Corporate Actions - A Concise Guide - Francis Groves

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dividend in an effort to thwart a takeover (as happened in the takeover bid by MAN of Germany for the Swedish truck maker, Scania). If an acquiring company pays for the takeover by offering its own stock to the target company’s shareholders, they may lose out if the merged companies fare badly after the takeover and the share price declines.

      Where the shareholder may see pros and cons for the takeover bid, for the directors of the target company the situation is bound to be clear-cut and unwelcome. A hostile takeover bid can be an explicit or implicit claim that management of the predator company would make a better job of managing the target company than its current directors, who will, if the bid is successful, almost certainly be voted off the board. [24]

      A takeover bid presents the shareholder with three basic choices: [25]

      1 Accept the offer

      2 Reject the offer

      3 Sell their shares on the open market in the course of the bid. This option may be attractive in a situation where the shareholder is doubtful that the bid will be successful but wishes to take advantage of the (temporarily) increased share price that the bid has brought about. Alternatively, the offer may consist wholly or chiefly of shares in the acquiring company and the shareholder prefers to have cash straight away.

      Takeover bids tend to be preceded by a period when rumours of bids abound and a subsequent stage when the intention to bid may be clear but the terms have not yet been announced. [26] Speculation about the price the predator may put on the target company’s shares will be reflected in a higher (and possibly more volatile) share price at this time.

      Poison pills

      In some countries, it is common practice for companies to have “poison pills”, which are designed to make hostile takeovers more difficult. Typically, this might mean that once a shareholder acquires as much as 15% of the voting shares in a company, all the other shareholders are able to buy new shares at a big discount to the stock market price. Poison pills have been upheld by the Supreme Court of Delaware until recently but this may be beginning to change. They also occur in Japan.

      In recent years the idea of “chewable pills” has grown in favour. These are poison pills with features to make them more acceptable to shareholders, such as shorter lifespans or a triennial review of poison pills by independent directors.

      Reverse Takeovers

      A reverse takeover can mean the acquisition of a larger company by a smaller one, or the acquisition of a listed company by an unlisted one. [27]

      Agreed takeovers

      This kind of takeover (or merger) accounts for some of the most important takeovers, such as the acquisition of mobile phone operator O2 by Telefonica of Spain.

      Although an agreed takeover has a good chance of success, the shareholders should consider the reasons the target company’s directors have for recommending the offer. For example, an agreed offer may arise where several predators are interested in the target but there is one that the directors of the target company prefer. Also, the acquiring company may have gained the support of (some of) the target’s directors through offers of directorships in the merged company.

      De-mergers

      A de-merger occurs when a company spins off a business it owns into a completely separate company. This result is often achieved through an issue of shares in the de-merged entity to the shareholders of the original group (in proportion to their shareholdings). [28] The rationale for a de-merger may be that it permits each of the businesses to focus on their core activities or that the market capitalisations of the separate companies will become more than the market capitalisation of the original group, thus increasing shareholder value. To put it another way, it becomes clear that the original group is less than the sum of its parts.

      For companies that are active in more than one kind of business, de-merger rumours can be a staple of comment by analysts and the financial press. This has been the case with Pearson, for example, which has divested itself of Royal Doulton, Madame Tussauds and its stake in Lazard Brothers and whose Financial Times subsidiary is a perennial favourite of de-merger speculation.

      Severn Trent/Biffa, an example of how the sums worked out

      Severn Trent’s de-merger of its waste services subsidiary, Biffa, in the second half of 2006 was recommended to shareholders on the grounds that the two companies had few ‘operational synergies’ and that the de-merger would be an opportunity to return value to Severn Trent shareholders (who benefited from a return of capital and the receipt of shares in Biffa).

      On 1st October 2006 a shareholding of 375 Severn Trent shares would have been worth £5,010. They would have received:

      £618.75 as a special dividend (the return of capital)

      375 new shares in Biffa (one for each Severn Trent share held)

      250 new shares in Severn Trent (two for each three shares formerly held)

      A year later (1st October 2007) the 375 Biffa shares were worth £833 and the 250 Severn Trent shares were worth £3,525, making a total of £4,408. If one adds back the special dividend the shareholder is slightly ahead.

      But…!

      For a higher rate taxpayer there would be some £155 in extra tax to pay on the special dividend.

      Endnotes

      10 For example, a rights issue is usually thought of as a single corporate action in terms of its import for the investor, but corporate action practitioners may see it as two separate actions; firstly, the distribution of the rights (nil-paid) and, secondly, the (call) payment for the new shares. [return to text]

      11 ‘Lost in Transcription’ (The Banker, 1st June 2007). [return to text]

      12 Infosys white paper (Ramamurthy, Arora & Ghosh, November 2005). [return to text]

      13 These VOC dividend percentages are not true dividend yields based on the price the shares were trading at when the dividend was paid – in the early years of the 17th century there was no official quoted price with which to calculate a true dividend yield. Instead, the VOC dividend is expressed as a percentage of the price of the shares at issue (ie, their face value). [return to text]

      14 Chapter 9 looks at the tax implications of different kinds of corporate action in more detail. [return to text]

      15 Money Observer features its ‘ten per cent club’ annually. The UK companies listed have increased their dividends by 10% over 10 successive years. [return to text]

      16 The ex-dividend date is the first day on which purchasing the shares would not entitle the investor to the dividend in question. The record date is the date on which the registrar would compile the list of shareholders due to be paid (these important dates are dealt with in more detail in the next chapter). Note that the approval of the final dividend payment would normally be the subject of a shareholder vote at the AGM, so the shareholders’ approval is retrospective. If a company operates a dividend re-investment scheme they will normally make clear to shareholders the latest date for joining or exiting the scheme. In the above example a shareholder would know that they had to opt into the dividend re-investment plan by, say, 23rd April to be sure of having their final dividend re-invested. [return to text]

      17 This description of ‘scrip’ is true in UK parlance. In the United States, the term ‘scrip dividend’ seems to be ambiguous and is sometimes used to describe a promissory note in lieu of an actual cash dividend. The term ‘stock dividend’ meaning a dividend paid in shares is also current in the US. [return to text]

      18 Barclays Capital Equity Gilt Study, 2005. [return to text]

      19 Not to be confused with

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