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).