Newspaper article The Evening Standard (London, England)

Chance to Clamp Down on the Bid Approach Bluffers; CITY COMMENT

Newspaper article The Evening Standard (London, England)

Chance to Clamp Down on the Bid Approach Bluffers; CITY COMMENT

Article excerpt


NO ONEis likely to object much to this week's decision to remove the restriction on dawn raids - the takeover tactic under which a prospective bidder swept into the market and bought up a major chunk of the target before anyone else realised what was going on.

For a time 25 years ago, they were so popular that bids were effectively decided before private shareholders even knew they were happening. So the authorities decided to restrict to 14.9% the amount that could be bought on day one, with further caps on succeeding weeks. It is these staged restrictions that have been removed.

No one will complain because bidders do not do dawn raids any more.

They stopped because dawn raids require hard cash. Instead, those who wish to make life difficult for a company's board buy an economic interest in its shares through the derivatives market - usually using contracts for difference, which are in effect options to buy the underlying stock.

There are no restrictions on what potential bidders or hedge funds can do here - they do not even have to disclose who they are or how much of the equity they speak for. So not only do they have to put up only a tiny fraction of the cash it would cost if real shares were bought in the open market, they can also bluff the company about how much they do have.

This is the real abuse about which, characteristically, the authorities have done nothing - or not yet at any rate.

What happens these days is that hedge funds call up companies and tell them they speak for 20% or more of the shares, and they therefore want the board to undertake a course of action.

It could be a return of cash or the sale of a division, or even to sell out to another company in which the hedge fund also claims to have an interest. If the board refuses to co-operate, the hedge fund warns that it will use its shares to vote all the directors out of office and put in its own people, who will obviously do what it wants.

At best, this runs the risk of the board acting in response to the wishes of a minority of shareholders rather than all of them. At worst, it is what used to be called greenmail - a whitecollar form of blackmail - though people seem a bit precious about using that expression these days.

The problem for the target board is that it has no means of knowing whether the hedge fund actually does control the number of shares it claims to have under its belt because there is no register for derivatives and no mechanism to force the disclosure of beneficial interests. So the board does not know whether it is up against a serious player with serious money at risk, or an opportunistic bluffer interested in hijacking the company to make a quick turn.

This matters because one hears reports of companies that are being targeted in exactly this way - although the boards rarely admit to it officially or publicly. …

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