In previous articles, I covered how a board should react to an unsolicited approach or offer for the company, how it would value it, valuing shares versus cash offers, whether it’s friendly, unfriendly or hostile, and irrevocable commitments. Here, I am going to look at the different sorts of offers that you might receive as a board and how you might respond.
The ‘knock-out’ offer
This is an offer that you think is so good, that you and your advisers want to accept it without much ado. You will want to be sure that the offer is ‘real’, ie that the offeror will carry through on it and has the means to do so. Assuming that you are happy with this, you can proceed onto the next stage, due diligence. Beware, of course that the bidder may use the information gained in due diligence to justify reducing their offer in the same way that house buyers sometime use structural surveys to negotiate a lower price.
The ‘interesting, but not enough’ offer
This is a very common type of offer. It isn’t high enough, but it’s enough that you can’t dismiss it out of hand. Typically every first offer is rejected as inadequate and very rarely do bidders put their final offer in first. Your advisers might describe this offer as ‘well judged’. It is high enough to show they are serious, and, since everyone assumes they would be prepared to go higher, it may be difficult for the target board not to engage with them.
The target board can respond in a number of ways;
- A straight ‘No, thanks’ and a refusal to engage. This is confusing for the bidder, as they want to know whether the board is refusing to engage at any price or whether it is just waiting for a higher price. Almost certainly there will be adviser-to-adviser contact as the bidder tries to understand this. Faced with a brick wall ‘No’, the bidder has a number of options; to move to a ‘knock out’ offer; to go away, at least temporarily; or to appeal directly to the target’s shareholders.
- A ‘Not at this price’ response. This is a come on, suggesting that the offer is close but not quite high enough. The bidder may then seek guidance from the target’s advisers as to what price would be acceptable. The target board’s advisers may or may not provide such guidance. It doesn’t really matter as this is now a negotiation. This is quite common and most ‘agreed’ mergers will have gone through a few private rounds of offers, refusals and improved offers.
- A ‘Not at the moment’ response. There may be a non-price reason why the target board doesn’t want to talk at that moment, and the message may go that the time isn’t right. This could typically be when a new CEO has just joined and the board wants to understand what the new person thinks they can achieve. Alternatively, the target board may be aware of a price sensitive development that it thinks will boost the share price, such as a new product launch or new contract.
- An ‘Interesting, but there’s more you need to know’ response. This can be linked to the last point, as for some reason the target board believes that outsiders don’t fully appreciate its value. It offers to ‘lift its skirts’ to tempt the bidder to make a higher offer. The target offers due diligence access to financials and/or commercially sensitive data on the clear condition that it won’t accept the original offer, but is prepared to help the bidder come to a higher value. This would be a common situation, particularly for a private or specialist company.
The ‘insult’ offer
There are several reasons why a board might receive an offer so low that it regards it as insulting. The bidder might be playing a PR game, prior to going hostile. The bid price mysteriously leaks into the market, which may hit the target’s share price. It can become accompanied by negative comments about the target company, its products or management. This used to be more common in the 1980’s when companies could take out adverts knocking target boards. Alternatively the bidder may just be trying it on, just to see how strong the target board is. If the target engages, the offer may yet be lifted to an acceptable level in time. Although the offer may feel insulting, the target company is best advised to react coolly and professionally, making great efforts to ascertain the real motivation of the bidder. However dubious the bidder’s methods, institutional shareholders rarely applaud a public fight about them.
The ‘Spurious’ offer
This is an offer where the target doesn’t believe that the objective is to succeed. The most obvious would be where a competitor bids, perhaps with the objective of getting confidential information from the process. In this case, the target board may either refuse to engage, or decide that it is prepared to entertain an offer, but won’t provide due diligence information. The bidder will then have to bid with either publically available information only or heavily redacted private information.
The ‘I want to join the party’ offer
This is where an offer has been made by someone else, and others then also knock on your door. They may do so in order to gain information, especially if they are competitors or private equity interested in the sector. They may also do so if there is a regulatory inquiry. When Morrisons and Safeway announced a merger in 2003, Sainsbury, Tesco and Wal-Mart all announced their intentions to make an offer. This had the effect of ensuring that the original offer, together with the new ones, would get referred to the Competition Commission, and possibly blocked or at least delayed (ultimately by 14 months). It also meant that the competitors had a seat at the table with the Competition Commission, although the Safeway board refused to give those competitors any due diligence.
I have covered only the share price here for simplicity. The board may take other factors into account, although, especially in a public or private equity company, price is likely to be the dominant factor. Once the price has been broadly agreed, then non-price factors, such as keeping factories or production, may come more into play, as the final details are negotiated.
- Most first offers will be rejected, as the first offer is very unlikely to be the final one.
- ‘No’ can mean ‘No’, but it can also mean ‘yes, at a higher price’.
- Not all offers are equal. Some are real and some have different motives.
- Make sure that an offer is deliverable, especially if it looks too good to be true.
- Offering due diligence can be a key negotiating tactic.
- If you don’t think the offer is really genuine, don’t feel that you have to engage.