Why I still believe we need more hostile bids

25 June 2013, Bernard Swanepoel

On 6 Jan 2000, when I was CEO of Harmony, we launched a hostile bid for Randfontein Estates, a company then part of Brett Kebble’s JCI group.

This infuriated Kebble because he was trying to consolidate a number of mining companies, including Randfontein and Western Areas, so Harmony’s rival offer for Randfontein was a spanner in the works for him.

Our offer for Randfontein was a significant premium to the low-ball offer by Kebble and his associates as part of the infamous Project Eagle. It made headlines and front pages, but within days, it was done and dusted.

Harmony had successfully pulled off a hostile takeover of Randfontein, and the result was that shareholders got much more than what they were offered by Kebble in their ”fair and reasonable offer as recommended by their board“. Kebble, it should be pointed out, was supported ably by just about every highly-paid advisor and banker in Joburg at the time.

Their ridiculous claim at the time was that Randfontein only had about 3-years left of life. Now, 13-years later, this has proven to be clearly untrue: parts of Randfontein have been on-sold at a decent profit, and the combined mines still employ a few thousand people.

Then, in October 2004, Harmony launched what was to become a hostile bid for Goldfields.

Perhaps my team and I can be forgiven for believing then, a few years later, that Goldfields’ unpopular move to split the company into South African and non-South African assets could be stopped with an unsolicited bid by Harmony for all of Goldfields.

After my initial friendly overtures were rejected, I phoned Goldfields CEO Ian Cockerill on a Saturday afternoon to inform him that on Monday the 18th October 2004, we would be making an offer for 100% of Goldfields with his largest shareholder’s support. It is fair to say that come that Monday morning it was ‘hostile’!

But how exactly could a public bid at a significant premium for all of a company’s shares ever be hostile? Hostile to whom? Hostile to shareholders who could accept or reject the offer?

No, clearly it could only ever have been hostile to other stakeholders, more specifically those special employees, who need protection, also known as Executive Management.

Surely by the time a company has consistently underperformed for so long (or, as in the case of Goldfields at the time, had lost it strategic direction), any bidder who offers a substantial premium to the share price clearly believes more in that company than the incumbent management? Probably even more than some of its disgruntled shareholders.

As history has recorded, Harmony’s offer for Goldfields failed, buried under a mountain of red tape and legal actions launched by Goldfields management specifically to thwart the bid.

Now, Bidvest’s Brian Joffe finds himself confronting the board of Adcock Ingram, who don’t seem willing to entertain his offer. In Adcock’s case, wouldn’t it be proper if the current board stand aside, put the offer and their own counter proposals to shareholders and let them decide for themselves?

Sadly it’s not likely, because managers and boards don’t think they work for shareholders – instead, they believe they need to think for them and protect them against premium offers. The sooner this type of arrogant and paternalistic thinking gets eradicated from our boardrooms, the better.

In South Africa, unsolicited offers often fail – Harmony’s successful bid for Randfontein was one of a handful that have succeeded in the last decade.

So, instead of making unsolicited takeovers virtually impossible in SA, our legislators and regulators should seriously consider making it easier for such offers to be made.

We could start by making it mandatory for directors to carry out their fiduciary duties by expecting of them to put such offer – with their considered opinions, of course – to shareholders within a brief prescribed time period. A month would be a good time limit.

After all, our competition authorities and our labour laws are more than adequate to protect the truly vulnerable stakeholders – small shareholders even have Appreciation Rights, for example.

The real issue is this. How can it ever be acceptable for the few individuals, who through their own underperformance are threatened by a premium offer to shareholders, to now have the right to spend millions (or with Goldfields, hundreds of millions) on a defence if it will cost a lot less perhaps less than R1-million) to let shareholders decide?

The Gold Fields bid demonstrated so starkly how unclear legislation, securities regulation panel rules and mismatched approval process all create opportunities for frivolous and frustrating legal action. In this environment, hostile or unsolicited bids become nothing more than the topic of folklore and legend.

Experienced dealmakers will tell you that timing is important – but time can kill a deal. With drawn out processes and delays comes uncertainty and ultimately deal fatigue. Legislation in many parts of the world tries to overcome this by prohibiting frustrating actions.

The new Companies Act and other new laws have also missed a trick by doing nothing to promote these unsolicited offers as deemed necessary and desirable. Surely it cannot be that we believe our public companies are so well run that there is no need to keep the management on their toes and in check?

It is, at the very least, possibly true that the potential for such hostile offers could prevent bad management form destroying companies and jobs.

I acknowledge that it is not always easy to determine what the reasons for such offers are – but surely we should let the bidder and the current management put their cases to shareholders? They are the owners after all.

Public scrutiny will establish soon enough how much of the respective rationales are driven by either CEO egos or self-preservation of the threatened incumbent management.

Regardless, let’s show a bit more believe in shareholder democracy, seeing that shareholder activism has become nothing more than one man on a crusade against executive remuneration.

If nothing else, these unsolicited offers fills newspapers, especially when the full page ad campaigns start – as happened with Goldfields.

At least Brian’s lawyers, if they are who I suspect they will be, know what it takes to spend months (and earn millions) whilst frustrating shareholder democracy, as they have so successfully done defending Goldfields’ executive against Harmony’s offer to their shareholders.

May they succeed this time, and may they in the process clean up the mess of legal precedents left after some 20 legal challenges we had to face off against during the Goldfields bid.

The bottom line is that legal uncertainty and red tape continues to protect of the underperforming management teams against potential suitors. It would be nice if this could change.

Either way, win or lose, the lawyers will get paid. Bidvest will add a bit more substance to the ‘Bid’ part of their name and the endangered management team of Adcock? Well, they may have to take two Panados.