Anthony Hilton: Predators say no to struggling firms

It is a myth that when good companies get into deep trouble they are likely to get taken over.

Anthony Hilton
Anthony Hilton

Bids don't come when they need them. It is only when they have tackled whatever it was that caused the problem and have begun the long climb back to respectability that they are in serious danger. That is when a predator is likely to strike.

When the stricken business is really up against it, no one else wants to get involved. Potential acquirers can never tell from the outside how bad things are, so the sensible ones refuse to take the risk. There are exceptions, of course, but boards that plunge in anyway often come to regret it. Think no further than Lloyds TSB and HBOS or Morrisons' acquisition of Safeway.

The problem for the potential target is that stock markets are slow to forgive. Shares will fall sharply as the disaster unfolds, but are unlikely to recover much soon after the company turns the corner. Investors need time to be convinced the firm really is on the way back.

This gives the predator the window of opportunity when the target's problems are basically resolved, but the share price is still depressed. So the defence needs to find a way to deliver a jolt to the investing community and engineer a speedy recovery in the share price.

Nothing puts a rocket under a share price faster than a bid rumour, so one answer is for the defence to float the idea of an imminent attack on the company. Thus with BP - the obvious example of a vulnerable business. One newspaper last weekend splashed on a bid from Exxon, another on a partial bid from BHP Billiton. A third ran a story on 'certain' management changes to fend off an unnamed predator and a fourth 'revealed' a private equity plan to break up the business.

They can't all be right and there is no evidence that any of these stories emanate from BP. But neither are they likely to be complaining because they stand to gain from the leaks. It is unlikely that anyone planning a bid would choose to advertise their intentions in the press when all it will do is push up the price.

As a postscript, BP shares are now looking healthier than at any time since the disaster struck.

Anthony Hilton is City commentator on London's Evening Standard

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