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Apr 30, 2010

M&A roundup: takeover debate

Debate about takeovers continues in the wake of Kraft's acquisition of Cadbury, with issues raised of national protection, shareholder voting rights and adviser transparency

Everyone seems keen to chip in on the takeover debate going on in the UK. The discussion began during Kraft’s acquisition of UK confectioner Cadbury, which led to much hand-wringing among the British press, public and politicians about the loss of a company with long roots in the country.

Since then, the nationalistic angst has been cropped somewhat by investment house Prudential’s mega-bid for AIA, the Asian arm of insurer AIG, which would make the man from the Pru – another historic British brand – the biggest insurer in Asia. Disquiet over the manner of Kraft’s takeover of Cadbury rumbles on, however.

Leaving aside the question of protecting British jobs, there are other issues raised by Kraft’s takeover. First, there is the question of advisers’ fees, in particular the suggestion that advisers are incentivized to complete a deal and therefore push mergers that perhaps should be left alone. Such fees also tend to be on the large size and can reduce the impact of any synergies the buyer might hope to produce.

Second, there is the issue of who has the most right to vote on the acquisition. In the UK, shareholders get to vote on major buys or sells, as was the case with Cadbury. But during the Kraft/Cadbury scrap, hedge funds took control of more than 30 percent of the share register, according to Cadbury chairman Roger Carr.

These were always going to sell to Kraft for a quick profit once they had bought the shares on the open market. Should these short-termists be allowed such control over the future of a major British firm?

One of the latest names to join the debate is Peter Montagnon, director of investment affairs at the Association of British Insurers (ABI), whose members own roughly one quarter of the UK equity market. (It used to be closer to a third but, Montagnon notes, equities aren’t as attractive as they used to be.) He takes a high-minded approach when it comes to capital markets, and has pushed best practice in a number of areas, such as preemption rights, over the last year.

Montagnon disagrees with the suggestion that voting rights should be withheld from short-term investors, as this could lead to a very small number of existing shareholders having the final say. He made his thoughts known in a letter to UK business secretary Peter Mandelson, in which he also attacked the idea of needing a super-majority (over 50 percent) to pass a takeover. ‘What started out as a genuine attempt to protect good companies could easily end up entrenching bad ones,’ he wrote about these two suggestions.

But Montagnon did push for more transparency on the part of advisers and their fee structures. ‘There is a strong case not only for more transparency, but also for more accountability,’ he continued in the letter to Mandelson. ‘We have been pressing companies on this point and look for your support in the case we are making.’

This may prove good news for IROs, as it could force advisers to be more open about how they operate. It might also knock them down a peg or two, which would come as a welcome change for IR teams who’ve had to suffer the condescension of investment bankers during big corporate actions in the past.