tag:theconversation.com,2011:/us/topics/takeovers-733/articlesTakeovers – The Conversation2023-03-17T12:29:20Ztag:theconversation.com,2011:article/2020242023-03-17T12:29:20Z2023-03-17T12:29:20ZThe state takeover of Houston public schools is about more than school improvement<figure><img src="https://images.theconversation.com/files/515917/original/file-20230316-28-4ctm5n.jpg?ixlib=rb-1.1.0&rect=17%2C17%2C5674%2C3771&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The state takeover is based largely on one school.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/multiracial-group-of-students-sitting-at-desk-in-royalty-free-image/1345022868?phrase=high%20school%20&adppopup=true">Maskot / Getty Images</a></span></figcaption></figure><p>When the state of Texas <a href="https://www.statesman.com/story/news/2023/03/15/houston-isd-takeover-texas-public-education/11480698002/">took over Houston’s public school district</a> on March 15, 2023, it made the district one of more than 100 school districts in the nation that have experienced similar <a href="https://global.oup.com/academic/product/takeover-9780190678975?cc=us&lang=en&">state takeovers</a> during the past 30 years.</p>
<p>The list includes New York City, Chicago, Boston, Philadelphia, Detroit, New Orleans, Baltimore, Oakland and Newark. Houston is the largest school district in Texas and the <a href="https://www.houstonisd.org/about">eighth largest</a> in the U.S.</p>
<p>While <a href="https://www.statesman.com/story/news/2023/03/15/houston-isd-takeover-texas-public-education/11480698002/">the state of Texas claims</a> the planned takeover is about school improvement, <a href="https://global.oup.com/academic/product/takeover-9780190678975?cc=us&lang=en&">my research on state takeovers</a> of school districts suggests that the Houston takeover, like others, is influenced by racism and political power.</p>
<h2>States fail to deliver</h2>
<p>State governments have used takeovers since the late 1980s to intervene in school districts they have identified as in need of improvement. While state administrations promise that takeovers will improve school systems, <a href="https://global.oup.com/academic/product/takeover-9780190678975?cc=us&lang=en&">30 years of evidence</a> shows that state takeovers do not meet the states’ promised expectations. For instance, a recent report called Michigan’s 15-year management of the Detroit schools a <a href="https://www.chalkbeat.org/posts/detroit/2019/11/14/report-detroit-schools-emergency-management/">“costly mistake”</a> because the takeover was not able to address the school system’s major challenges, which included adequately funding the school district.</p>
<p>But while the takeovers don’t deliver promised results, as <a href="https://global.oup.com/academic/product/takeover-9780190678975?cc=us&lang=en&">I show in my book</a>, they do have significant negative political and economic consequences for communities, which overwhelmingly are communities of color. These negative consequences often include the removal of locally elected school boards. They also involve decreases in teachers and staff and the loss of local control of schools.</p>
<p>Despite the highly problematic history of state takeovers, states have justified the takeovers on the grounds that the entire school district is in need of improvement. However, this is not the case for the Houston takeover because by the state’s own standards, the Houston school system is not failing.</p>
<h2>Low threshold for state intervention</h2>
<p>Following a 2015 law, <a href="https://capitol.texas.gov/tlodocs/84R/billtext/pdf/HB01842F.pdf">HB 1842</a>, the state of Texas was granted authority to take over a school district if a single school in that district fails to meet state education standards for five or more years. The bill was passed by the Republican controlled state legislature with Democratic support. However, Democratic state lawmakers representing Houston argue that the law was a mistake and <a href="https://www.houstonpublicmedia.org/articles/news/2018/05/03/283249/state-lawmaker-calls-for-legislature-to-intervene-revise-school-takeover-law/">urged for it to be revised</a>.</p>
