Takeovers & Trends in Takeover Activities

Takeovers
In business, a takeover is the purchase of one company (the target) by another (the acquirer, or bidder). In the UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to the acquisition of a private company.

Types
1) Friendly Takeovers Before a bidder makes an offer for another company, it usually first informs the company's board of directors. If the board feels that accepting the offer serves shareholders better than rejecting it, it recommends the offer be accepted by the shareholders. 2) Hostile Takeovers A hostile takeover allows a suitor to take over a target company whose management is unwilling to agree to a merger or takeover. A takeover is considered "hostile" if the target company's board rejects the offer, but the bidder continues to pursue it, or the bidder makes the offer directly after having announced its firm intention to make an offer. 3) Reverse Takeovers

A reverse takeover is a type of takeover where a private company acquires a public company. This is usually done at the instigation of the larger, private company, the purpose being for the private company to effectively float itself while avoiding some of the expense and time involved in a conventional IPO. 4) Backflip Takeovers A backflip takeover is any sort of takeover in which the acquiring company turns itself into a subsidiary of the purchased company. This type of a takeover rarely occurs.

Trends in Takeover Activities

Takeovers are high on the agenda for many companies looking to 'buy' growth. These companies need to be aware that while the outcomes can be attractive, a takeover that fails to address risk and governance issues can come at a very high cost. Given current trends, these issues need to be considered by all companies, not just corporate heavyweights. While media headlines often focus on larger takeover plays, many smaller companies use them to make 'bolton' acquisitions, or for other strategic purposes, such as achieving a back-door listing on the stock exchange. Risk arises as an important issue for all companies considering a takeover but the stakes are particularly high for smaller entities who have never been through the process. If they have not sought

proper advice, they are at real risk of running foul of the law and severely damaging their businesses. Even companies who have been through the process need to be aware that the rules of the game are subject to change. However, all entities should also be aware that, despite the risks, the strategy of pursuing growth through acquisition remains one of the most effective ways of expanding a business. Risk and governance issues Recently published information shows a strong appetite for takeovers. The market value of deals done in the calendar year ended 2004 were about the same as the combined total of all takeovers in 2001, 2002 and 2003. So far, 2005 has been a busy year for takeovers, not only in terms of the transactional worth of the target companies but also in the number of transactions undertaken. There are also positive trends that have been reported, indicating takeover levels for 2005 could even surpass 2004 activity, if not in value terms, certainly in takeover numbers. The large numbers of transactions being undertaken may give the impression that there is 'safety in numbers' and that there is little risk involved in launching a takeover bid. However, a number of issues need to be considered to ensure a smooth and beneficial transaction. Analyse the options

First, it is important to consider all of the options available in making a takeover. Do not assume that every quest for ownership of a public company must follow the traditional, regulated takeover model of a bidder's statement and accompanying offer. The Chapter 6 takeover provisions apply to all listed companies, listed managed investment schemes and unlisted companies with greater than 50 shareholders. The advantage of proceeding using the regulatory path imposed by Chapter 6 is that it is a clear process regulating all the transactional steps. It should also be kept in mind that: * stamp duty on the acquisition or transfer of shares does not apply where the securities are listed and * depending upon the perceived needs of target company shareholders, the takeover bid can be structured so that they are either paid cash for their shares or offered similar type securities. Capital gains tax (CGT) rollover relief can apply if 80 per cent or more of the company is acquired, so that target shareholders swap their shares for shares in the bidder, with no applicable CGT. The key here is that the swap must be of the same style of security. In some instances, despite the added stamp duty burden, it might be worthwhile considering the acquisition of the company's business and its assets rather than shares. Quite often, this can minimise the extent of due diligence investigations needed. It is important to remember that acquiring a company through the acquisition of its shares also means acquiring all of its historical

baggage, including exposure to liabilities, such as claims for liability to unpaid tax etc. There are also other, more circuitous, ways to acquire a business that can be considered, such as schemes of arrangement and complex capital reductions. Due diligence The parties ordinarily, at the outset, enter into mutual confidentiality covenants by the execution of an appropriate deed. This 'confidentiality deed' deals with the process of due diligence, as well as identifying the scope of the exercise. Ordinarily, before due diligence is undertaken, it is not uncommon for the parties to have a determined price in mind (or at least a range) as well as applicable time frames so that there is some level of commitment associated with the desire to 'do business'. It is fair to say that the most successful acquisitions are those which have been properly planned and analysed and where the assimilation of the new business into an existing business is a good fit. This can depend upon the synergies and attendant cost savings which might be realised in the merger process. Never underestimate the subsequent effort required to achieve assimilation. Corporate history is littered with stories of acquisitions which, in principle, were good ideas but never reached their full potential for the acquiring party because of shortcomings in the post-acquisition stage. In many cases, some of the post-acquisition pitfalls can be traced

