Takeovers are not just about price

It is easy in an age when the financial markets are obsessed with the pursuit of shareholder value for management to assume in a takeover that everything is about the price paid to shareholders.

Anthony Hilton is City commentator on London’s <em>Evening Standard</em>
Anthony Hilton is City commentator on London’s Evening Standard

However, as the chairman of the Stock Exchange Chris Gibson-Smith has said, such a narrow view is too simplistic and may get the company into trouble. He reminds us that directors have a broader duty of care that must also be satisfied in the context of their primary duty to shareholders.

It is interesting how often this is overlooked – most recently in the struggle by the Qataris acting through a fund known as Delta Two to gain control of J Sainsbury. After months of haggling the potential bidder has put together a package that seems to meet the concerns of the Sainsbury board, not just in terms of the price but more importantly in how the offer is structured. 

Delta Two should have all the money anyone could possibly want, given the oil wealth flowing into the region, but seemed strangely reluctant to use all its own cash for the deal, preferring to borrow a lot. Yet the world is full of supermarket companies that have been destroyed by taking on too much debt. 

Not surprisingly, Sainsbury wanted to be sure that was not going to happen to its business.

It took Delta Two a while to get the fact that price on its own was not the issue, but having got it the bidder then repeated the error with the pension fund.

These days pension trustees are by law required to resist any change of control, which weakens the finances of the pension fund, so this was always going to be an issue. But the bidder refused to negotiate seriously over how much additional cash or security might be needed until the lack of such a settlement was leaked to the press as a potential deal breaker. 

It is an interesting example of the power of the press being used during a negotiation to alert politicians to a potential problem. And more directly, to embarrass the advisers to the bidder  who would be highly embarrassed to be associated with an acquisition of such a high profile target which left the pension fund in the lurch.

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