The importance of pre-deal scrutiny

The late Jimmy Goldsmith once said: "I am always pleased when I hear a company has hired Kroll to investigate me – it means the management has no decent arguments to offer."

While not being entirely fair, and who ever expected him to be so, there is a germ of truth in this: an ad hominem attack on a bidder rarely does the target much good with its shareholders, although it may make management feel better.

Goldsmith's unorthodox lifestyle ("when you marry your mistress, it creates a vacancy") may offend a conservative mid-western US pension fund manager but there is no scope to include it in his valuation model.

The old days of the "hero from zero" emerging from nowhere, funded by inexhaustible quantities of junk bonds, are long gone. Now, hostile deals are invariably strategic: most often, two companies in the same industry, with the bidder looking to increase geographic coverage, gain technological advantage or just bulk up market share.

The private equity buyers, which have replaced the old conglomerates for financial engineering deals, are disinclined to go hostile in all but a few cases (corporate governance hedge funds are rarely interested in acquiring). Today, the hostile bidder is corporate, probably very well known to the target as a competitor, supplier or customer; often listed in a major market; with an open approach that is part strategic, part opportunistic. So, is there still a role for investigative research in such takeover battles?

There are many old school PR types (and some former colleagues of mine) who believe there is; but I suspect that they are appealing to the sort of management that Goldsmith said had no useful arguments to offer.

When someone launches an uninvited bid, the target management may be forgiven for thinking the bidder must be managed by "bad people" and be gratified to learn they are [somewhat] correct. I used to describe such projects as "round up the usual suspects", but some may have missed the irony in the quote from the French chief of police in Casablanca. I, too, believe there is a role; but it is a very different and more sophisticated one from the old-style dossier of management profiles and detailed reviews of reputation issues.

While these issues are important when the bidder is looking at the target (whether or not it's hostile – indeed, getting good information may be key to making it friendly rather than hostile), and they make useful information for the PR team to satisfy the press, they probably will not make much difference to the audiences who will decide the progress and success of the bid. A moment's thought about those audiences and what will matter to them tells you where the focus needs to be.

The most obvious audience is the shareholders. Most of them care mainly about value, which is slightly more complicated than price. If shares in the bidder are being used as currency for the acquisition, challenging their valuation is not just fair game – it's a target management imperative.

Relying solely on the in-house analysts may be risky; and in contested scenarios, some more substance and some independence (they probably had a "buy" recommendation out the week before the bid) is often required if the shareholders are going to be convinced.

The issue may even arise for some big shareholders with a cash deal: they have to redeploy the funds back into the market and may be (or may become) uncomfortable with the leverage that the bidder will have to assume.

The value issues that I am concerned with are not accounting questions but the underlying substantive ones: not reserve estimate accounting policy but whether there is oil in the field, can it be extracted and is the company's concession secure?

Has the last acquisition been properly integrated or is the new deal intended to disguise the problems? Do the healthy margins reflect better management or sharp practices? Is there a track record of respecting minority shareholders rights? Is there a risk of expropriation? What is the attitude to corporate governance issues? Digging into these issues requires an understanding of the business involved and where the weaknesses may be found, which comes from the depth and breadth of experience in doing this work; it is also likely to need geographic and language coverage, because everything seems to be cross-border these days.

The other audience is the regulators, and these days they are numerous and various: competition watchdogs, licensing authorities, national interest guardians (CFIUS in the US, NIRB in Australia) and so on, all with a different agenda and their own special hurdles for acquirers to jump over. Many cannot stop a deal but they can delay it and may even make it uneconomic; most are under-resourced and rely on the parties to submit data and analysis to make their jobs possible.

If you are going to make the case for a pattern of anti-competitive behaviour, a disdain for foreign regulation, a poor environmental or labour practice record, or even something as simple as excessive market share, you need facts at short notice about a subject – the bidder – who is not inclined to be co-operative in sharing information.

Of course, in this brave new world of shareholder value, no one seeks to block a deal; only create enough space and time to assess and negotiate the best offer possible for shareholders (and should the bidder fail to provide it, only then send them packing).

All the research suggesting that most hostile deals are value-destructive implies that such space and time is worth fighting for, and so it must be sensible to consider all the available tools to achieve it. So some carefully considered fact-gathering, conducted by professionals who are focused on corporate value, should still have a role.


-- Tommy Helsby is the Chairman of Emea for Kroll, who wrote it for Acquisitions Monthly.

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