HRD's pocket guide to... hostile takeovers

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The HRD’s pocket guide series offers an explanation of areas outside day-to-day HR that business-savvy HRDs need to have a handle on

Why do I need to know about it?

When US food giant Kraft tried to acquire beloved British confectioner Cadbury in 2010 there was national outcry. Despite the media attention and a good fight on Cadbury’s part the deal went through, and the business was sold for £8.40 per share.

This was possible thanks to hostile takeovers and the way they can be used to get around an organisation’s leadership team. “[A takeover] is hostile because it goes over the heads of the directors of the target; friendly takeovers proceed by agreement between the directors of the bidder and the directors of the target,” explains Andrew Johnston, professor of company law and corporate governance at the University of Sheffield.

If the target business’ shareholders agree to the sale the acquirer will then “be able to change the board of directors of the target, giving it full control, and where appropriate merge the target with its own business”, Johnston adds.

This then provides an avenue for the acquirer to radically change the target business should it wish to, as was the case with Cadbury. Kraft swiftly scrapped Cadbury’s commitment to Fairtrade cocoa beans, and continued the closure of a factory in Somerdale it had promised to keep open.

With many businesses, particularly in the retail sector, finding themselves in financial trouble we could see a rise in takeovers – both hostile and friendly. Since 1968 The City Code on Takeovers and Mergers has made it difficult for the directors of a target company to defend against a takeover bid. As a result the UK witnesses more than anywhere in the EU.

What do I need to know?

Hostile takeovers can affect the profits and share prices of both the target and the bidder. A takeover attempt “may increase the price of the target company’s shares on the stock market”, says Peter Parry, policy director at the UK Shareholders’ Association. “It might also depress the share price of the company making the bid.”

“If the target is loss-making it may take time for the new owners to bring it back to profit. There will probably also be acquisition and integration costs, which in the short term could damage the performance of the acquiring company,” Parry adds.

Business operations could also be affected. “If the bidder thought the company would be more profitable if there was a change in strategy it could mean that the target company is taken in a new direction. In some instances very few changes might occur; for example if a company is acquired because it has particular technology, patents or skills that are useful to the bidder,” points out Matthew Cole, lecturer and module leader in competition law and mergers and acquisitions at the University of Exeter.

Where can HR add value?

HR’s main role in a hostile takeover will be communicating with employees and handling redundancies.

The City Code on Takeovers and Mergers requires the bidder to explain what it plans to do with the target organisation’s employees and management. “HRDs should make the offer document available to employee representatives or to the employees themselves,” advises Johnston. “The target board should also give their opinion on the bid, including the likely effects on employment. HRDs should make this available, and inform employees they are entitled to append their opinion to the board’s.”

Communications in both businesses are key to keeping employee concerns in check. “It is important that HR in both businesses have a clear communications plan for keeping employees fully informed and reassuring them. In the absence of this employees will have to rely on what they read in the media or hear on the grapevine. Such information may be inaccurate or only give part of the story,” Parry says.

If employees aren’t kept informed, and morale isn’t bolstered as much as possible, productivity is likely to suffer. “For employees of both firms a major merger is likely to be a time of stress. There are two situations that will need to be avoided: staff become unmotivated because they think they are going to be made redundant, or are overwhelmed with uncertainty and either drop their performance or decide to jump ship, which could lead to losing key staff,” adds Cole.

Anything else?

It’s not a given that hostile takeovers will succeed. It’s possible for the target company’s board to come up with a defence strategy that persuades its shareholders not to agree to a sale.

Also, bids will be scrutinised by the Competition and Markets Authority in the UK and possibly by the EU Commission. The government can also intervene if it feels any takeover is a threat to national security, financial stability or media quality, plurality and standards.

This piece appeared in the March 2018 issue. Subscribe today to have all our latest articles delivered right to your desk

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