What are dividends?

 

A simple question, I’m sure you’ll reply. Everyone knows that a dividend is money paid to shareholders by a company to reward them for owning its shares. However, a non-executive director needs to know a little more than this, as dividends can prove surprisingly complex.

 

A dividend is a form of shareholder distribution. However it is not the only form of distribution, the main alternative being a share buy-back. I’ll come back to that in a later article.

The first question that needs to be asked is whether a shareholder distribution would be legal.

Is a dividend legal?

 A company can distribute only profits to shareholders, so there must be sufficient accumulated profits in the balance sheet. This is shown by whether there are sufficient ‘distributable reserves’. If you look at the bottom of the balance sheet, you will see a number of reserve accounts listed, some of which are distributable and others not. The accounting bodies have conspired to make this highly complex, so I won’t go into the details here. However an alert non-exec will ask the CFO or Audit Partner to list out the distributable reserves to show that they exceed the shareholder distribution being proposed.

Be careful here, in that the distribution is made out of the top company accounts, not the group consolidated ones, so look at these (it may be the only time you look at the ‘company’ accounts, usually buried right at the back of an Annual Report). Also be aware that it has to be the last filed accounts that show sufficient reserves. Management accounts don’t count, nor does any profit earned after the last set of accounts filed with Companies House.

It is illegal for UK companies to pay a shareholder distribution that does not meet these conditions. If you subsequently find that an illegal distribution has been made, you will have to either claim it back from shareholders (not a great idea) or pass a retrospective EGM resolution to absolve shareholders from any claim from the company to get the money back. Best not get yourself into this position, although it does happen, especially since the law has been tightened.

Do shareholders like dividends?

There’s not much point in paying a dividend unless shareholders want one, but it’s pretty rare for them to be unpopular. Dividends do three things;

1. Pass some of the profits onto the owners of the business (ie shareholders)
2. Reduce cash balances or increase net debt for the company
3. Signal confidence in the future to the market

Dividend cover: Companies normally pay out a proportion of their annual profits. This is shown by the dividend cover. A common level is a cover of 2.0 meaning that the profit after tax is twice the dividend, or to put it another way, the company is paying out half its post tax profit. As a rough rule of thumb, a non-exec should be wary if the company is paying out a lot more than this (ie cover well below 2.0). Shareholders value a stable and predictable dividend flow, so you should satisfy yourself that this level is sustainable. It is possible to have an uncovered dividend (ie the dividend is higher than the profit, a cover of less than 1.0), but it is very difficult to keep this going for long.

If the cover is 3.0 or above, shareholders may query why more isn’t paid out. There may of course be good reasons, perhaps the company is trying to reduce its borrowings or is nervous about the future.

Dividend yield: The other way to look at dividend return is expressing the annual dividend as a percentage of the share price. This is the dividend yield. It can be compared to an interest on a savings account. Shareholders might expect a yield to be higher than a savings account to take account of the risk of fluctuations in the share price. A typical dividend yield at the time of writing is 3.5%, well above most savings returns.

Shareholder might be happy with a lower dividend yield if they expect the share price to rise, perhaps as the company is investing its cash resources into expanding the business. On the other hand, a higher dividend yield may not be good news, as this may suggest that the market expects the share price to fall and indeed that the dividend may not be sustainable.

Different shareholders look for different returns. Most private (“retail”) shareholders look for income, and so favour stocks that deliver at least a market average dividend yield. This would also be true of institutional income funds. However growth funds are more focussed on the share price, and so may be relatively indifferent to the dividend.

Do dividends matter?

Theoretically dividends shouldn’t matter. It’s all shareholders money whether its distributed (dividends) or kept in the business (share price). Shareholders should worry only about total shareholder return (TSR), which is share price appreciation plus dividends paid. A higher or lower dividend should not affect TSR.

However, in practice, dividends do matter:

1. A shareholder might have tax advantages in receiving capital gains from a rising share price, rather than income from dividends.
2. Shareholder distribution may be part of the company moving to a different capital structure, such as increasing debt and leverage. This alters the risk profile of the company and may move the valuation of the stock.
3. A rising dividend is sending the market a sign about management confidence and this may be reflected in a higher share price. Alternatively a cut in the dividend suggests that management is foreseeing more difficult times ahead.

