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6th June 2020
Title: Take Overs
Author: Fallon, Ivan, Srodes, James
Price: $32.50
Publisher: Hamish and Hamilton
Date Published: 1987
Specifications: HC., 290pp., 6.5" x 9.5", 650g.
ISBN: 024112073X
Condition: Very good in dust jacket.
Copies in stock: 2
Category: Finance More books in this category
Book type: Investment History
Hindsight ID: 1762
Take Overs

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Notes: There is no doubt about Merger Mania in these authors' minds. Their book is an account of a few high profile takeovers over the seventies and eighties that were notorious and generated a lot of scandal, with one notable exception. The scandals were Slater, Maxwell, the battle for Harrod's, Morgan Grenfell, Guinness and, inevitably, Ivan Boesky. The exception, at least in terms of its outcome, was Hanson.

Acknowledging that mergers often made commercial sense, the authors date the rot from the seventies, the Slater era. It was this era that gave takeovers a bad name, which wasn’t shaken off by anything that happened in the eighties. Naming the era for Slater is perhaps a moot point, given that Maxwell was the bigger villain, but Slater was the first of the takeover merchants to achieve public notoriety. This is closely followed by the bizarre battle for Harrod’s waged between Tiny Rowland and Mohammad Fayed. The brief account given here, in what is an overtly journalistic book, does nothing to explain the obsession that Rowland developed with Harrod’s. This was such an obsession that he allowed Fayed to effectively buy Harrod’s twice over!

An even greater irony is that Norman Tebbit, as the Minister then responsible, simplified the takeover and acquisition rules in 1984. He told the authors that the only thing that mattered to him in considering referrals was the competition element. Given that no competition element arose in the Harrod’s case, had Rowland held his nerve, he would also have held on to Harrod’s!

The authors point out that the Rowlands/Fayed spat was really a one-off. Takeovers are usually arranged by accountants and directors and managers, and, in the United States, hordes of lawyers. The Harrod’s affair was a conflict between the two men, and as such didn’t fit the pattern of takeovers in the seventies and eighties. Apart from generating a lot of curiosity, it didn’t give rise either to the sort of concerns that they raise throughout rest of the book, so it is presumably included for its straightforward entertainment value.

The bulk of the book is given over to efficient and brief accounts of the takeovers listed in the first paragraph above. Much space is devoted to the Guinness business as being the most notorious. Hanson is included by way of contrast, because although its takeover of Imperial was in the face of a hostile board, it won and proved that bids however large and whatever the proposition didn’t require Guinness-style tactics. Before long the dust settled and the company prospered. There is a further interesting footnote in that Hanson at one time made bid for the troubled Westland, but withdrew having consulted Michael Heseltine, then Minister of Defence and later to make such a fuss over the Sikorski bid, who promised Hanson that there would be no orders for helicopters forthcoming from the Ministry! Westland rightly doesn’t figure on its own account, as whatever controversy that takeover raised was purely political: the takeover was smooth and logical and in the interests of all parties.

The calm collection of Hanson is further exemplified in the manner which it acquired SCM, which leads the authors to raise interesting questions about how companies are actually valued. Sir George White valued SCM on “gut feeling” and bought it for $1bn including costs. A third of the company was then sold for £1bn. The remaining two thirds was judged to make a profit in its first year after acquisition of $170m. White could have sold it off for a further $1.7bn. All this represented pure profit in one year. The question then arising is: does the market place really decide the worth of a share? Perhaps a question without a conclusive answer and besides, Hanson may have been unusual in its quiet competence and, perhaps, unusually lucky. Nevertheless, as part of the brief for analysing the seventies and eighties as a mania, the question plays its part.

They identify three causes of merger mania: the real money professionals who either anticipate a trend or actually set it off; the indebtedness of the predator firm that stalks companies rich in cash assets (Maxwell was a notorious asset stripper); and the temptation on the part of the target firm to sell out, regardless of the of the long-term considerations, in order to maximise profits.

The authors also point out that often enough it is a small group of fund managers, perhaps no more than twenty people, who ultimately decide the fate of great corporations. While this raises questions of probity and public interest, the small number of people ultimately involved does justify their contention that there are brakes that work in the market place and at law, and that public opinion does still count for something.

Their real concern is to show how merger frenzy leaves shareholders on both sides with little advantage, and how it has a disturbing impact on the business judgment of financiers and chief executives.

They also raise important questions about the law. For in the heady atmosphere of wasteful raids the rules often change mid-play. So who gets indicted and is it fair?

A crucial problem is that the rule makers are at a loss to devise a set of legal relationships for corporations that preserve the free functioning of the market while providing a fair but not suffocating protection for individual shareholders’ interests, the investing corporations and the general public. The absence of such watertight guarantees of course feeds a frenzy once it gets going.

Their conclusion is that there is enough evidence that predatory takeovers don’t work, and that they are ultimately not good for either the companies or the shareholders on either side. Shareholders in the aggressor companies can see an appreciation of their assets in only one in three cases. The shareholders of the suitor company usually benefit at least in the immediate short-term, but the deal is justified in the interests of the aggressor company’s shareholders!

In late 1970s an increasing number of takeover bids were not aimed at improving manufacturing competitiveness or promoting the profitability of the target firms, but at closing the perceived gap between what a company’s shares might fetch on the stock market and what the company’s assets might fetch if put on some hypothetical auction block. Hence the importance of Sir George White’s gut feeling!

Keys: Take-over, Takeovers, Merger, Acquisition, Harrods, Tiny Rowland, Hanson, Goldsmith, Junk Bonds, Banking, Takeover

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