II Historical background and structure of contested takeovers.contested takeovers
1. Historical background
Although the most significant contested takeover activity in the last 10 – 15 years has taken place in the United States, the origin of this phe
nomenon is Great Britain.1 While contested acquisitions have been known even further back, Great Britain experienced a boom of this type of trans
actions in the late 1950’es.
Until the mid-sixties it was almost unheard of that a U.S. company would acquire a company listed on a stock exchange by purchasing the shares in that company directly from the company’s shareholders and without negotiating with the company’s management. The ordinary pro
cedure in the United States until the early I960’es would be to have the managements of the acquiring company and the target-company negotiate the terms for the acquisition subject to the subsequent approval by the two companies’ shareholders.
In the 1960’es the modus operandi for U.S. corporate acquisitions began to change, and acquisitions were increasingly effected by public purchase offers made by the acquiror directly to the shareholders of the target-com- pany.
The reasons for this change were probably to be found in the general im
provement of the U.S. economy and the increasing willingness on the part of U.S. banks to participate in the structuring and financing of such trans
actions.
Also, the valuation of the shares on the stock markets began to take place on a different basis. For a long time it had been assumed that the collective valuation of a company’s shares made by numerous independent investors and reflected in the price quoted for such shares on a stock ex
change, would be equal to the value of the company. During the 1960’es it was acknowledged by more and more investors that there may very well
1 It should be noted, however, that a num ber o f contested takeovers took place in the U nited States in the 19th century, as early as in 1825, see W alter W em er, Corporation Law in Search o f its Future, 81 Colum bia Law Review 1611 at 1635 (1981). See also Louis Lowenstein, W hat’s Wrong with Wall Street p. 119 ff.
II. Historical background and structure of contested takeovers
be a difference between the aggregate value of a company’s shares as quoted on a stock exchange and the value or potential value of the com
pany to a single owner.2
Until the mid-eighties, corporate acquisitions were ordinarily funded through the acquiror’s own assets and, in addition, commercial banks would grant loans to finance the transactions. This picture changed, how
ever, in 1984, when a new financial concept, the so-called “junk bond”- fmanced takeover appeared. Junk bonds or “high-yield bond” are bonds is
sued with a marginal security only and paying a high interest rate. Due to the high risk attached to junk bonds, they cannot be classified in any of the standard classifications issued by Standard & Poors and Moody’s.3 Junk bond financing is undoubtedly one of the factors that have contributed most to the increase of takeover activity in the U.S., see below.
In late 1989 an event took place that was to signal a significant change in the use of junk bond financing. The junk bond market had for some months showed signs of stagnation when several banks refused to partici
pate in the financing of the acquisition of UAL Corp. (holding company of United Airlines) by a group including labor unions, management and British Airways pic. Perhaps due to a combination of the weakened junk bond market and general uncertainty over the future economy, the banks were not convinced that the transaction could be refinanced4 by means of junk bonds. Shortly thereafter a number of other deals suffered a similar fate.5 It is probably not likely that the junk bond market will disappear en
tirely, but these recent developments suggest that the market has shrunk and that equity financing will regain some of its lost importance. Time will show exactly to what extent.
U.S. mergers and acquisitions have increased substantially within the last 15 years. In 1975 merger and acquisition activity amounted to 12 bil
lion dollars but increased to 44 billion dollars in 1979, 83 billion dollars in 1981, 180 billion dollars in 1985 and more than 200 billion dollars in 1988.6 Merger and acquisition activity amounted to 118.7 billion dollars
2 For a further discussion o f these issues, see Louis Lowenstein, Pruning Dead- wood in Hostile Takeovers: A Proposal f o r Legislation, 83 Colum bia Law R e
view 249 at 257 ff. (1983).
3 Junk bond financing is further discussed under 2.
4 See 2 for further details on this.
5 This developm ent is further described in M ergers & Acquisitions, Vol. 24, No. 4, p. 18, and No. 6, p. 29(1990).
6 See Louis Lowenstein, W hat’s Wrong with Wall Street p. 128 and, as regards 1988, Financial Times, January 11, 1989 p. 20. In 1988 the largest contested
II. Historical background and structure of contested takeovers
in the first 6 months of 1989, which was slightly less than the comparable period in the preceding year.7 The level indicated represents “friendly” as well as contested transactions. However, there is reason to believe that contested takeovers or the threat of contested takeovers has caused a sig
nificant part of the friendly merger and acquisition activity. A substantial number of leveraged buy-outs and management buy-outs8 are made as a response to a contested takeover attempt, which makes it likely that the level of merger and acquisition activity is to a very large extent influenced by contested takeovers.9 10 The very latest trend in the United States seems to be a substantial decline in takeover activity, probably in part due to the collapse of the junk bond market in late 1989.11
Since the early eighties, a majority of the Western European countries have experienced a substantial increase in the number of corporate mergers and acquisitions. In 1988, the merger and acquisition activity in Western Europe amounted to approximately 134.2 billion dollars.12
takeover in history took place when Kohlberg Kravis Roberts & Co. acquired RJR N abisco, Inc. for 24.88 billion dollars. Two other very large acquisitions took place in 1988: Philip M orris acquired K raft for 12.90 billion dollars and British G rand M etropolitan pic acquired American Pillsbury for 5.75 billon dol
lars.
