Poker for Dummies
The “put up or shut up” laws spreading throughout Europe are forcing suitors in the region to make their intentions known.
July 7, 2008
If anything came out of the Microsoft/Yahoo saga it’s that the intentions of a suitor are rarely easy to gauge. The angst for many public entities begins as soon as a bidder lodges a proposal to acquire a company. And given the number of broken deals over the past 18 months, few targets can feel comfortable at the outset of an offer.
In Europe, however, regulators have rolled up their sleeves in addressing this issue, as a law that first cropped up in the UK – known as the “put up or shut up” rule – has quickly been picked up by other countries in Europe, such as France, Austria, Belgium and Luxembourg. The Netherlands is also considering similar legislation, which is ultimately designed to force bidders to make their intentions known if there is any ambiguity as to what their goals are.
In the UK, for instance, if a potential acquirer makes ambiguous statements as to what they may or may not do with a target company, the target may request that the Takeover Panel issues a deadline to a potential bidder. This deadline requires the suitor to make an official offer or back away from the target for a six-month “cool-off period.” The practice has been common in the UK since the establishment of the Takeover Panel, a self-regulated non-governmental body that regulates merger activity.
In early July, for instance, advertising giant WPP Group plc made a public proposal to buy market research company Taylor Nelson Sofres plc (TNS) for £1.08 billion ($2.14 billion). TNS management claimed that offer was merely a ploy to upset its merger with Germany’s GfK AG, and the Wall Street Journal quoted TNS chairman Donald Brydon dismissing the bid as an attempt “to screw us up.” The solution, however, was fairly straightforward, as the Takeover Panel ruled that WPP had one week to either put forth a binding bid or back off.
If this were poker, it would be akin to having the high bidder turning over their cards before the rest of the table decides whether or not to call.
The “put up or shut up” laws received a boost throughout Europe following the European Union’s 2004 enactment of the directive on takeovers. Years in the making, the directive was an ambitious attempt to establish an overall structure of takeover legislation that would govern M&A occurring within EU member nations. The key component to the legislation was transparency.
The initial impact, though, was wholly underwhelming. The agreement was seen as being driven more by compromise than an innovative, overarching vision. With that said, market observers believe it has ultimately succeeded in establishing a gradual shift toward greater comity among EU nations. The effect on the “put up or shut up” laws, which were not part of the takeover directive, is that several EU member states have enacted similar legislation.
Proponents will cite that the laws prevent companies from being besieged by offers that aren’t genuine or have some goal other than an actual merger or acquisition. Had Microsoft been forced to “put up or shut up,” for instance, Yahoo head Jerry Yang might have had an easier time convincing shareholders that he wasn’t negligent in turning away the software giant’s entreaties.
Others, however, wonder if the legislation doesn’t effectively serve to shackle the hands of acquirers doing business in EU countries.
Mark Jordan, a managing principal at global investment bank Vercor, takes a view that some would consider typical in America – essentially, he believes that the push for more regulation runs the risk of putting the deal process in the hands of the courts.
“Shareholders should be able to capture the best valuation of their company, and [the “put-up or shut-up” rule] jeopardizes shareholders getting optimal value,” he says.
Regulatory interference, for instance, effectively scuttled QBE Insurance Group’s bid for Insurance Australia Group and also threw a wrench in Halliburton’s attempt to acquire Expro International.
In the last week of June, a UK High Court ruled against Mason Capital and Sandell Asset Management, hedge funds who were looking to allow Halliburton to re-enter the bidding war to acquire Expro. Instead, the judge voted to approve the £1.8 billion sale of the oil and gas company to Candover.
David McCorquodale, European head of consumer markets at KPMG’s corporate finance division, dismisses concerns that acquirers are held captive from bidding during the cool off period.
“I never buy that,” McCorquodale says. “There is always the opportunity of come out and put in a bid through an appeals process. The regulations only keep a hostile bid out.”
He notes that Sainsbury saw three different takeover bids in 2007, and each bid failed because the bidder was not able to successfully arrange financing for the proposed acquisitions.
Nevertheless, as hostile takeovers appear to be on the rise, many argue that limiting the ability of bidders to engage in hostile actions can affect target valuations.
Stephanie Bates, chair of Mayer Brown's corporate finance special interest group in London and co-head of the London’s capital markets group, believes that the positives of the “put up or shut up” laws outweigh the possible negative outcomes. But she concedes that it may be a difficult adjustment for American hedge funds if they were to take their activist strategies overseas.
Meanwhile, Vercor’s Jordon does not anticipate similar rules cropping up stateside. As he sees it, US regulatory authorities are primarily concerned with protecting shareholders and preventing fraud and deceit – whereas, the “put-up or shut-up” rule is more focused on establishing a due process of bidding and merger activity.
Poker artwork courtesy of Flickr user Jam Adams, obtained through Creative Commons.
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