On whose side is the Takeover Panel?

The Panel has gained an excellent reputation as the ultimate arbiter in many a contested takeover battle in the UK Stock Market and many countries are in dire need of a comparable institution.

But while no one can question the qualifications or motives of those professionals who work for the panel - who probably take a sizeable pay-cut in doing so - we would like to remind readers that the panel is not necessarily the best forum to defend the interests of the shareholders of the involved companies.

In our opinion, the Takeover Panel is too concerned with organising a smooth bid procedure but does not see the wood for the trees. As a consequence, the selling shareholders do not get fair treatment due to a defect in the mechanics of public takeover bids.

A simple look at the good old Supply and Demand Graph that will be familiar to all of those who have done an economics degree will demonstrate that any cut-off (bid-price) that may appeal to a majority of holders short-changes those investors who would only have planned to sell at a price that is higher than the agreed price.

By disenfranchising the shareowners at the upper end of the Supply Curve (e.g. the last 10 or 5% of the holders) the sellers lose what is comparable to a 'consumer surplus' in economic theory. The buyer would have to pay substantially more on the totality of the outstanding shares if he would have to pay the price needed to buy the last 5 or 10% to all the sellers.

The politicians in the UK (as well as in some other countries) have followed the advice (of dealmakers?) and made it easier to 'squeeze out' minorities and introducing 'schemes of arrangement' that penalise shareholders that hold out for a higher price before agreeing to sell out.

All this contributes to explains why the 'Venture' Capital Industry (as much a misnomer as 'Private' Equity) can easily pick off shareholders in public companies and produce good returns. The surprising fact is that the returns of the Venture Capitalists are not much better in spite of this tactical advantage (amazingly, many studies even claim that the risk-adjusted performance lags the broad indices).

Why only now Mr. Pessina?

We read with interest that an 'energetic' Stefano Pessina now 'puts spring in step at Boots'.
The question we would like to ask is why is it only after buying out the public shareholders of Boots that the man in charge of the business is able to manage the company the way he thinks is right. In the article he even admits that Alliance Boots is still being run 'as if it were a UK-quoted company'. We just cannot believe that it is beyond the capability of any skilled top manager worth his salt to manage a listed company properly.
We suspect that MBO's and LBO's are mainly a way to divert the profits of a company to a changed set of owners. If the incumbent management is a beneficiary of a buy-out we urge shareholders - or their agents (the institutional fund managers) to be extra vigilant and refuse to ratify a sell-out. It will always be much cheaper to install new management if the existing management is unable or unwilling to put in the effort to make the business perform well.

Mitchells & Butlers - who looks after the small investor?

It is management dogma at most business schools - and certainly with investment 'bankers' - that corporate activists are a good thing. However, the current activity around Mitchells & Butlers (M&B) raises a few points of principle.

First, newspapers report that a group of investors controlling about 40 per cent of M&B's shares are preparing to 'move on the board' (sic). They are 'understood to be acting separately but collectively' . Now it would be interesting to find out what that is supposed to mean. How can you act collectively and separately at the same time?

The same newspaper report also refers to a 'series of letters and telephone calls' in which the shareholders have 'warned the management' and demanded that management take a specific action with respect to its property portfolio. Some of these shareholders might also be interested in entering into transactions with respect to this portfolio.

This situation illustrates a basic problem with the practice of shareholder activism as a solution to the problem of corporate governance: Any communication among investors creates the danger of conflict of interests. Dialogue with management or other investors gives an investor insights into the business outlook of the business and an advantage vis-à-vis ordinary shareholders that are not privy to this information.

Only full disclosure of all communications between management of investors can guarantee a level-playing field for all investors. In addition, a 'quiet period' after any direct communication might also be useful. A few days after any direct contact (and dissemination of relevant minutes of the information exchanged) should be enough given that most investors have easy access to bulletin boards, corporate websites and newswires.

It would also be helpful if all significant proposals are discussed in an open forum that is open to all shareholders and where all proposals are put forward. It is high time that the owners of a business do not only read in the newspaper when major decisions affecting their investment are taken. The good old Annual General Meeting (possibly supplanted by some sort of electronic alternative) would be the most appropriate forum.