7 See W all Street Journal, at C 11, (July 25, 1989). The num ber o f com panies that w ere acquired dropped by 17 percent in the above 6 m onths’ period, com pared to the first 6 months o f 1988. Foreign acquisitions o f US targets am ounted to 21.9 billion dollars in the first 6 months o f 1989 com pared to 29.8 billion dollars in the corresponding period o f 1988, see study by IDD Information Services, released July 24, 1989; BNA Corporate Counsel W eekly, August 2, 1989, p. 2.
8 Leveraged buy-outs and m anagem ent buy-outs are discussed under XI. 10. and 9., respectively.
9 See Louis Low enstein, W hat’s Wrong with Wall Street p. 128.
10 The historical developm ent o f takeovers in the United States is described and discussed by John Brooks in The Takeover Game p. 1 ff. See also D evra L.
G olbe & Law rence J. W hite, M ergers and Acquisitions in the U.S. Economy: An A ggregate and H istorical Overview in M ergers and A cquisitions (Alan J. A uer
bach, ed.) p. 25 ff.
11 See M ergers & Acquisitions, Vol. 25, No. 2, p. 91 (1990) w here it is suggested that in particular the value o f transactions has sunk.
12 See Financial Times, January 11, 1989 p. 20. The am ount indicated is based on transactions having a volume o f more than 100 m illion dollars, publicized in 1988, and in connection with w hich at least one o f the parties is located in Eu
rope. O f the total am ount indicated in the text, 59.6 billion dollars concern trans
actions with participation o f parties from one and the same European country,
II. Historical background and structure o f contested takeovers
This figure includes “friendly” as well as “contested” transactions.
Contested transactions still only constitute a lesser part of the total number of transactions. In 1988, as per December 1, 63 contested takeover bids had been made, of which 40 had been made in Great Britain, whereas 23 had been made in Continental European countries, including 11 in France.13 The prime reason for this development may be the expectations with respect to increased competition and, as one of the consequences hereof, a demand for larger companies that is connected to the implemen
tation of the EC “Internal Market” in 1992.14 It seems as if many Euro
pean companies and their managements have realized that corporate ac
quisitions is a means by which larger and more competitive companies may be created.
This development in Europe has been accompanied by the use by Euro
pean companies of legal and financial concepts and methods that have been developed in the United States. For example, as we shall see later, a number of the offensive and defensive techniques known from the United States have spread to Europe. Also, it seems as if banks and financial ad
visors as well as companies in some countries are in the process of revis
ing their views on the use of financing through borrowed funds. Although nothing suggests that leveraged financing will gain the popularity seen in the United States, it is likely that debt-financing will increase and, to a certain extent, replace equity financing, at least in some European coun
tries.15 This changed attitude to leveraged financing has led to an incipient
while transactions in w hich parties from m ore European countries were involved am ount to 13.2 billion dollars. Transatlantic m ergers and acquisitions, i.e. trans
actions involving parties from Europe as well as the United States, am ount to 52.5 billion dollars, while transactions between com panies in Europe and Asia am ount to 8.8 billion dollars.
13 See M atthew Crabbe, Fending O ff Unwelcom e Attentions, Eurom oney, p. 83 ff.
(February 1989). The increased level o f contested takeover activity on the C onti
nent is illustrated by the fact that only four contested takeovers were consum m ated in 1987, o f which three were made in France and one in Holland.
14 See Eric G. Friberg, 1992: M oves Europeans A re M aking, H arvard Business Review, p. 85 ff. (M ay-June 1989).
15 For a discussion o f the changed views on leveraged financing, see M ergers &
Acquisitions, Vol. 24, No. 5, p. 25-33 (1990). See also Richard Evans and Peter Lee, Why Junk is A bout to Leverage Europe, Eurom oney, p. 52 ff. (Decem ber 1988). In this article the authors discuss, inter alia, Bank o f England’s apparently changed views with respect to debt-financing. In 1988, the British com pany Beazer acquired American Koppers for 1.8 billion dollars, o f w hich approxi
II. Historical background and structure of contested takeovers
market for junk bonds that has developed quite substantially lately but which continues to play a minor role only in connection with the financing of acquisitions in Europe. However, it is likely that the junk bond market in Europe will be affected by the decline of the United States’ junk bond market and that the so-called “private placements”, i.e. loans issued by banks or institutional investors, will remain the prime source of leverage financing, to the extent that such financing will be used in the future.16
Simultaneously with the spread of'American acquisition techniques and defensive means to Europe, a number of American investment banks have established offices within Europe and have so far been very successful in assisting and advising European companies in connection with contested acquisitions.17
The one single contested takeover attempt that has probably drawn the most attention and triggered most discussion is the attempt mentioned earlier by Carlo de Benedetti to acquire control of Société Générale de Belgique, which by most Belgians is considered to be the “crown jewels”
of Belgium.
