Going Ape over Takeovers

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In the air Cadbury was a different animal — a beloved brand

Workers at the Cadbury plant in Keynsham, in the west of England, thought they had a sweet deal. In the middle of a takeover bid for the British confectioner last fall, the U.S. food company Kraft pledged that the factory, earlier slated for closure by Cadbury, would remain open if it won the company. When the deal wrapped, though, the pledge soured. Too much of Keynsham's production had apparently been shifted to Poland to reverse its closure, Kraft lamented. The plant, after more than 75 years making chocolate, will shut next year, its staff of 400 among the early casualties of the $18 billion deal.

Few hostile bids for a British firm and a beloved brand have ruffled the country's business and political chiefs the way Kraft's did. But the debate took a twist. Although the Americans were excoriated for their U-turn, the pivotal role of short-term Cadbury investors in handing the firm to Kraft sparked calls for a rethink of the way takeovers are governed in the U.K.

And that's exactly what the Takeover Panel, the independent body that sets the rules for deals involving U.K. firms, is doing: undertaking a review of the mergers and acquisitions process with an eye on reform. With the government poised to unveil its own recommendations for change, Business Secretary Vince Cable said to a parliamentary committee July 20 that the aim is to "throw some sand in the system."

Few would dispute any British claim of being the takeover capital of Europe. According to Dealogic, which tracks global M&A, the U.K. has seen more than twice as many of its companies bought since 2005 as any of Europe's other leading economies. Among the conquests: airport operator BAA, bought by Spain's Ferrovial, and British Energy, bought by France's EDF.

Chalk at least some of that up to the Anglo-Saxon brand of capitalism, one that Continental regulators have often resisted. France, for instance, has bluntly protected its "national champion" companies from hostile offers. With boards and the government less able to meddle in the takeover process in Britain, says Roger Barker, head of corporate governance at the London-based Institute of Directors, it is "very much an outlier in terms of the openness of our market for corporate control."

To make deals tougher for acquirers to execute, the Takeover Panel is considering ways to grant longer-term shareholders in a target firm more power to decide the fate of an offer. One proposal being considered would see the threshold for an acquisition bumped from 50% plus one of the voting rights to 60% or higher. Another would disenfranchise investors who buy a target's shares after an offer has been made by denying them the right to vote on the bid.

Both ideas have their flaws. U.K. corporate law permits a shareholder to control a company with 50% plus one by, for instance, issuing resolutions to fire the board and appoint a new one. That such a stake would no longer grant ownership seems incongruous. Depriving newer investors of the right to vote on a takeover, meanwhile, makes presumptions about their motives and desirability that won't always be fair. After all, the reason there are short-term shareholders is that some long-term shareholders sell out. They are voting with their feet. Disenfranchising on those grounds, says Michael McKersie — an assistant director at the Association of British Insurers, which represents major investors in U.K. stocks — "is just a form of discrimination."

Other proposals, though, are less fraught. Giving shareholders in a bidding company a say in the process seems sensible, since those left holding stock in the combined entity have far more to lose from a poorly judged acquisition. Big deals involving a British buyer sometimes require approval from the bidding company's shareholders. Kraft, were it a U.K. business, would have needed shareholders to approve the move for Cadbury, for instance.

The City is not anticipating revolutionary change within the Takeover Panel's recommendations. Any radical measures to ensure deals are "decided on the basis of long-term-shareholder value rather than short-term speculation," as Cable advocated in June, would be more likely to come from the government. The Institute of Directors' Barker, for one, is betting on the government's "taking some significant action"; officials are already mulling plans to subject big deals to greater regulatory scrutiny before an offer has officially been tabled. That's far too late to help workers at the Cadbury plant in Keynsham. But it just might make the deal's aftertaste a touch less bitter.