back to insufficient appreciation of matters which may have been uncovered at the due diligence stage. Often this can occur, for example, because the 'people issues' were overlooked. The takeover process The most commonly used process for acquiring shares in a listed company is by what is termed an 'off-market bid', because the bid for the company's shares does not involve 'on-market' purchases of the target company's shares. Under the Corporations Act, the usual critical time at which a takeover bid must be made is triggered by the acquisition of a shareholding stake of 20 per cent or more in a company. Putting aside some of the exceptions and extra detail, the Corporations Act contemplates that if a person wishes to extend their relevant interest in a company's shares beyond 20 per cent then this needs to be done through a formal takeover bid. In this case, the target company's shareholders are made an offer with a closing date deadline. Once an off-market takeover bid is announced, a bidder must comply with the provisions in the Corporations Act. The provisions include strict regulation of the communications made with the target company shareholders. Neither the bidder nor the target company can include misleading or deceptive statements in documents circulated concerning the takeover bid. In many circumstances, apart from those where an expert's report is required to be included in the takeover documentation, both

bidders and target companies often utilise the services of experts to prepare reports for inclusion in the takeover documentation. This gives recipients of the documentation the benefit of a value analysis, often directed at persuading or dissuading acceptance (as the case may be). Given that 'friendly' takeover bids have an overwhelming advantage over 'hostile' bids, the advantage of doing the background homework and making the offer attractive to the target company shareholders is probably the most critical factor that will determine success or failure. If a dispute arises during a takeover bid, for example, if the disclosure requirements are not met or if one party has concerns about the other's conduct, the dispute can be resolved through the Takeovers Panel (Panel). The Panel has very wide powers and can intervene to stop a takeover bid proceeding. This could happen if the Panel believed one party to be guilty of unacceptable conduct of a serious kind such as disclosure or non-disclosure (as the case may be) of information in the takeover documentation. Minimising risk of failure Before the takeover begins, the business issues needing consideration are tax and stamp duty implications. Foreign companies must consider restrictions under the Foreign Acquisitions and Takeovers Act, such as the requirement for approvals from the government via the Foreign Investment

Review Board. Additionally, if the acquisition could have the effect of substantially lessening competition in a particular market, approval from the Australian Competition and Consumer Commission (ACCC) is required, otherwise the ACCC might intervene to prevent the acquisition proceeding. Companies also need to assess the importance of gaining 100 per cent of all shares in the target. Most off-market bids contain provisions activating the compulsory acquisition entitlement for a bidder who acquires at least 90 per cent of the relevant shares and a minimum of at least 75 per cent of the securities bid. This means minority interests can be compulsorily acquired so that the bidder can end up with 100 per cent of all shares in the target company. This is obviously an important element in achieving complete integration of a company into a group structure so that there is no later need to worry about the ongoing position of minority shareholders. Because the process of takeovers is highly legalistic, it becomes a matter of complete necessity to engage lawyers at the outset. It is also important to consider the tax and accounting effects of the target company in the bidder's group balance sheet. If the target company's directors have reservations about the bid and the consideration being offered, the commercial advantage of proactively marketing the bid (in an acceptable way) often becomes the telling feature between success and failure. For this

reason, it is invariably the case, particularly with bigger takeovers, for 'spin doctors' to be engaged to highlight the positive features of a takeover. Communication with shareholders in the target company is a key factor. From the outset, the share register needs to be carefully analysed to determine who holds key stakes, and to consider the best strategies for maximising the number of acceptances before the closing date of the bid. However, communication with the target company shareholders cannot be misleading or deceptive. Taking the 'back door' The issues outlined above are also pertinent when the acquisition is being made via a back-door listing. ASX-listed companies down on their luck after hitting the wall often become the subject of this form of corporate 'recycling'. These companies frequently have liquidity problems and have become dormant. Predominantly, they are languishing or are simply shells of their former being and their only identifiable worth is their number and spread of shareholders. Such a company is capable of being revitalised. A proposition can be put to the target company by another party with a business for sale. The business vendor will offer the business to the target company on the basis that they pay for it using newly issued shares in the target company.

By doing an all scrip deal, the company can acquire a viable business and the vendor can emerge as a major shareholder (and usually a director) in an ASX-listed company. These types of acquisition are carefully monitored by the ASX to ensure the shareholders are provided with a great deal of information about the proposals and have the benefit of a independent expert's report so they can assess the impact of the acquisition. The risks of this type of takeover include that, in certain cases, the ASX can treat the whole exercise as being of sufficient gravity or magnitude to warrant the target company reapplying for its ASX listing. This means a new prospectus needs to be prepared and issued to facilitate its re-entry as a listed company. The prospectus then becomes a document of record for future trading in that company's shares. Certainly this form of acquisition can carry a higher level of risk and is not often an orthodox way of acquiring a business. However, it was a popular form of acquisition following the burst of the 'dot com' bubble several years ago when back-door listings became a way of salvaging some shareholder value from failed companies. Conclusion A takeover bid for a company is, in many cases, the best way to achieve business growth quickly. In many instances, the process involved in making the bid and 'mopping up' can be completed in around three to four months. No company should ignore a takeover bid as a strategy to acquire

a company because it may all look 'too hard' and the risks too great. Directors and executives should not be too proud to ask for professional advice in choosing the best way forward, being aware that it may be necessary to compromise to achieve the desired outcome.