<p>Although the state has given the Houston Independent School District a <a href="https://txschools.gov/?view=district&id=101912&tab=overview&lng=en">B rating</a>, it plans to take over the Houston schools because <a href="https://www.houstonpublicmedia.org/articles/education/2023/03/15/446250/texas-education-agency-takeover-houston-independent-school-district/">one school</a>, Wheatley High School, <a href="https://www.houstonpublicmedia.org/articles/education/2023/03/15/446229/considering-race-class-and-power-in-texas-education-agencys-takeover-of-houston-independent-school-district/">has not made sufficient progress</a> <a href="https://txschools.gov/?view=school&id=101912018&tab=performance%7Caccountability&lng=en">since 2017</a>. According to state law, the state can take over a school district or close a school if it fails to meet standards for five years.</p>
<p>The Houston Independent School District has <a href="https://www.houstonisd.org/achievements">280 schools</a>. The district serves over <a href="https://www.houstonisd.org/site/handlers/filedownload.ashx?moduleinstanceid=48525&dataid=244567&FileName=2018-19_FactsFigures_.pdf">200,000 students</a>. It employs roughly <a href="https://www.houstonisd.org/site/handlers/filedownload.ashx?moduleinstanceid=48525&dataid=244567&FileName=2018-19_FactsFigures_.pdf">12,000 teachers</a>. Wheatley High School serves roughly <a href="https://www.usnews.com/education/best-high-schools/texas/districts/houston-isd/wheatley-high-school-19252">800 students</a> and has roughly 50 teachers. </p>
<p>So why would a state take over a school district that has earned a B rating from the state? And why base the takeover on the performance of one school that represents fewer than 1% of the district’s student and teaching population?</p>
<p>In order to understand the logic of the planned state takeover of the Houston schools, it pays to understand the important role that schools have played in the social, political and economic development of communities of color. Historically, communities of color have relied on school level politics as an entry point to broader political participation. School-level politics may involve issues like ending school segregation, demanding more resources for schools, increasing the numbers of teachers and administrators of color, and participating in school board elections.</p>
<p>The process of gaining political power at the local level – and eventually state level – <a href="https://www.jstor.org/stable/j.ctt7t8s2">often begins at the schools</a>, particularly the school board. For instance, before Blacks and <a href="https://search.proquest.com/openview/d8d4de9a1c8d4e615fe547902d29a3d2/1?pq-origsite=gscholar&cbl=18750&diss=y">Latinos</a> elect members of their communities to the city councils, the mayor’s office and the state legislatures, they often <a href="https://www.researchgate.net/publication/242612106_Race_Gender_and_Descriptive_Representation_An_Exploratory_View_of_Multicultural_Elected_Leadership_in_the_United_States">elect members to the school board first</a>.</p>
<h2>Political representation at stake</h2>
<p>In Texas, communities of color are politically underrepresented. Although Blacks, Latinos and Asians represent nearly 60% of the population in Texas, their political power at the state level is not proportional to their population. Whites make up <a href="https://www.texastribune.org/2023/01/11/2023-texas-legislature-representation/">54%</a> of the state legislature. The Republican Party controls the governorship, state House of Representatives and state Senate, but only <a href="https://www.texastribune.org/2023/01/11/2023-texas-legislature-representation/">12%</a> of all Republican state legislators are of color. Communities of color in Texas have filed lawsuits arguing that they have been prevented from gaining political representation at the state level by Republicans through <a href="https://www.houstonchronicle.com/news/politics/article/Supreme-Court-hears-arguments-in-Texas-racial-12860526.php">racial gerrymandering</a> and voter identification laws that <a href="https://www.brennancenter.org/our-work/court-cases/texas-naacp-v-steen-consolidated-veasey-v-abbott">disenfranchise Black and Latino voters</a>.</p>
