Published 2 August 2021 by Audra Walton
There has been an uptick in M&A activity the past six months with deals reaching ‘exceptionally high’ levels in the UK. This is not surprising given the growing number of private equity funds who have been quietly waiting to spend the war chests amassed over the past 18 months, combined with the precarious position many companies now find themselves in. But while many funds and companies have found themselves happily betrothed, others have been hitting a wall when it comes to shareholder approval.
Increasingly shareholders are dissenting after a merger or acquisition has been agreed with the board and the deal is publicly announced. This is more often the case when it is an offer from private equity, but regardless, the ramifications for the transaction are the same: a deal goes nowhere without the requisite level of shareholder support.
Blackstone recently had to raise its offer price for St. Modwen when JO Hambro and Janus Henderson said they would reject the initial offer. “Our preference would be to work with the existing board to help support, both strategically and financially, the continuation and acceleration of the existing strategy," which would deliver value "well in excess of the potential offer," said Alex Savvides, Fund Manager at JO Hambro.
Similarly, Allianz Global Investors, the largest shareholder in UDG Healthcare Plc rejected an offer made by Clayton Dubilier & Rice (CD&R) because they felt it was “opportunistic and significantly undervalues UDG and its prospects”. It was later agreed at a higher level.
Even with a large percentage of irrevocable support, as in the case of Ramsey Health Care’s bid for Spire Healthcare, deals are still falling through due to lack of shareholder agreement. Ramsey had a 29.9% irrevocable from Mediclinic and increased its original bid from 240p per share to 250p per share, yet the deal still failed to achieve the required 75% approval of shareholders. The defeat significantly impacted the governance reputation of the Spire board.
There are other examples as well, including the Fortress consortium’s offer for Morrisons which is now very likely to be rejected after Silchester, the largest shareholder, announced last week that they will not be supporting the deal. They feel that things have been done too hastily, and that there is “little in the recommended offer that could not be achieved” if the grocer remained listed.
Opportunistic Buyers, Lack of Engagement & Boards Under Pressure
On the face of it, one might conclude that these are straightforward cases of investors negotiating for a better deal. But we would argue there are several forces at work here.
The first is that fund managers have become increasingly angry about what that they feel are opportunistic private equity firms offering lowball offers in order to take advantage of the UK public markets’ relatively lowly valuations since the Brexit referendum. It isn’t simply about the price per share, which often gets the recommendation from the board. It is the feeling that the private equity bidders are opportunists who can’t be trusted not to gear up and gut the businesses they buy — and that they might not be acceptable owners at any price.
The second factor at work is the lack of engagement. Often these deals are being agreed with management and boards, and publicly announced without any true consultation of the shareholders. Even in the cases where the shareholders are made aware, it is often only a few top shareholders in an effort to attain irrevocables, rather than a proper engagement campaign as is often necessary to meet the thresholds for shareholder approval required in the UK.
The third factor at work is boards are feeling pressure to do something, and making decisions more quickly than they might have previously. In many instances, they are agreeing deals without the same guarantees on investment, jobs or ESG that they might have insisted on two years ago. Some investors see this as poor governance—the kind which may lead to the voting in of a new Board at the first available opportunity. They want Boards to consider all aspects of a sale or merger, and to sell to good buyers, not just ones with deep pockets or a convincing argument.
What Boards Can Do
There is a panacea for Boards and their companies. Boards must first do the work to identify all their shareholders, down to the fund level, with details of who holds the voting mandate. Then they must engage with them to discuss the deal on the table, not simply announce it. By having a dialogue with shareholders, their negotiating ability is stronger, and shareholders feel heard and involved—making them much more likely to vote in favour. Lastly Boards would be wise to execute a comprehensive proxy campaign that educates and informs stakeholders in the run up to the vote. Continuing the dialogue and flow of information will help to de-risk the deal—both by bringing shareholders on board and identifying those that aren’t.
Boards are under an incredible amount of pressure. Remuneration policies are under scrutiny, environmental efforts are being dissected and challenged, and best practice governance is now expected not exceptional. Accurately identifying and engaging with shareholders would help release pressure in each of these areas—which is why many agree it is a sensible way forward, particularly when there is a resolution being tabled on these topics. But when it comes to an M&A deal that has the potential to undermine the heart of an organisation’s long-term value, strategy and future, it isn’t just sensible, it is mission critical.
Written by Audra Walton
CMi2i, the world’s leading forensic capital markets intelligence firm, specialises in the world’s most accurate Equity & Debtholder identification service and supports issuers and their advisors with their ESG investment, investor relations, M&A, virtual AGMs/EGMs, shareholder activism, capital restructuring and reputation management goals. The company has supported more than 1000 corporate transactions, and has over 500 clients worldwide.