By Alex Tawanda Magaisa
THE recent attempted take-over battle for the control of Marks & Spencer (M&S), one of Britain’s most prestigious retail companies, demonstrates a number of key issues about t
he take-over process and the consequences arising from the struggles for corporate control. The rules that regulate take-overs and mergers in Zimbabwe are generally derived from the English system.
M&S is a major retail company with shops all over the British Isles and has established outposts in continental Europe. It occupies a prestigious place within the retail sector and is often hailed as a great British institution. Phillip Green is the man who wanted to take over M&S through his investment vehicle called Revival. He is a billionaire who owns another prestigious retail chain called BHS. He also controls other chain stores such as Top Shop and Dorothy Perkins, which form part of the vast Arcadia group of retail companies. Green’s proposed bid to take over M&S sparked an intense battle against the board of M&S. After six weeks of jostling, he withdrew his “virtual bid” on July 13.
First, it must be noted that although there was never a formal bid the circumstances surrounding the proposals meant that it was nonetheless classified as a “virtual bid” for regulatory purposes. Green set conditions attached to what he termed his “final bid” and the Take-Over Panel which regulates take-overs and mergers in the UK was forced to issue the “Put Up or Shut Up” notice which forces a bidder to table his bid by a certain date or to walk away for at least six months before returning with another bid.
This is meant to end speculation and endless wrangles. After the refusal of the M&S board to co-operate, the conventional route would have been for Green to launch a hostile take-over bid. He did not do that but his actions nonetheless put him in a position where his proposed bid was considered by the Take-Over Panel to be a “virtual bid” hence the notice issued to him under the circumstances. Those that intend to launch bids therefore ought to realise that their proposals can attract the notices from the panel, as they will be considered “virtual bids” in certain circumstances.
The M&S board rejected all three successive proposals arguing that they seriously undervalued the company. Although Green claimed that about 34% of the shareholders, including Brandeis Investment Partners, a US fund management group which with 11,7% was M&S’ biggest shareholder were in favour of his proposed bid.
The virtual bid appears to have sparked positive action within the M&S boardroom in the direction of improving the management and productivity of the company. First, the erstwhile chief executive Roger Holmes was ousted and was immediately replaced by Stuart Rose. This management change seems to have been a defensive mechanism aimed at demonstrating the company’s commitment to internal change and growth in the face of a rival. It brought in a fresh impetus for change and indeed Rose fought against the bid arguing that he would make a strategic plan to cut costs by about £320 million by 2006-07 and increase sales in the faltering empire.
He has pledged to serve the interests of investors, employees and customers while simultaneously setting standards for corporate governance and commitment to corporate social responsibility. This may demonstrate that the market can act as a mechanism for the control of corporations and managers. If the appointment of Rose will change the fortunes of M&S, then the bid might in retrospect be seen as a good omen for the company.
In most cases where the acquirer makes his intentions known and are accepted, the process is relatively smooth and he is allowed to do the due diligence and seek recommendation of the board. In this case these were the sticking points as the board rejected the request for due diligence. Why did Green want due diligence and board recommendation? This was meant to be a friendly deal but given the refusals, it became hostile. Green and his family were putting in a huge amount of money (£1,6 billion in total) as part of the £9,4 billion bid for M&S.
As he said he did not want to have a heart attack on discovering any horror upon completing the purchase. Given the relatively poor performance of M&S and questions over its pension funds, it seemed fair that the bidder wanted to see the books first before launching a formal bid. He did not want to get involved in a long drawn and expensive hostile take-over when there were big uncertainties. The company was adamant that Green could not be allowed to see the books and insisted that at £4 per share, he had undervalued the company.
What it means, however, is that the M&S board is now under pressure to perform and demonstrate that indeed a company that was trading at £2,60 per share in April is worth more than £4 per share that they rejected. It is daunting task, given the competition and general slowness of change in the industry. One therefore can see a positive in the proposed bid in that it will spur M&S to do well and convince its shareholders that they were right to refuse the bid by Green. Both the shareholders who supported the board and those who had backed Green will be expecting positive changes.
