A beginner's guide to takeovers - MoneyWeek Investment Tutorials

takeovers are billed as the sexy side of financial markets but in a lot of cases they're actually a complete waste of time more about that later what are takeovers and how can investors expect to profit from them and what are one or two of the key bit Falls to watch out for well that's going to be today's video topic okay so takeovers how do they work now you might think well one company buys another but you need to be a little bit specific about what you think that means and who's making the key decisions so let's start off with a very quick summary we could have a company Val call a a PLC most likely and a company that will call B PLC and we've got one group of shareholders who own company a and another group of shareholders who own Company B okay now the mechanics or take over and then we'll look at one or two of the pitfalls and how investors can get involved are as follows the board of company a need to make an offer to the shareholders of Company B in order to get control of it because don't forget the people who control companies are ultimately shareholders insofar as key decisions have to go through them so it is the shareholders a Company B that need to be persuaded by the directors our company a that this is a good deal so the directors of company a might wake up one day and think well buy a Company B now I'll have a look why they might think that in just a moment and what they need to do is persuade enough of the people who own Company B to give up their shares okay now what they might offer is cash it doesn't have to be cash it could be all kinds of other things all right but normally cash will be a chunky part of the deal alright and the shareholders need to effectively say yes by giving up their shares all right so this could be a cache for shares transfer and the question as to how many of these people need to agree well 50% plus one vote is just about enough alright why because the board of company a can buy 50 percent plus one more vote alright which means that some of these people might actually disagree they might reject the offer okay then basically company a has control of Company B through a majority its voting shares we think about it are the next Annual General Meeting of companies B shareholders which now include the director company hey company aids directors can say let's get rid of all of the rector's in Company B alright and the minority left here might object and company A's Board say let's take it to a vote we have 50% plus one vote that means all the director of Company B get fired not 50% plus one that's what control means okay so in a takeover you might aim to get more than 50 to M plus one vote but 50% plus one would in theory do it all right and we'll look at one or two more key percentages in just a moment so there we have it a takeover would result in the board a company a controlling let's say Company B through a majority of its total shares and then theory they can do to Company B as they will all right now does it have to be aggressive I've almost described this as though there's something's as a scholar skull-and-crossbones going on here almost like a wall street style at Gordon Gekko no takeovers don't have to be aggressive or unfriendly or hostile and that's why there's a fight on the company ie to actually get enough shares to control Company B all right it could be friendly it could be the Company B shareholders go yep I'm liking the cash that's on the table and I'll disappear and retire early and spend it all right but in a hostile takeover it can take quite a long time for company A's board to persuade enough of these shells income PB that it's a good idea and of course the directors in Company B may not recommend company A's deal to their own shareholders am I trying to fight it off and in moment we'll look at how they can fight it off or one or two ways all right so what else we got to think about well let's have a look at just two more key percentages like this is not a video about rules and regulations but in the newspapers you will see a couple of key percentages other than the one I just mentioned mentioned quite a lot so imagine this is the percentage of Company B that you could possibly own starting from zero all right if your own no shares and Company B then going up to a hundred percent if you owned all of the voting shares in Company B all right I just mentioned that 50 percent is quite a key percentage ideally you want to get somewhere above that line in order to have control of Company B other words people's online I think you have to get all the shares income PP not strictly true all right below that 30 percent is quite important and above it 90 percent is quite Borton just mention those two all right why are they important basically a company may may try and take over another one by stealth bit by bit chunk by chunk all right it may build a stake in the target company that's the one being bought okay predators the ones doing the buying targets the ones being bought that's the language of the city so you may get up to just below 30 percent the reason you'd stop is because at that point you can be forced by the panel on takeovers emerges to try and make a pitch for the rest of the company they reckon you are annoying enough say thirty percent to cause problems at an agenda meetings company B so you can be forced to make a bit which is why you'll see journalists talk about stakes of twenty nine point nine nine percent quite often that's because somebody has got close to the limit and stopped and the reason they've stopped they don't want their hand force before they could and ready all right ninety percent if you manage to snaffle up at least ninety percent of this year's exempt maybe you can kick out the minority who are not playing ball you can just say look I'm sorry you guys are going to just take what's on the table and go alright so just a couple of key other percentages there there are others I won't mention in this video now then what next how can company B defend themselves against the predator attempting to take them over well again there are many varied take-home defenses or just mentioned two or three in this video okay one and they all have quite sexy sounding names is the White Knight Company B doesn't be taken over by company a so it find someone else that it prefers okay and they buy Company B instead now they're gonna have to outbid company a obviously come up with something which is better for Company B shareholders but a white knight is that kind of defense there are others you can depth-charge your own company so company B might use what's called a poison pill and that capability for example allows existing shareholders to buy shares in Company B in this count alright