Hostile takeover bids like Saskatchewan Wheat Pool’s proposal to buy Agricore United have about a 50-50 chance of succeeding, based on the record of the past three years.
In 2004, there were three high-profile hostile takeover bids in Canada, none of which succeeded.
In 2005, the tide turned, with six of seven hostile bids for Canadian companies proving successful.
So far in 2006, there have been five hostile takeovers attempted, and only two have gone to the bidder.
That works out to a success rate of 53 percent, based on statistics gathered by Toronto law firm Stikeman Elliott, one of Canada’s leading mergers and acquisitions law firms.
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“Most takeovers in Canada are friendly takeovers,” said Rob Assal, a lawyer with the firm, adding that many hostile takeover bids turn into friendly ones during the process.
A takeover bid is categorized as hostile when the board of directors of the target company advises shareholders to reject the bid, generally on the basis that the price is too low.
While Sask Pool has used the terms merger, amalgamation and combination to describe its proposal, AU’s board of directors has described it as hostile. AU advised shareholders not to tender their holdings to Sask Pool pending the completion of a formal review of the bid by a special committee of directors.
When the pool announced its intentions on Nov. 7, it described a $1 billion bid involving a share exchange, a small amount of cash and the acquisition of AU debt. The pool said the offer would provide AU shareholders with a 13 percent premium on the value of their investment as of that date.
Assal said whether a premium is reasonable depends on the industry and on the history of the target company’s share price.
“If the share price fluctuates by 10 or 15 percent a week, then 13 percent is not a big deal,” he said.
“But if it’s stable or if this is the highest it’s ever been and it never increases by more than five percent a year, then 13 percent is a significant premium.”
As of last week the pool had still not made a formal offer to buy AU, but is expected to shortly.
Once that happens, AU has 10 days to respond with a management circular to shareholders, analyzing the offer and presumably advising shareholders to accept or reject it.
Here is a typical timetable of activities for a target company such as AU facing a hostile takeover bid:
- Days 1 to 3 – Create a working group, assemble legal and financial advisers, co-ordinate a communications strategy and hold an initial board meeting.
- Days 2 to 10 – Provide shareholder list to bidder, begin preliminary analysis of alternative responses, begin preparing management circular to shareholder, perform financial due diligence.
- Day 8 – Hold a second board meeting to update progress, discuss a possible shareholders rights plan and solicitation of a white knight to offer an alternative bid and prepare a draft of a directors’ circular to shareholders.
- Days 14 and 15 – Hold third board meeting for further updates and mail management circular to shareholders.
- Days 15 to 35 – Continue to review alternatives and strategies and react to actions of bidder.
- Day 28 – Last day for directors to issue formal recommendation on the bid.
- Day 35 – Bid expires unless extended.
A target company has several tools to help it fight off a hostile takeover.
Aside from urging shareholders to reject the offer, the most common response is to implement a shareholders rights plan, commonly known as a poison pill.
Such a plan might involve issuing a large amount of cheap stock to shareholders other than the bidding company if the takeover process reaches a certain point.
Such a tactic was used by United Grain Growers in 1997 when it successfully fought off a takeover bid from Manitoba Pool Elevators and Alberta Wheat Pool.
Assal said a poison pill is generally designed to buy time for the target company to seek out a white knight. The pill generally expires in about 50 days.
