Ahead of the Deal: Boards and Takeovers

Tony Damian:

Hello everyone, I'm Tony Damian.

Amelia Morgan:

And I'm Amelia Morgan.

Tony Damian:

And welcome to another episode of Ahead of the Deal. This week, we're very lucky to be joined by one of the most experienced M&A deal practitioners in Australia, John O'Sullivan, affectionately known in the market as JO'S. JO'S, welcome.

John O'Sullivan:

Thank you. Thank you Tony. Thank you Amelia. Pleasure to be here.

Tony Damian:

Today we're going to be talking about the board's role in takeovers. JO'S, you've had a lot of experience, both as an M&A lawyer yourself and then in an investment bank and then as a chairman and a director.

It's a Friday night. A chairman gets a phone call from a bidder saying there's a control proposal coming in. Take us through that. What's it like in the boardroom? What's happening?

John O'Sullivan:

Tony, the first thing I'd say is that if that is the first time the board has sat down and thought about this possibility, they're in deep trouble.

I think one of the most important things a board has to do these days, along with CEO succession planning, is making sure it's ahead of the possibilities for control transactions. Any strategic transaction both, I should say, defensively and offensively.

So they should have thought about this situation a long time ago. And ideally they should have a takeover defence manual, ideally prepared by Ashurst. A bit of a plug, good plug, Tony?

Tony Damian:

Thank you JO'S.

John O'Sullivan:

But they should certainly have, at minimum, they should have thought about the situation. They should have a takeover defence manual that tells them, that gives them, the steps they should go through when something like this happens.

Initially, on first approach, even with something you don't expect, the first thing that you do is usually pretty simple. It's usually put out a holding statement that says, assuming you're going to announce, and we'll come to this question of announcement later, but if you are going to announce that you've had a bid, then you put out the announcement that says, "We've got this bid. Don't do anything", to your shareholders. And then, you know, you've got a platform to go forward.

A first question, of course, is does a board announce a bid or do they keep it secret? And you know, Tony, no doubt Tony and Amelia will have views on that. I think it depends on the circumstances. There are, you know, the modern trend these days is probably more commonly to announce that you've received an offer, but there are certainly circumstances where it's not appropriate to announce.

For example, if the bidder has said, if you announce this, we're off, as some bidders, particularly American bidders will say, then that makes you think carefully about announcing it. But, so there's a sort of a grab bag of some of the first things that you should think about when something comes in over the transom on a Friday night.

Tony Damian:

And JO'S, you've talked there about some very interesting things, in terms of the preparation and being ready with a manual and those sorts of things. From a longer term perspective, as a chair, as a director, what sort of thinking should a company be doing over the longer term to, sort of, put itself in a good position should something come in?

John O'Sullivan:

Well, the best defence to any takeover bid, of course, is a high share price. And hopefully that high share price is an outgrowth of the company's existing strategy, that the company has got an existing strategy, it's maximising its growth potential, it's doing well. If it does all those things, a high share price will usually follow.

Not always. Not always. There are all kinds of reasons why the market sometimes values stocks in ways directors find incomprehensible. So the first thing, of course, is always to run the company well. Make sure you get your share price at a fair - but, you know, appropriately a fair level which appropriately values the company.

Amelia Morgan:

And interesting perspectives on the role of the board. We sometimes hear people say that boards have too much latitude, that a board shouldn't be able to block a bidder from putting a scheme to shareholders, or even that every single takeover approach should be disclosed. What are your perspectives on that, JO'S?

John O'Sullivan:

That's what serial bidders say, they say boards have got too much power. Look, I think boards play an important role in Australia in making sure - in supervising - control transactions to get the best result for shareholders.

And I think it's important for them to retain residual powers or not just residual powers over things like do they announce, do they do a scheme, those key questions, because that's what will give shareholders the best outcome.

And giving shareholders the best outcome is, you know, in a macroeconomic sense, apart from anything else, a good thing because you want the market for control of Australian companies to be efficient and fair and give shareholders a fair return.

If a bidder doesn't like the price that the target wants in return for doing a scheme that tells you something, but if they want to they can do a hostile.

Amelia Morgan:

Yes, there's the bid there.

John O'Sullivan:

Yes, buy shares on market, they can. But if they want the price for a friendly deal, if they want the success of a friendly deal then they've got to pay the price.

