Some surprising facts on takeovers

Much of the debate about hostile takeovers in Britain takes place in a politicised context, with enthusiasts for the Anglo- Saxon models of corporate ownership arguing against admirers of the Continental (and Japanese) models with little factual background to support the arguments of either side. So a book* published this month, which looks at what actually happens in contested takeovers in the UK, deserves a warm welcome.

The book falls into two parts. In the first, the authors, Tim Jenkinson and Colin Mayer, examine what happened in general terms to companies involved in hostile takeovers in the second half of the 1980s, and the costs of such bids. This is then set in a European Union context by looking at the way in which companies are protected on the Continent.

The second half looks in detail at 42 hostile bids conducted in Britain between January 1989 and March 1990 at the height of the takeover boom. This leads to some quite surprising conclusions about the British takeover system.

One conclusion is that, while UK and US practices are usually lumped together, British companies are in fact more vulnerable to hostile takeovers than those in the US. Not only do they have fewer defences in the case of paper bids, but with cash bids they also have virtually no defence save the seeking of an alternative bid from a 'white knight' - which in practice often proves a 'grey knight' by turning the favoured bid into a hostile one at a later stage in the battle.

This can be taken one step further: British companies actually have fewer defences against hostile bids than companies in any other country, including the US. In the US, there are a variety of devices which companies can use, in particular 'poison pills' which increase the cost to the bidder.

But, most important of all, do takeovers work as a sanction against companies where the management has failed? It would be nice to be able to report that where there was clear evidence of such failure, bids tended to succeed, and where there was no such evidence, they tended to fail. Alas, there is no such relationship.

The authors divide the 42 hostile bids into three categories - 16 where there was definite financial failure, 10 where there was possible failure and 16 where there was none. In the first group, only six bids were successful and 10 failed. In the second, six succeeded and four failed. And in the third, eight succeeded and eight failed.

The only sensible conclusion one can draw from this is that either success or failure is random or, at the very least, the performance of the target company is not relevant to the outcome.

This evidence, plus the fact that British companies are unusually vulnerable to cash takeovers, inevitably has implications for policy.

The book suggests that companies should indeed be better protected, but argues against any attempt to import the Continental style of company ownership, where banks hold large shareholdings.

Instead, Jenkinson and Mayer argue that companies should be able to establish additional defences, perhaps on US lines, but with two restrictions. Such defences should have the agreement of shareholders, and they should be for a limited period.

The first would stop managers creating defences which reduce the value of the company to shareholders, while the second would prevent managers becoming too entrenched.

Just how more US practices might be brought in is left open - that would really be an issue for the companies and their advisers - but as a way forward it seems extremely sensible.

It is surely better than the idea that we should try to adopt more German or Japanese ideas just at the moment when these are being reassessed. In fact, what seems to be happening around the world is a convergence of practice, something that one might reasonably expect as ownership of companies becomes more international.

In any case, it is important to remember that ordering the way in which changes in ownership of companies take place is only a means to secure better management performance. One lesson of the post-war period is that ownership by shareholders, in its many forms, seems a better mechanism than ownership by governments. Nationalisation does not work.

Now that that particular dragon has been slain, we really do need to talk more vigorously about ways in which the various models can be improved. This is a debate which could not comfortably take place while supporters of stock market ownership were still on the defensive. Now we know we have the best system, we ought to be confident enough to seek ways of improving it further.

* Hostile Takeovers - Defence, Attack and Corporate Governance, Tim Jenkinson and Colin Mayer, McGraw-Hill.