If it seems as though each week brings news of yet another takeover offer for a UK firm, the actual figures from the ONS (Office for National Statistics) are quite mind-boggling.

Aside from the number of listed companies being bought, either by ‘inward’ investors or domestic buyers, hundreds of privately-owned firms are being snapped up every quarter.

If you are in a position where a company you own agrees a takeover bid, however, what is the process and how do you get your money?

In this article, we will walk you through an example of a takeover situation and explain how it worked, how long the timetable was for the deal to go through and what shareholders received once the deal had completed.

RECENT M&A TRENDS

In terms of background, the provisional number of UK domestic and inward M&A (merger and acquisition) deals involving a change in majority share ownership between April and June of this year was 323, which in itself is staggering, but was actually 70 fewer than the period between January and March.

The value of inward M&A during the second quarter was £5 billion, down £600 million on the first quarter, while the value of domestic M&A was £2.6 billion, a drop of £1 billion on the first quarter, possibly due to companies sitting on their hands in the run-up to the general election.

The Bank of England’s summary of business conditions reported a slightly more positive sentiment around investment decisions in the second quarter compared with the first quarter as uncertainty over the economic outlook eased, although it flagged financial constraints including the cost of finance and margin pressures continued to weigh on some companies.

The report also observed: ‘Although expectations have been tempered by geopolitical uncertainties, contacts expect moderate growth in volumes through 2024.  Contacts report that credit supply conditions remain the same. Debt markets are open and private debt funds are active. Lending to the largest borrowers with the lowest credit risk continues to be very competitive. Smaller firms that present greater credit risk report tight access to bank finance, though challenger banks and non-bank lenders are more willing to lend at high interest rates.’

We will have to wait until the start of December to see whether M&A activity picked up in the third quarter, which we sense it did, although with the Budget looming in October we suspect some firms would have kept their powder dry until they heard what the chancellor had to say.

Dan Coatsworth, investment analyst at AJ Bell, comments:

What to bear in mind when you get a bid for your shares.

Anyone who finds one of the companies in their ISA or pension subject to a takeover bid has a few things to consider before accepting the offer.

First, is the bidder offering a fair price? It’s all very well for someone to come along and offer 20% or 30% above the market price, but does that factor in what the company might achieve in the future or is it simply based on what it has achieved in the past year?

Second, how is the bid structured? Companies can pay in cash, shares or a mixture of both. Many investors prefer hard cash in their pocket as inheriting shares means they must weigh up if they want to hold the acquiring company in their portfolio longer-term.

Third, some bidders have their shares quoted on a foreign stock market, so investors in the target company need to work out if they’re happy inheriting such shares. There might be foreign exchange fees to pay and potentially extra tax applicable to dividends on overseas-listed companies.

Fourth, while it is tempting to accept a takeover offer for a nice little bump now, would your portfolio be worse off without that stock? Some companies have proven to be nice little earners for an ISA or pension if held over the long term, so you need to allow for the fact that accepting a bid today means giving up future returns.

MOST DEALS ARE FOR CASH

Most deals tend to be cash offers for companies, which makes the process relatively simple and painless for shareholders in the target once a price has been agreed.

For example, on 20 June, US private equity firm Bridgepoint made a 505p per share or £626 million all-cash offer for Alpha Financial Markets Consulting which the board accepted and recommended to its shareholders.

The Bridgewater offer was by way of what is known as a court-sanctioned ‘scheme of arrangement’ under Part 26 of the 2006 Companies Act rather than under the Takeover Code.

What that means is, subject to a scheme sanction hearing at the High Court, the firms can then deliver a copy of the court order to the Registrar of Companies and the scheme becomes effective.

Once the scheme document was published by Alpha FMC, anyone who was on the share register as of Friday 16 August – the day after the deal was approved by the High Court – was entitled to receive cash for their shares.

Alpha FMC shares were then suspended from the AIM market on Monday 19 August and settlement was either by cheque or a credit to shareholders’ accounts via the CREST system on or before 2 September, so the whole process took just over 10 weeks.

In contrast, under the Takeover Code some deals can drag on a lot longer as the buyer asks for more time to carry out ‘due diligence’, or look at the accounts of the company it is hoping to take over, and even then there is no guarantee there will be a firm offer at the end of it.

Housebuilder Bellway (BWY) made a opportunistic offer for rival Crest Nicholson (CRST) in April, and had to revise up its approach several times, extending the so-called ‘put-up or shut-up’ (PUSU) deadline twice, before eventually announcing in August it wouldn’t actually go ahead with a bid.

OTHER TYPES OF DEALS

There have been several large deals this year where shareholders in the target company have been offered shares as part or all of the consideration, such as Barratt Developments’ takeover of Redrow to form Barratt Redrow (BTRW), Benelux insurer Ageas’ (AGS:EBR) approach to Direct Line (DLG) and International Paper’s (IP:NYSE) offer for DS Smith.

Part- or all-share offers are helpful for the buyer as they reduce the cost of funding – new shares can be issued free – and they can help ‘sell’ the deal to reluctant target shareholders who want to stay in the business under new ownership, with the promise of synergies to come.

Solicitors Slaughter & May, who advise on M&A transactions across the value spectrum and specialise in takeover defence, say they have seen a number of trends develop this year.

First has been the return of higher-value bids, in part due a backlog of deals as interest rates and inflation stabilise; second is corporates looking for ‘strategic’ acquisitions to take them into new markets or build new customer bases; and third is private equity firms using ‘stub equity’ offers, which involve a cash offer with an alternative offer of unlisted securities for eligible shareholders.

WHAT TO EXPECT IF YOU GET A BID

If you own shares through an investment platform and one of your holdings is the subject of a takeover, you should get an email notifying you of a ‘corporate action’.

This means, among other things, that any active orders you might have in the stock, such as a regular investment or dividend reinvestment instruction, may have been canceled.

You should also receive directions to the London Stock Exchange website where you will find details of the proposed offer, and you may also get a separate email  from your platform provider answering FAQs (frequently-asked questions) about M&A deals.

If the offer becomes official, you will have the opportunity to sell your shares with no dealing charge at the price offered by the bidder.

Typically, as in the case of Alpha FMC, a court-sanctioned ‘scheme of arrangement’ means the deal has been agreed by the board and recommended to shareholders, so the process should be fairly quick and easy.

You also have the option, particularly if the shares are trading in line or close to the bid price, of selling your shares in the open market ahead of the takeover going through. This reduces the risk of you being exposed to a last minute hitch in the transaction.

Disclaimer: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (Ian Conway) and the editor (Tom Sieber) own shares in AJ Bell.

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