<p>However, despite years of systematic exclusion of people of color, the political landscape is changing in Texas. Texas is <a href="https://www.washingtonpost.com/politics/2019/08/08/fascinating-swings-voting-by-state-type-county/">increasingly urbanizing</a> as a result of population growth in the state’s cities. Since urban voters are <a href="https://www.usnews.com/news/best-states/articles/2019-05-14/demographic-shifts-in-cities-and-states-bring-political-changes-too">more likely</a> to vote Democratic, the growth in the urban population may potentially alter political dynamics in the state. Also, while African Americans have solidly identified with the Democratic Party in Texas, Latinos have not. But that, too, is changing. <a href="https://latinodecisions.com/blog/texas-sized-opportunities-part-3b/">Polls</a> show that Latino support for Republican presidential candidates in Texas went from a high of 49% during George W. Bush’s reelection in 2004 to 35% for John McCain in 2008, 29% for Mitt Romney in 2012 and a low of 18% for Donald Trump in <a href="https://www.washingtonpost.com/news/monkey-cage/wp/2016/12/02/donald-trump-did-not-win-34-of-latino-vote-in-texas-he-won-much-less/">2016</a>, before bouncing back to <a href="https://www.nytimes.com/interactive/2020/11/03/us/elections/exit-polls-texas.html">41% for Trump</a> in 2020.</p>
<p>Houston, as the largest urban center in Texas, is <a href="https://www.houstonchronicle.com/news/houston-texas/houston/article/Houston-area-Democrats-upset-by-Bonnen-recording-14536869.php">at the forefront of this challenge</a> to the Republican grip on state power. The Houston schools, in particular, are representative of the state’s demographic and political future. The nine-member Houston school board is reflective of the community it serves. It has three Latinos, four African Americans and two white school board members. This, in my view, is what has put the Houston public school system and school board at the forefront of a battle that is really about race and political power.</p>
<p>The Houston public school system is not failing. Rather, Republican Gov. Greg Abbott, Education Commissioner Mike Morath and the Republican state legislature are manufacturing an education crisis to prevent people of color in Houston from exercising their citizenship rights and seizing political power.</p>
<p><em>This is an updated version of an <a href="https://theconversation.com/the-made-up-crisis-behind-the-state-takeover-of-houstons-public-schools-128346">article previously published Jan. 10, 2020</a>.</em></p><img src="https://counter.theconversation.com/content/202024/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Domingo Morel does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Political power and a history of racism lurk behind the recent state takeover of the Houston public school system.Domingo Morel, Associate Professor of Political Science and Public Service, New York UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1943132022-11-10T13:27:13Z2022-11-10T13:27:13ZCryptocurrencies: why Binance’s failed FTX rescue deal could mean ‘crypto winter’ is coming<p>Life in the cryptocurrency industry is rarely quiet for long, and after a <a href="https://decrypt.co/collections/2022-crypto-crash">tumultuous summer</a>, it seems the market is now entering a “<a href="https://www.forbes.com/uk/advisor/investing/cryptocurrency/what-is-crypto-winter/">crypto winter</a>”. Over the past week, the founders of two of the largest cryptocurrency exchanges – Binance and FTX – have had a public Twitter spat that triggered the collapse of one exchange and a failed bailout deal from the other. Unsurprisingly, these events have caused widespread panic across a market that has barely recovered from several major failures earlier this year.</p>
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<p>Binance, which is estimated to be worth more than <a href="https://fortune.com/2022/03/31/binance-made-billions-craze-crypto/">US$300 billion</a> (£263 billion), was actually FTX’s first investor in December 2019. Since then, FTX has grown to be worth more than <a href="https://www.barrons.com/articles/crypto-exchange-ftx-valuation-funding-51663854185">US$32 billion as of last January</a>, counting mainstream finance giants such as BlackRock and SoftBank among its many backers. </p>