Other kinds of dividend

Dividend in kind: Some companies offer investors to receive dividends in shares, either through a scrip issue of new shares or a ‘DRIP’ scheme (whereby the company purchases existing shares to give to investors). The advantages to shareholders are that, if they don’t need the cash immediately, they can reinvest the money in additional shares with no dealing costs. The advantage of a scrip issue to the company is that it preserves its cash, effectively issuing new equity. The DRIP uses cash, but slightly reduces the shares in issue, with some benefit to earnings per share. In the UK there is no tax difference in taking a cash dividend versus shares. If a new scrip or DRIP scheme is being launched, a non-exec should just ask what level of take-up is expected in order to justify the modest additional costs for the company.

Special dividend: Sometimes a company will declare a special dividend. The description ‘special’ simply implies one-off. It is typically where the company wishes to pass on the proceeds of a sale of a major asset or division, or where it wishes to increase significantly its gearing or reduce its spare cash. In other respects a special dividend is the same as an ordinary dividend.

Summary

 Dividends can be a surprisingly complex area. They need to be thought about and pitched at the right level for the cash resources, strategy and future expectations of a company.

1. Always ask the question about distributable reserves before approving a shareholder distribution.
2. Ask how the share register is made up, especially between income and growth investors.
3. If the proposed dividend cover is less than 2, ask the question why such a high pay-out and is this is sustainable?
4. If the proposed dividend cover is higher than 3, ask why the dividend is restricted to this level and could a higher payout be afforded?
5. If the dividend yield is higher than 4, ask why. Does the market expect a dividend cut in the future?
6. Asking the question doesn’t mean it’s wrong. It will just elicit the information a non-exec needs to understand before approving a shareholder distribution.

“Marking our homework” – Why executives resent non-execs

 

It won’t be long into your first non-executive job when you start to feel as if the executives resent you. It’s okay. You haven’t become paranoid. They really do resent you. Why?

 

 

 

Being an executive director is a tough job. You work all the hours that the Working Time directive allows, then you opt out and work some more. The market is very tough and competitive, and you end up making numerous difficult decisions. You do this for a couple of months and try to summarise what’s happened and why for the Board. Then a few part-time directors waft in and criticise the papers, ask stupid questions and lecture you about governance. What’s not to hate about that?

 

But being a non-executive director is also a tough role. You are invited to join the board of a company about which you probably know little and possibly in a sector of which you know nothing. You may get a cursory induction programme and then it’s straight into a board meeting. The performance information may be either perfunctory or so detailed that you can’t get any sort of meaningful overview. Management may be defensive, resentful and resistant to questions. You ask yourself, how can I add value to this board?

 

Executives often say they feel that non-execs come to board meetings ‘to mark their homework’. This is very difficult to avoid. Execs usually work very hard and in their heart of hearts, really want the non-execs to turn up and applaud them. There are few things more irritating than having a non-exec appear and come up with a good idea or question the execs hadn’t thought of. Even if it’s helpful, human nature means that you may resent it.

Here are some suggestions to help harmonious board discussions.

For the executive:

1. Remind yourself that the non-exec is trying to understand your position and making sure that you have thought of all the angles.
2. Don’t react immediately, but let the board discussion continue. The initial comment, even if naïve, may lead to a useful discussion.
3. Remember that you are paying the non-exec to be there. Whether you like it or not, you might as well listen to something you’ve paid for!
4. Pause a while, as what may seem initially as a strange comment from a non-exec may turn out to give a new insight or angle into a common issue. They won’t necessarily use the same jargon as you, but may still understand the problem.
5. If the non-execs are well chosen and sensible, remember that their comments are likely to be, or at least intended to be, helpful.
6. Avoid being defensive at all costs, and watch out for sounding defensive.

 

For the non-executive:

1. Avoid stating the obvious or asking a question implying that executives don’t know their job.
2. It is tempting to review paperwork and point out errors. If this is necessary, do it privately outside meetings, rather than in board discussions.
3. I think that it is good practice to ask questions that arise from reading advance paperwork directly of executives before the day of the meeting. This can be in person, by telephone or email.
4. Questions should generally be asked in board meetings only when they have just occurred to you or will elicit an answer that you would like everyone to hear. If the latter, you could also warn executives in advance that you intend to ask the question and give them time to prepare a good response. This will make them much less defensive as they won’t feel that you are trying to catch them out.
5. Keep interventions and questions short. The longer you go on, the more pent up anger may build in others.
6. Don’t confuse asking a question with making a speech. There’s a time for both, but not at the same time.
7. Try to put important questions or points early in the discussion, rather than dropping them in like a depth charge, just as the Chairman is drawing the discussion to a close.
8. Use cautious language, with plenty of conditional tenses and get-outs (“I was wondering if…” ,“Perhaps this might be an issue…”)
9. Offer to meet separately (”offline”) if the discussion goes on for a long time or has generated some unwelcome heat.
10. Remember that when you leave this meeting, you can go onto other things, but the executives are stuck dealing with the same issues full time until the next board meeting.

