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Photo Courtesy: Abod |
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OF TAKEOVERS AND HOSTILE TAKEOVERS
By Gideon Sackitey,
Ghanadot
Gideon Sackitey takes us
through the process of takeovers what they mean and the
impact the Ghana case could have on the minds of foreign
direct investment:
One of the major events that
took place in the country in the year just gone by was the
attempt by First City Monument Bank (FCMB), a strategic
investor from Nigeria to buy majority controlling shares in
CAL Bank of Ghana. The hostile takeover process took the CAL
Bank officials and management by surprise. They however,
survived the procedure among other things thanks to a move
by the Bank of Ghana to block the move. The Central Bank
explained that it was acting in the interest of Ghanaians
and the financial industry as a whole in the event of a
withdrawal of Nigerian investment in Ghana, citing the five
Nigerian banks already operating in the country as enough.
Accra January 4, 2007 -
One curious word which has suddenly burst into the
public domain in recent days is ‘TAKEOVER’, a phenomenon
which seems to connote some unholy alien intrusion into
business in this part of our world although in the rest of
the world is a normal and very regular occurrence in the
corporate business.
Takeovers may happen for several different reasons, but more
often than not, would happen for good reasons rather than
bad. In the past couple of weeks, in the wake of the CAL
Bank stockholding issues, several meanings and
interpretations have been applied to this process and argued
out from a variety of positions,
depending on who is on the floor.
On account of posterity and for
the sake of students of finance, I believe that it is
important not to simply attempt to set the facts rights, but
also to ensure that one is applying the terminology
correctly in all given circumstances.
It must be pointed out that takeovers, or the ‘hostile’
version of it, are generally accepted corporate procedures,
allowed by law and are stock market-determined. Both
varieties – friendly or hostile - follow prescribed
procedures on the books and floors of all stock markets
across the world.
Terminology
The adjectives used to qualify the corporate activity under
discussion have evolved out of a blend of economic,
financial and journalistic parlance. There is what the
market calls a ‘friendly’ takeover, which, to a considerable
extent could equally be referred to as a merger because the
managements of the two or more companies involved actually
negotiate agreements to merge their respective companies.
The so called ‘takeover’ is negotiated.
On the other hand, an ‘unfriendly’ or ‘hostile’ takeover
usually begins with a tender offer for the shares of a
targeted firm with the goal of acquiring sufficient control
over voting shares in order to wrest management authority
away from the target firms’ existing management.
Clearly, the pace of corporate takeovers in the world these
days has actually surpassed the feverish pace chalked in the
late 1960’s. As stated by United States securities industry
sources, 1985 went down as the most active year for
corporate takeovers, registering about 2,500 corporate
activities.
Takeover activity has had an important impact on debt
markets since many takeovers are financed with borrowed
funds. Needless to say, this invariably affects the
structure of the companies involved.
It is for reasons like these that, many analysts are
becoming more and more interested in the takeover
phenomenon. Regulatory agencies for instance are
increasingly interested in and concerned about the effects
of takeovers of the corporate sector as well as the
stability of the financial system. But all said and done,
takeovers generally serve a useful purpose in bringing new
information to bear on the value of stocks and also impose
considerable discipline on corporate management. Of course
it likewise generates risks for the lenders of such
activities.
How Takeovers Occur
To study the causes of takeovers, it is important to review
the events that take place in the course of a takeover, with
particular reference to the prices of shares of the
candidate and acquiring firms. It should be noted that since
share prices should reflect current and future anticipated
returns to shareholders, they are a convenient standard of
the market’s assessment of takeovers.
The point must be made that a takeover may begin with a
silent acquisition of shares by the acquiring firm or
individual. If more than 5 per cent of the outstanding
shares of the target firm are acquired, the buyer must file
with the Securities and Exchange Commission, by revealing
the acquirer’s intended strategy. Note that a similar but
more formal approach is engaged if the acquiring firm wishes
to issue tender offer for a controlling interest in the
firm: Here the acquiring firm
files papers, stating the offer price among others and other
particulars of the tender.
Studies across the world have shown that the stock prices of
the target firm sometimes rise as high as 25 to 30 per cent
after takeover announcements. However, more recent research
at the University of Rochester in the United States now
indicate that stock prices actually begin to rise even
during the “silent” phase of an acquisition, suggesting that
brokers and others in the market use information on the
volume of shares traded as an indication of nascent takeover
activity. (This suggests that whatever gains were
anticipated as a result of putting together the companies
are captured largely by shareholders of the target firm).
One major characteristic of hostile takeovers is management
resistance which overly replaces shareholder vigilance in
disciplining management. The disciplinary theory can be
countered by the fact that targets of hostile takeovers were
no way financially inferior compared to the targets in a
friendly offer. But this does not rule out the scope for
better management and a more efficient use of resources.
It must be noted that deliberate and cumbersome legislative
hurdles for hostile takeovers could stifle innovation and
hamper the restructuring process. However, as shareholder
and institutional pressure increases, promoter-managers
could try leveraged buyouts as is now happening in Japan and
South Korea .This is key because the sector regulators
should be particular in their approach as it could create a
stiff-neck situation numbing the entire process.
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