The shareholders were divided on the issue of the take-over. While on the one hand there were indications that most large institutional shareholders such as Brandeis were backing the bid, on the other hand private investors and a few other institutional investors such as British-based Standard Life Investments were backing the board against the bid. One of the private investors was Mrs Powell who has been a shareholder since 1932. It has been suggested that the support of these private investors played a crucial role in the public relations efforts of the board in blocking the bid.
But why did they give support to the board when there seemed to be so much value that would accrue in the event of the bid being accepted? It has been argued that for these shareholders the attachment to M&S is more than economic. Many of them are older generation M&S customers who have a sentimental attachment to M&S and see it as a great British institution. They could not bear the sight of M&S being traded on the back of the short- term interests of the mostly foreign institutional investors.
At the general meeting, the interim chairman of M&S expressed gratitude to the private investors and seemed to demonstrate displeasure at the manoeuvres of the larger shareholders. This raises questions as to whether in the board’s eyes, the different shareholders were to be viewed and treated differently.
In terms of the City Code, which governs the conduct of take-overs and mergers in the UK, a formal bid normally triggers the observance of a strict timetable. Although in this case Green did not make a formal bid, his virtual bid nonetheless triggered action from the Take-Over Panel. The bid placed the target company into an offer period in which certain rules apply and the Panel issued a “Put Up or Shut Up” notice which sets a deadline by which an offer should be made or the potential bidder walks away for at least six months.
The date set in this case was August 6. In this case, Green walked away before that date. Although this attempt has failed, there is nothing to stop him coming back after the six-month “cooling off” period. The board of M&S is therefore still under immense pressure to perform and protect their position. Yet again this might be a positive result of the bid and if they are successful, the company and the shareholders will have cause to celebrate. If not, they will still be targets and Green will be waiting to strike again.
An issue that was not quite prominent in this battle is whether the take-over of M&S into Green’s retail empire might breach competition rules. Might the addition of M&S constitute a fundamental share of the market so as to breach competition laws? It is quite difficult to make a conclusion without sufficient data. It suffices however to state that in similar situations it is always necessary to seek approval of the bid by the competition authorities and it is useful to know that a bid might still fail as a result of breaches of competition rules.
In Zimbabwe, this would normally fall within the province of the Competition Commission led by Alexander Kububa. Still on competition, one of the possible consequences of this failed bid is the emergence of “price” or “style” wars between the retail chains. Given that Green’s stores operate in relatively similar markets, there might be possibilities that there will be increased competition in prices and styles offered by the competitors. The consumer would seem to benefit from this competition.
However, it has also been argued that as Green might return with a second bid in future, it is unlikely that he would wish to damage M&S at this stage.
Finally, as typical in most take-over battles there were dirty wars being waged in the process. It emerged that before the initial bid, certain people including Rose had bought shares in M&S. The Financial Services Authority (FSA) was inevitably brought in to question both Green and Rose possibly around issues related to insider trading.
Secondly, when it appeared that someone had gained unauthorised access to Rose’s mobile telephone records he issued notices to Green and his advisers in terms of the Data Protection Act to force disclosure of information that they had on him. The response was Green’s delivery of Rose prostitutes’ cards stating that it was the only information that he possessed on him. At that stage, it was clear the war was getting very messy.
The battle thus ended (probably temporarily) on July 13 when Green withdrew his proposed bid. The process itself may not have reached fruition, but it bears a number of lessons of which corporate types may do well to take heed. For the moment M&S remains in the old hands but surely Green will be waiting by the side. The M&S board has set huge expectations high after the refusal of a seemingly attractive bid. They will need to satisfy the institutional shareholders that they were right to refuse Green’s approach and to the extent that performance will soar as a result, it will be good for the company and the shareholders. In the meanwhile, as a headline in the Financial Times aptly put it, “Rose must bloom to avoid attack from Green fly”. But then again, the Green fly might still be attracted as the rose blooms.
* The author acknowledges theFinancial Times newspaper as a key source of information for this article. Alex Tawanda Magaisa is Baker & McKenzie Lecturer in Corporate & Commercial Law at the University of Nottingham. He can be contacted at firstname.lastname@example.org