In recent times, we have seen a number of high profile bids announced without the support of the target company. The most notable of these are the current bids for Macarthur Coal and Foster's.
Traditionally, these have been known as 'hostile' bids. However, bidders nowadays are sure to distance their bid from any suggestion of hostility, with public statements focusing on delivering value to target shareholders and emphasising a willingness to work with the target to successfully execute the bid.
The way so called 'hostile' bids have played out of late shows that truly hostile bids are few and far between these days. As happened in the bids for Macarthur Coal and Foster's, and the earlier bids for Oaks Hotels & Resorts, EDT Retail Trust, Northern Energy and Crane Group, 'hostile' bids may start off that way but often end friendly.
This is not to say that the truly hostile bid is a thing of the past, as shown by the far from friendly struggle between Wah Nam and Brockman Resources for control of the emerging iron ore producer.
Why go 'hostile'?
An uncertain economic climate presents opportunities for bidders prepared to aggressively pursue assets that are undervalued by the market. However, target boards are wary of the popularly classified 'opportunistic' bid. This can make it difficult for the bidder not only to get a positive recommendation but to even get due diligence access.
In these circumstances, rather than negotiating with a target that may only be willing to open its doors or give a recommendation at a price that's beyond where a bidder is willing to go (at least at first instance), bidders may choose to fly solo to start with.
Launching a bid without the target's support will put pressure on the target board to justify a negative recommendation. Target boards will often look to lean on the opinion of an expert. If that opinion declares the bid to be not fair and/or not reasonable, it will at least give the bidder a steer as to where it needs to go to get a favourable expert's opinion (and, usually by extension, a positive recommendation from the target board).
However, proceeding without the target's support can make life difficult for a bidder, as no matter how soothing the sounds about wanting the deal to be done in a friendly manner, it will be hard for a bidder to persuade shareholders (in particular retail shareholders) of the merits of its offer if the target board is telling shareholders that the offer is not in their best interests. This will especially be the case where the offer involves shareholders taking up scrip in the bidder.
Making a bid without having had the opportunity to conduct due diligence (as SABMiller did in its bid for Forster's) is a very different proposition to doing so after due diligence but without target support (which is what Peabody and ArcelorMittal did in their joint bid for Macarthur Coal). Unless a bidder has knowledge of the target's business, for example through a pre-existing commercial relationship, it will be difficult for a bidder to make a fully informed decision about the value of the target based only on publicly available information. The challenge of getting financing approved without any due diligence to rely on may also deter some potential hostile bidders.
Where a bidder has been denied due diligence access, it can seek to elicit key information through 'due diligence conditions'. These are bid conditions that require the target to include certain information in the target's statement. This strategy was used by SABMiller in its bid for Foster's and New Hope in its initial bid for Northern Energy. The problem with this approach is that, depending on the other bid conditions, due diligence conditions can give the impression that a bid lacks certainty of completion, making it difficult for a bid to gather any real momentum until some of the conditions are satisfied or waived.
The recent willingness of bidders to go public with their bids absent target support is an encouraging trend for shareholders and the market generally.
Looking abroad, it will be interesting to see whether the robust reaction of the UK Takeover Panel to Kraft's hostile bid for Cadbury results in an increase in 'hostile' bids in that jurisdiction, as the almost blanket outlawing of deal protection measures there has removed one of the key advantages of making a bid on an agreed basis.