Amelia Morgan:

And you've seen takeovers from every angle. You know, you've been an adviser, you've been on the bidder side, the target side. What do you think are some things that bidders could be doing to, I guess, advance their goals and maybe some things they shouldn't be doing?

John O'Sullivan:

Well, one thing they shouldn't be doing flows from my previous comment, which is don't be a cheapskate. Bidders that go low looking for the bottom feeding opportunity.

Amelia Morgan:

Yes.

John O'Sullivan:

Hardly ever works out. Sometimes it does. You know, if you've got a really troubled company, sometimes cheapskate bidders can pick things up on the cheap.

But in the kind of well-run, quality companies that are most usually the subject of these kinds of bids, you've got to be prepared to pay a fair price, you know, and if you're prepared to pay a fair price, then that's a good first step. But there's lots of other steps.

You should do your homework. Make sure, you know, a bidder should know, as well as is possible from the outside in, how well a company is running, what its strengths and weaknesses are, what the opportunities and risks are, because then, you know, they will be prepared or they will be able to do a sensible deal, pay a sensible price and have an appropriately structured deal.

If they don't do their homework, that's going to cause problems at some point down the track. For example, you know, in due diligence when they discover: "Oh, you know, terrible problem number one or terrible problem number two."

So do your homework, be prepared to pay a fair price and then get competent advisers, get Ashurst on board. I'm out of the investment banking racket now so I won't -

Amelia Morgan:

Only plugs for lawyers.

John O'Sullivan:

But yes, no that's important, get good advisers.

Tony Damian:

Very good. Can't can't disagree with that suggestion. JO'S, over the years the role of boards in takeovers, have you seen it change or have things remained the same? How have you seen it?

John O'Sullivan:

I think boards have become more conscious, more conscious of risk, more careful, probably more professional over time.

Large shareholders have always been vocal, but once upon a time they were more vocal behind the scenes. These days you get, you know, lots of high quality, big institutional shareholders who are prepared to be very public about their views on bids. And inevitably, that shapes the way boards think.

You know, boards, a good board doesn't do things just because they think that's you know, shareholders will love them for it. They do things for the right reasons.

But they, you know, these days boards are very conscious of, of how their actions will be judged and whether or not they get or are perceived to have got the best outcome for shareholders.

You know, I mean, one of the metrics that proxy advisers use these days, which, you know, is relatively new, is ROI on shares of companies on which directors sit. So people can tell, you know, director A, B or C, has been on companies that have produced this kind of return for shareholders.

That, sort of, makes people think about making sure they get the right result for shareholders. So I think they're, you know, more careful, more professional, I think is the -

Amelia Morgan:

And finally, changing tack slightly. The Panel's been in the news a lot this year, and you were a member of the Takeovers Panel. Apart from all of your decisions which were of course first class, do you think the Panel does a good job and any areas that you think can be improved there?

John O'Sullivan:

I do think - I'm an unabashed, self-interested fan of the Panel -

Amelia Morgan:

Yes.

John O'Sullivan:

I did four terms on the Panel in two separate stints, and I think it's a great institution. And I do think there is a bit of an element of rough justice about it, in the sense it's not the Rolls-Royce, you know, kind of, cross-examined to within an inch of its life procedure you see in the Supreme Court or in courts, but you get a very quick, very practical decision that is generally sensible from a market perspective as well as from an individual company perspective.

So, I think, I think the Panel works very well. I would be, you know, there have been suggestions from various people at various times about giving the Panel, for example, power over schemes of arrangement, changing its powers. You know, I would worry about that. You know, I'm not absolutely convinced because I think actually think courts do a reasonably good job on schemes of arrangement. So I wouldn't change the Panel too much, I think it works very well.

The one thing I would say is it's important for governments to continue to appoint experienced and knowledgeable people to the Panel. One of the biggest risks, I think the Panel faces, is if it becomes just another political pork barrelling opportunity. I'm not suggesting that has happened, I'm not suggesting it will happen, but that is the risk.

You know, anything that's appointed by the government - I mean, today, governments of all persuasions have been pretty good, but they need to keep being sensible about who they appoint to the Panel.

Amelia Morgan:

Well, very interesting insights. Thanks very much, JO'S.

Tony Damian:

Yes, thank you JO'S, across a whole range of areas. Something in that for everyone.

John O'Sullivan:

Thank you.

Amelia Morgan:

Well, that's it for this episode, until next time...

Tony Damian:

Stay Ahead of the Deal.