play in their domestic markets they must generally be able to negotiate a deal with the controller, failing which there will be no deal. By contrast, in the UK the lack of controllers gives potential bidders the opportunity to explore any listed company, with the possibility of going hostile if the board is not receptive.