There is a war being fought every day that most of us know nothing about. It’s tough, ruthless, bloody, vindictive and merciless. It takes no prisoners and thrives on tactics and adrenalin. Vast industrial estates can be built up and torn down just as quickly. Allow me, to introduce you, to the world of corporate takeovers.
In polite company they’re called hostile takeovers. But make no mistake, this is war and only the strongest, or the smartest, or both, will survive. Think of backroom deals worth billions, Orcs in business suits without a conscience, engaged in scandalous conduct, firing loyal employees and making Wall Street villain Gordon Gekko, look like Mother Teresa.
By way of explanation, hostile takeovers are when a company, or investor, seeks to take over a business that doesn’t want to be taken over. If a company is listed on the stock market, it can be vulnerable to a hostile takeover. It’s especially vulnerable, if the company is undervalued or seen to be struggling.
Hostile takeovers happen in a number of ways. The first, is through tender offers where the bidder, offers shareholders a premium on the stock price. Even if the company bosses and the Board of Directors oppose the offer, it can still be accepted if the majority of shareholders agree. The company board of directors is required by law to act in the best interests of shareholders so if an offer is good enough then they are supposed to agree to the sale.
The other way is through a proxy fight, where the bidding company tries to convince shareholders, to replace the takeover target’s, board of directors, with their supporters who will approve a buyout. Under Corporate rules in Australia, a bidding company can cause a spill of the board of directors, if it acquires five percent of the voting stock or convinces 100 shareholders to call for a spill. If a bidder manages to buy 20 percent of company stock then a full takeover bid is triggered.
Hostile takeovers, aren’t necessarily a bad thing. It can often result in a great improvement in company profit, and size, with the introduction of better management. But the opposite can also happen, where company assets are stripped and sold and employees lose their jobs.
There have been plenty of examples of this type of hostile takeover.
In the United States, in the 1980s, a group of investors, that were more like corporate raiders, made a bid for airline company, TWA. The corporate raider tag came from their past reputation for stripping and selling off the company assets for massive profits. One of the most prominent of these corporate raiders, was Carl Icahn, who is said to be the financier who provided inspiration for the character, Gordon Gekko. Just like in the movie Wall Street, Icahn continues to launch attacks on companies he sees as vulnerable. His latest move was against online giant eBay. But it was his involvement with the now defunct, TWA, that was the most controversial.
At one time, TWA was mentioned in the same breath as American Airlines, United and Pan Am. TWA always had a checkered financial past and by 1985, its parent company decided to cut its losses when Carl Icahn came knocking. According to a profile written about Icahn in St Louis Magazine, he wasn’t the only corporate raider to make an offer. Another came from union buster Frank Lorenzo, who gave TWA employees even more reason to be fearful. In some ways he made Carl Icahn looked like an angel in comparison. According to St Louis Magazine, once Icahn got his hands on TWA, he made it clear, when he said he wanted TWA to be profitable, he was talking about profits for himself. The magazine quoted a former TWA pilot, who said: “It became more and more apparent that Carl was not interested in growing the airline but in using TWA as a financial vehicle to acquire wealth for himself.”
Three years after the buyout, Icahn turned TWA into a private company, banking $US469 million in the process. In return, TWA was burdened with $US540 million of debt. This debt eventually became an albatross for TWA. In order for the airline to remain competitive it needed new planes. Icahn ordered 12 new planes for the fleet when employees were expecting more than 100. As far as TWA was concerned worse was to follow. In 1991, Icahn sold TWA’s London routes to American Airlines for $US445 million, which immediately ended a lucrative revenue source for the airline.
But Icahn didn’t just sell off TWA’s assets to make a quick buck. He also needed to pay back the money he borrowed to make his raid on the airline in the first place. That’s the other point you need to remember about hostile takeovers. It is almost always using borrowed money, which of course has to be paid back once the deal is done.
By 1992, TWA was bankrupt, owing hundreds of millions of dollars to creditors. In what must surely be a sad irony, these creditors included Icahn, who was owed $US190 million. TWA management negotiated a repayment deal with Icahn that ended up costing the airline $US100 million a year. It crippled TWA, which was eventually sold to American Airlines. Nothing remains of the company apart from this story.
And this will give you some idea of how ruthless this kind of corporate trench warfare can get. In 2009, US based food conglomerate, Kraft, launched a hostile takeover bid for Cadbury, the iconic British confectionary manufacturer. Cadbury had been on the Kraft radar for a number of years. But a takeover was not possible until Cadbury sold its drinks business, Schweppes, in 2008.
Following that sale, Kraft made one bid for Cadbury and then another a week later. Both bids were firmly rejected by Cadbury’s bosses. Cadbury’s chairman Roger Carr said it was an “unappealing prospect” to be absorbed into Kraft’s “low growth conglomerate business.” The Cadbury CEO called the offer “derisory.” Cadbury was also upset that Kraft’s second offer of about $US 25 billion, was actually lower, than the figure they offered in their first takeover bid. Kraft amended its takeover offer after billionaire, Warren Buffett, who held a 9.4 percent stake in Kraft, warned the company not to pay over the odds for Cadbury. The British confectionary operation, had its collective backs against the wall and was being threatened by a foreign multinational. So Cadbury decided to try and buy some time. It asked the UK Government’s Takeover Panel to force Kraft to submit a formal offer for Cadbury. This would give Cadbury time to formulate a defensive strategy, as well as gather more information about Kraft’s intentions. It looked like Cadbury might survive the threat when the company posted an encouraging third quarter financial report while Kraft recorded a disappointing result. Cadbury’s share price rose above the takeover offer. But interested parties, who know the smell of money almost as much as blood in the water, knew Cadbury was still very vulnerable. A group of Cadbury’s biggest shareholders, comprising US weighted hedge funds and short-term investors, decided to force the majority of Cadbury shareholders into accepting the Kraft offer. Of course the people who really do have the most to lose, like Cadbury’s employees and the family descendants of Cadbury’s founders,were devastated when the company was sold to overseas interests for what they perceived to be a bargain basement price. The fact that these overseas interests were clearly driven solely by the need to make greater profit, was a bitter pill.
The takeover deal had a catastrophic result for the 400 people working at one of the Cadbury factories in the UK, that Kraft had dutifully promised to keep open, should it win the takeover battle. A month after the takeover deal was signed, Kraft reneged on its pledge and said the factory would close. No room for sentiment when there is money to be made and costs to be cut. Company loyalty counts for nothing. I have always wondered how people, who have no respect or regard for their fellow human beings, are able to sleep at night. But even if I was to ask them, they would stare at me blankly and be puzzled that I even asked the question. So be it. But for me money, quite frankly, is over rated unless it can be used to do some collective good.