 

I have been in executive and non-executive roles on quite a few boards, and even temporarily moved from non-executive to executive on some boards, so I have seen these issues from both sides. I am grateful (and would like to apologise) to all my boards for allowing me to make all the mistakes listed here, and now to write from bitter experience!

 

Board meetings can very sensitive affairs. A good one informs all participants and pools their knowledge and experience to come up with good decisions. A poor meeting just stokes resentment between the various participants. Directors should remind themselves that it’s not an aural exam and board papers are intended to be the genesis for a two-way discussion. There is no marking of papers required!

 

What’s your favourite part of being a non-executive director?

Now I’m going to take a wild guess here, that the least favourite part of a typical NED role is setting executive remuneration. To the media, and now even the government, it appears that NEDs love nothing more than awarding large pay increases, bonuses and pay-offs to executives. It often seems that investors share this perception, and believe that it is only institutional shareholder intervention that can restrain the irrational generosity of the average non-exec.

Meanwhile executives are usually demanding higher remuneration and showing the Remuneration Committee comparisons that reveal how underpaid they are.

There is no right answer as to how much to pay someone. The only ‘objective’ measure is to pay what you perceive is the ‘market rate’ for the role, or some fixed relationship to it (eg upper quartile or 10% above/below). This is the first stop of the remuneration consultants, who advise NED’s. However market rate setting causes inbuilt inflation. Many companies want to pay above the average, but few want to pay below average. The rest is mathematics.

Remuneration consultants will tell you that FTSE 250 benchmark is 150% of salary in annual bonus, and it’s difficult to argue down from that. Long-term bonuses are now generally signed off any way by large shareholders from the start.

Of course not all Remuneration Committees do a good job and some make bad judgements. Personally I agree that much executive pay, like that of a few other occupations, is too high, especially long-term incentives.

The question is what to do about it. The latest proposal from a Tory MP last week, and apparently backed by leading fund manager, Neil Woodford, is that large companies should form a committee of their five largest shareholders, with a worker representative and the company chairman invited as observers. This committee would approve pay deals, recommend appointment and removal of directors and question strategy.

Most non-execs would be only too delighted to delegate remuneration to someone else. The problem is that remuneration decisions are closely linked in to the detail of a company’s operation, career development or recruitment and retention. This means that the decisions need to taken with full knowledge of a number of complex and potentially price-sensitive issues.

Many larger fund managers currently delegate governance issues to a specialist corporate governance department. However these individuals inevitably lack the knowledge of the company and sector that the fund manager has. To have any chance of this working, institutional shareholders would have to send the fund managers, not corporate governance specialists, to these committees. My suspicion is that this would not be a welcome extra task for fund managers. Mr Woodford is already a busy man.

Institutional shareholders can already nominate, vote directors in and out. Do they really want to become the Nomination Committee, even without seeing how directors perform in board meetings?

Why would it take a committee of five large shareholders to challenge company strategy? In my experience most shareholder meetings talk strategy and there is plenty of opportunity for shareholders to express their views.

There are many smaller shareholders who would be worried about how this proposal would increase the power of a few large holders. Recent rule changes have strengthened protection for smaller shareholders from single dominant shareholders. Protection of minority shareholder’s interests is a key role for directors, which could be undermined by strengthening the power of the top five over director selection.

There isn’t an easy solution to setting executive pay. Remuneration has become a leviathan, taking up absurd amounts of board time, as directors try to balance executive aspirations with many different shareholder demands and compliance requirements.

I would welcome clearer guidelines from institutions as a whole on how they would like remuneration to be set. They would of course need to agree those guidelines amongst themselves first. Fund managers could engage more with non-exec directors, both to evaluate them and to communicate their wishes, and then to vote at AGMs for non-execs they trust.

If there were clear unitary guidelines, investors could vote out directors who don’t follow these rules. Shareholders don’t need to, don’t want to, and can’t, manage companies that they invest in. They should set the rules, and then judge the directors who do manage their companies.

This would build on our existing strong corporate governance framework, rather than bowing to media and political pressure by creating new parallel structures.