While many Belgians seemed to acknowledge that Société Générale might benefit from Mr. de Benedetti’s leadership, strong national interests were attached to keeping the company on Belgian hands.18
mately 1.7 billion dollars was financed through loans from banks. For a discus
sion o f this and o f the scepticism that has been expressed regarding increased leverage, see Corporate Finance, p. 35 ff., and, in particular, p. 42-43 (D ecem ber 1988).
16 For a discussion o f the use o f ju n k bonds in Europe, see Alistair M acdonald, Gearing, C orporate Finance, p. 19 ff. (Septem ber 1988). See also by the same au
thor, Laws o f Leverage, C orporate Finance p. 26 ff. (O ctober 1988) and Richard Evans and Peter Lee, Why Junk is A bout to Leverage Europe, Eurom oney, p. 52 ff. (D ecem ber 1988).
17 In the first six months o f 1988, the A m erican investm ent banks, Goldman Sachs and Shearson Lehm an Hutton International were involved in five out o f the ten largest takeovers o f com panies listed in G reat Britain, cf. Claire M akin, The Am ericanization o f British M &A, Institutional Investor, p. 41 ff. (October 1988).
18 The attem pt by Mr. de Benedetti failed, at least so far, because Société Générale m ade an alliance with and issued shares to a “friendly” third party. The m atter is an illustrative exam ple o f how a contested acquisition is not only a question of econom ic interests but also may carry with it a num ber o f political issues, in this case the relationship betw een the Flem ish-speaking and French-speaking peoples in Belgium . The Société G énérale-m atter is discussed by Valérie Hirsch, Le Raid sur la Société G énérale de Belgique: Une Legón de Choses p o u r VEurope, R e
Other incidents have shown that national interests do play a significant role in the European debate. It has thus been criticized that, inter alia, Swiss and German companies appear on the European corporate arena as contested acquirors, while it is extremely difficult, if not impossible, to acquire Swiss or German companies by means of a contested takeover.19 This debate clearly shows that even though an increased number of merg
ers and acquisitions have been experienced in Europe in recent years, considerable differences exist as regards the legal and business “climate”
for takeovers in the European countries.
Although it is only recently that the term “contested takeover” or
“fjendtlig overtagelse” has been used as a label on certain corporate ac
quisitions in Denmark, the factors that constitute a contested takeover are not, as such, new in Denmark. There have been incidents several years ago where a shareholder attempted to acquire control of a company and where it has been a part of the acquiror’s plan to remove the incumbent man
agement.
Exam ples include A m e G roes’ attem pt to gain control o f Sadolin & Holmblad in 1983 and K FK ’s attem pt to acquire Peder P. H edegaard in 1987.
The development in the other European countries suggests that the number of corporate takeovers will increase in the years to come and that future takeovers will to a large extent be influenced by new ways of thinking in terms of financing of the transactions as well as with respect to the legal structuring of acquisitions. It has yet to be seen if Denmark will be among
II. Historical background and structure o f contested takeovers
vue du M arché Com mun, No. 314, p. 61 ff. (February 1988), and by Simon Brady, The Unguillotined Aristocrat, Eurom oney, p. 120 f. (February 1989).
19 See the discussion in the New York Tim es, August 26, 1988, p. D 3. The two Swiss com panies, Nestlé and Jacob Suchard, in the spring o f 1988, made com pet
ing “hostile” takeover bids in order to acquire control o f British Row ntree pic.
The outcom e o f the com petition was that N estlé acquired Rowntree. At the same time, many Swiss com panies have denied registration o f shares bought by foreign com panies, thereby preventing such foreign shareholders from exercising their voting rights. See also Peter G. Rogge, Foreign Takeovers o f Sw iss Com panies, p. 6 f„ Swiss Bank Corporation/Prospects 5/1988, and Nedim Peter Vogt and H anspeter W üstiner, Share Transfer Restrictions under Swiss Law and Hostile Takeovers o f Swiss Companies, International Business Lawyer, p. 355 ff.
(Septem ber 1988). One o f the m ost recent exam ples o f German com panies’
“hostile” takeover activity was Siem ens’ attem pt jointly with GEC to acquire British Plessey.
II. Historical background and structure of contested takeovers
the countries that adopt the American concepts used by now in many other European countries.
A ccording to a report on m erger and acquisition activity in D enm ark in 1989 prepared by the D anish Com petition Council (’’K onkurrencerådet” ) and pub
lished in 1990, 391 com panies were acquired in 1989. This figure com prises ac
quisitions irrespective o f w hether they are “friendly” or contested. Only very few o f these acquisitions could be referred to as “contested” , however. The com panies acquired represent an aggregate turnover o f approxim ately DKK 28 m illion and a total num ber o f em ployees o f some 29,000. A cquisitions by for
eign acquirors account for 21 percent o f the total num ber o f acquisitions and 19 percent o f the aggregate turnover o f acquired com panies. This group o f acquisi
tions represents 21 percent o f the total num ber o f em ployees o f acquired com panies.