Thursday, December 4, 2014

Hostile Bids and the UK "Put Up or Shut Up" Rule

Mergers and acquisitions in the U.K. are regulated by the Takeover Panel, a coalition of about 35 individuals from law, banking and industry.  A recent rule is altering the way deals are done in the U.K.   Under a controversial "Put Up or Shut Up" rule, potential bidders have 28 days to make a binding offer after acquisition intentions become known.  After that they must walk away for six months before attempting the deal again.  'Becoming known' apparently includes news leaks of a potential bid.  The following facts are from a very interesting article in the Wall Street Journal by Shayndi Rice:
  • The law was put in place in 2011 and has had greater impact this year as deals (including cross-border deals) have proliferated.
  • 'Put Up or Shut Up' is designed to make lengthy hostile deals less problematic for a potential target. Proponents say it forces bidders to come to the table 'better prepared'.
  • The rule forces potential bidders to line up financing quickly.
  • Stryker Corp., Glencore, Carillion, and Pfizer had to walk away from deals this year because of the rule.
  • The article quotes Robert Gillespie, a former director general of the Takeover Panel as saying "I don't think there have been any unintended consequences of what we did."
Whoa!  Hold your horses!  I'll stop citing facts from the article and put on my professor hat.  Saying there are no unintended consequences is like waving a red flag in front of a finance professor/economist. Unintended consequences are very common and it is hard to imagine they don't apply here.  

One consequence is a slowdown in hostile deals.  This may, in fact, be intended, but a concurrent loss of economic efficiency is unlikely to be at the top of anyone's wish list.  Hostile deals can indeed be disruptive but keep in mind that they involve potential bidders bidding with their own money, offering premia to existing shareholders in return for the chance of their own gain.  

Hostile deals, activists, and even the threat of hostile deals serve as a disciplinary force of corporate governance.  When internal governance controls fail to maximize value, external forces will.   The net impact of this law is an empirical issue, and certainly hostile deals can be distracting and disruptive, but let's also keep in mind the negative effects of inefficiency and complacency.   

All the best,


No comments:

Post a Comment