 

Someone getting emotional?

 People are only human. Occasionally they fall in love with other people. Ideally, the ‘other person’ works elsewhere, but sometimes the two work together.

Many executives will have come across co-workers, who are in a relationship. This knowledge can vary from being a matter of mild interest to one of real discomfort. I had a boss once who was having an affair with their deputy in our small team. It was very uncomfortable most of the time, but also hilarious at others, especially when they tried comically to hide what everyone already knew. Most companies these days will have policies against relationships with subordinates, particularly as they could be construed as sexual harassment.

However, rules don’t guarantee compliance, especially in matters of the heart. So, as a non-executive, what do you do if you discover that there is a relationship at a company at board level or involving a board member?

Firstly look up the rules to establish the legal position. Is there a company rule that forbids or defines parameters for such relationships? The rules may well be different for relationships between co-workers as opposed to those between boss and subordinate.

The easiest thing for a non-exec is to ignore the situation. You may feel that you should ‘do something’ but if it doesn’t seem to be interfering with work and you don’t feel that it is exploitative, there may be plenty of other more important matters to worry about. Just keep an eye on it. If you don’t feel comfortable with this, the next step is to quietly mention it to the Chairman, and leave the ‘hot potato’ steaming nicely in their lap.

The most problematic relationship is often one a CEO and a senior executive. I have seem this a few times, and it is rarely a good thing. Inevitably other executives know about it, resent the special bond, and fear the pillow talk. This cannot, I think, be ignored. A non-exec would be wise to discuss it privately with the Chairman, and if they refuse to engage on it, raise it at a non-exec meeting. The very least you should aim for is that all non-execs are aware of the issue and can take it into account when they participate in board discussions and decisions.

If you feel that the relationship is exploitative, then you must raise it at board level. If the board declines to take any action, then you must decide whether to live with it or resign.

Beyond this, any non-exec has to apply their own discretion and judgement. How dysfunctional is the relationship to the company and its board? How concerned are the other non-execs? How much fuss do you want to make? There is no right answer here, but you should try to work out, all things considered, what is in the best long term interests of the company?

A final word on your due diligence when you join a board. When one Chairman asked me to lunch shortly after I joined the board, I assumed that he was being welcoming and that we could get to know each other a little better. In fact, he wanted to tell me that there was a relationship that I needed to know about. How kind of him to tell me a week after I had signed on. That taught me as much about the Chairman as it did about the participants.

I would recommend that in your final due diligence before being appointed as a non-exec, you ask the Chairman a direct question as to whether there is anything you should know about personal relationships in the senior management and the board. If you get an astonished denial, you can rest more easily. That’s what due diligence is for. But you might just find out something that could save you a lot of trouble later on.

Summary

1. Relationship happen at work. They are not necessarily harmful.
2. Check the company rules on relationships.
3. You can ignore it, if it does no harm. If in doubt, consult the Chairman.
4. If the Chairman doesn’t do anything, you can consult your fellow non-execs.
5. If the relationship risks being exploitative, you should take action.
6. Worth asking a question during your due diligence.

 

Notes from a non-executive director

A series of articles looking at practical issues and problems that arise on boards.

1. Becoming a non-executive director
   1. What you need to know for your first NED interview
   2. How to choose your first NED role
   3. How to assess your NED Offer Letter
2. Learning to be a non-executive director
   1. Your first 100 days as an NED
   2. “Marking our homework” – why execs resent non-execs
   3. What if you have no financial experience?
   4. What’s all the fuss about cash?
   5. What’s your favourite part of being a non-executive?
3. Things it’s worth knowing as a non-executive director
   1. What are pre-emption right and why do they matter?
   2. What are dividends?
4. What to do if your company gets bid for
   1. What if you get an unsolicited approach for the company?
   2. Let battle commence. The unsolicited approach
   3. Just say ‘No’ – Assessing an offer for the company
5. Difficult issues that board sometimes face
   1. Is management telling the whole story?
   2. Is someone getting emotional?

Is management telling the whole story?

The company was in financial difficulties, as changing market conditions had seriously exposed the misplaced strategy. There was however no suggestion that anything improper had gone on. The external auditors were high quality, and there was a competent internal audit team with appropriate risk models.

Yet something didn’t feel right. Whilst the strategy had failings, the execution must also have been wrong, yet none of the KPI’s showed anything wrong. Eventually, management admitted that they had changed an accounting policy to capitalise losses, and then report the lower numbers. The figures that the board had been looking at, and relying on, were in fact useless and misleading.