kind of squeezing out the aggressor alright it's got a poison pill there's the pac-man defense all right back man gobble gobble gobble takes a magic pill turns around gobble gobble gobble all right that's the one where the target becomes the predator all right unbeknown to the predator the target has a couple of tricks up his sleeve like a big cash war chest for example and access to funding or perhaps plus combined with the White Knight and actually much to the shock of company a turns if you like into the predator that's called a pac-man or reverse takeover defense there are various other ones there the management team of Company B might get together and decide they're gonna buy out the company okay so there are various ways the company B could potentially defend yourself against a takeover bid some company hey now why does all this get us as an investor well here's the thing here's an interesting thing that's been observed about takeovers and here's where an investor can think about making a quick buck perhaps using something ice break bet all right what tends to happen when one company takes over another or it sort of in anticipation of one company taking over another is you tend to get the Predators share price falling and the target the share price tends to rise now why is that and the answer is very simple countless studies have shown that companies tend to overpay when they do takeover deals many many takeover deals create a lot of fire and brimstone at the time but long-term had very little value to anybody in fact so we'll ask the question why did none at all in a moment right but this is an observable fact about a takeover so people reckon the predator will get carried away with itself get excited like a kid in a sweet job and overpay there will be in some way they will end up overpaying for company be a long term that's not good for the predator it's quite often all right you'll see a dip and the Predators share price meanwhile people are thinking crikey all right you know the target would be lucky to ever achieve the kind of share price that's that's on the table if you like as part of what the Predators are prepared to pay in other words the price of you know 15 pounds per share is way above where the target share price is ever going to get and razones Dean all right so what then happens you quail fancy and time to take over target share price rising predator share price falling and for people who like to play around with bread bets for example that would give you the opportunity if you saw this coming to buy the target and sell the predator all right the reason I say you might win use spread bets is because um shorting actual shares for a UK retail investor is a little bit tricky so you might need to find some other way of doing it all right spread bets are for everyone well that's one possible way you can do what's called M&A arbitrage which if nothing else sounds exciting you down the pub your mates okay now now I suppose two final questions in this little short short video number one just a reminder why is it that many many many takeovers do not add long-term value all right well I've hinted at that it's that there is a tendency for companies to overpay get carried away for themselves is the adrenaline testosterone the city is often competition okay to buy companies okay look at some of the deals that went on just before we have the last crash or just before the dot-com crash okay make that case rather nicely so you know that the timing of these kind of feeding frenzies M&A going on in the city can often be by nose not surprisingly at the point where shares are getting pretty topping anyway getting quite expensive all right Sally's onto the question why are there so many take ups if there are these studies from the likes of McKinsey and KPMG saying what long-term quite a few takeovers don't really add any value to anybody okay certainly not the Predators share why does so many takeovers take place because they're in the press long time all right I'll offer you three or four reasons number one is quick it's far faster to buy someone else's company often than to grow your own all right that has the added benefit of taking out a rival one of the reasons why it's quicker okay it plays to directors need for excitement and adrenaline most big directors want to be running big footsie 100 companies fast you know within five years how to do that by lots of your competitors okay it's much more exciting after all to do M&A all right than it is sometimes to do the nitty gritty of running an actual business and finally it generates huge amounts of fees the investment banks who will often take out a cut okay of say the amount of money raised in order to do the takeover deal all right and so there is pressure if I can call it that from excitable investment bankers looking to earn a fee all right and one of the ways they can do that is to get mergers and acquisitions activity going okay so there's three or four reasons why take it was emerges are pretty common in spite of the fact that long term there may not be a lot of value added okay I could throw in just a final point which is the city has a short memory all right and all those studies showing that last time around things didn't work out too well long term for the predator shelves and takeovers those tend to get forgotten and swept to one side the next time a boom takes hold and one final point I forgot to mention is can a takeover be blocked even if the Predators directors want to go through with it the answer is yes there is an organization called the Competition Commission ironic here's and you're one of those all right it's a government body and they can step in and say this takeover it's not happening and it can take from six months to reach this kind of conclusion because it's anti-competitive it gives the combined company too much power okay so for example it's highly unlikely Never Say Never that Tesco will be allowed to buy another UK food retailer that would give it too much clout in the UK food retail market so they're busy expanding overseas all right are these rules hard and fast no for example in the UK audit market a firm called PricewaterhouseCoopers how they good share of the market but the Competition Commission doesn't seem bothered about that so people have said they get worried when one firm might be about to control 25 percent or more of a given market but that's definitely not a black and white hard and fast rule okay so a takeover seems to be taking a long time to go through or it's getting delayed or even fails it might be because the competition authorities have stepped in and said not on our watch

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Id: U76MGI7nppo

Length: 13min 43sec (823 seconds)

Published: Fri Mar 09 2012