Fortunately, outright distortion of data for a board is very unusual. However, a board can only work successfully if it knows all the salient information. A board cannot know everything that matters. It just doesn’t have the time. With luck, executive management will know most of what really matters. It will then brief the board on what it thinks the board needs to know. This will be supplemented by knowledge that non-executives glean from other roles and sources.

The prime source of information for non-execs is therefore what the executives choose to pass onto the board. NEDs can of course ask further questions, and this will elicit further information. Non-execs need to spend some time trying to crosscheck information. One way to do this is to look hard at the standard performance indicators (KPI’s) given in board papers.

A new non-exec might be surprised at how often a KPI appears to contradict what management is saying. It is worth challenging this, as the explanation is usually illuminating. It may well be that the KPI is being distorted by a one-off factor. Sometimes, this provokes a useful discussion as the distorting or one-off factor may be being forgotten. It may be that the question is followed by an awkward silence as the CFO starts flicking through his packs to find a reason. This may itself trigger a concern in your mind.

Management is likely to present information in a way that fits with its view of the world. This is perfectly natural. However one of the roles of independent non-executives is to be independently minded, and even to apply a little ‘devil’s advocacy’. The executive team is quite likely to be pulling one way under the CEO, so the NED’s can play a vital counter-balancing role.

If someone in management does decide to distort (or ‘re-present’) the data, it will be very difficult for a non-exec to detect. In my example, neither internal nor external audit spotted a change in an accounting policy, let alone reviewed if it was the right thing to do. Non-execs should not expect auditors to spot such problems. They may do so. They may well see such an event so early that it is corrected before the board even hears about it. But the auditors feel no responsibility for internal management performance data (even if, as here, the data was subsequently published). Internal auditors will only take responsibility if they are directed to review the performance measure itself.

You should expect any material change in accounting policies to be presented to, and approved by, the Audit Committee. This is an important check and balance for non-execs. It is also however worth asking whether any changes in accounting policies, treatments or estimates might have had an effect on important KPI’s.

If you spot an issue through advance reading of the board papers, it is good etiquette to ask the initial question before the meeting. If the answer is easy, then it can be dealt with quickly. If the response suggests to you that there is a real issue, it gives you a chance to raise this in the subsequent board meeting, at which management have had notice of the point you will raise and so will not feel ambushed.

If something doesn’t feel right, especially if the management narrative doesn’t seem to fit with some of the numbers or the KPI’s, it is worth asking questions. You may need to start out by asking apparently dumb questions. You will be surprised at how often an apparently stupid basic question elicits a very revealing reply. You may well find that one question leads to another and so on. It is worth persisting until you have an answer that satisfies you. Of course, it may be better to ask these question outside of a board meeting. Your colleagues will thank you for saying that you will take the issue up after the meeting and report back if anything material arises, rather than elongate a board discussion at the time. It may also be more comfortable for management to research the answers rather than to be put on the spot in the meeting.

 Summary

 

1. Boards thrive on good information. Most of it comes from management and from regular board reporting, such as financial statements and KPI’s.
2. Most management teams try to provide the best, balanced information that they can.
3. Occasionally, information can have a little spin added or even be distorted, and this can be challenging for non-execs to spot.
4. Try to cross-refer information with financials and KPI’s. If there are discrepancies, or things just don’t feel right, ask about them.
5. Watch how any change in accounting policies might affect KPI’s.
6. Keep asking questions to drill down to get the answer you want, but not necessarily at a board meeting itself.
7. Look for help from auditors, but do not rely on them. If unsure, ask the internal auditors to do a specific project on the area concerned.
8. Use the time between meetings to gain information and establish if there is an issue, but feel free to raise the issue at the meeting for discussion and to alert everyone to the point.

 

 

Just say ‘No’ – assessing an offer for your company

 

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;

1. 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.
2. 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.
3. 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.
4. 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.

Non-price considerations

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.

Summary

1. Most first offers will be rejected, as the first offer is very unlikely to be the final one.
2. ‘No’ can mean ‘No’, but it can also mean ‘yes, at a higher price’.
3. Not all offers are equal. Some are real and some have different motives.
4. Make sure that an offer is deliverable, especially if it looks too good to be true.
5. Offering due diligence can be a key negotiating tactic.
6. If you don’t think the offer is really genuine, don’t feel that you have to engage.