<p>Binance CEO Changpeng Zhao and FTX founder Sam Bankman-Fried (often referred to as CZ and SBF, respectively) are two of the most influential people in the cryptocurrency exchange world where investors can buy, sell and store digital currencies. While Zhao has been associated with <a href="https://www.cnbc.com/2022/09/01/us-sought-records-on-binance-ceo-for-crypto-money-laundering-probe.html">regulatory concerns</a> around Binance, Bankman-Fried was seen as a relatively stable and ambitious figure in the wild west world of cryptocurrencies. He swooped in to rescue failing companies during last summer’s crypto bust and has made a point of <a href="https://www.theatlantic.com/technology/archive/2022/10/sam-bankman-fried-crypto-ftx-2022-midterms/671823/">speaking with the media</a> and <a href="https://www.expressnews.com/business/business_columnists/michael_taylor/article/Taylor-Sam-Bankman-Fried-billionaire-17255683.php">US policymakers</a>.</p>
<h2>What happened to FTX?</h2>
<p>Bankman-Fried’s empire included the FTX exchange business, as well as Alameda Research, a trading firm that was supposed to be separate from FTX. But a recent story by industry news site <a href="https://www.coindesk.com/business/2022/11/02/divisions-in-sam-bankman-frieds-crypto-empire-blur-on-his-trading-titan-alamedas-balance-sheet/">Coindesk</a> reported that Alameda’s balance sheet was dominated by FTT. This is the crypto token or coin issued by the FTX exchange, which grants holders a discount on trading fees on the marketplace. </p>
<p>FTT is entirely controlled by FTX, Alameda’s sister company and can be “printed” as FTX wishes. Alameda also held US$3.37 billion across a range of other cryptocurrencies, such as Solana and Serum, which means that any cryptocurrency collapse could severely affect the company. </p>
<p>While there is nothing illegal or wrong with these holdings – particularly in the notoriously <a href="https://www.fscs.org.uk/news/protection/cryptocurrencies-risk-cover/#:%7E:text=Unregulated%20Cryptoassets%20are%20largely%20unregulated,FSCS%20can't%20protect%20you.">unregulated crypto industry</a> – the report showed Alameda’s heavy reliance on a coin invented by its sister company and not one issued by an independent backer or as legal tender by a government. If a company in such a position gets into trouble, such assets would be useless in shoring up the business and protecting users because they would also fall in value. This discovery about Alameda’s balance sheet led to liquidity concerns about the entire company. </p>
<p>Indeed, after the Coindesk news story was published, Binance CEO Zhao tweeted plans to liquidate the remaining FTT on Binance’s books. In another post a few hours later he called the move “post-exit risk management, learning from LUNA” (a reference to a roughly <a href="https://www.forbes.com/sites/qai/2022/09/20/what-really-happened-to-luna-crypto/?sh=3f8b5b344ff1">US$60 billion</a> crypto crash that happened earlier this year).</p>
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<p>Zhao has 7.4 million followers on Twitter so his tweets affect the market. The value of <a href="https://coinmarketcap.com/currencies/ftx-token/">FTT fell</a> from US$22 on Sunday to US$4 on Tuesday afternoon, while FTX was flooded with a <a href="https://techcrunch.com/2022/11/09/cryptos-biggest-acquisition-binance-ftx-exchanges-sbf-cz-alameda-unlikely-close/#:%7E:text=%246%20billion%20in%20withdrawals">reported</a> US$6 billion in withdrawal requests. <a href="https://t.me/FTX_Official/694212">Some customers</a> were unable to access their cryptocurrency holdings on the exchange due to the number of requests. </p>
<p>Bankman-Fried responded on Monday by saying a “competitor is trying to go after us with false rumours” and adding that “FTX is fine” (he later <a href="https://cointelegraph.com/news/ftx-founder-sam-bankman-fried-removes-assets-are-fine-flood-from-twitter">removed the tweet</a>). But it seems this was too little, too late: <a href="https://coinmarketcap.com/charts/">total cryptocurrency market capitalisation</a> dropped from more than US$1 trillion to around US$830 billion in a matter of days.</p>
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<p>In a surprise move, just days later both Zhao and Bankman-Fried (above) tweeted details of a deal for Binance to acquire FTX. But the <a href="https://www.wsj.com/articles/binance-is-said-to-be-likely-to-walk-away-from-deal-to-buy-ftx-11668020963?mod=tech_lead_pos4">Wall Street Journal</a> reported the following evening that Binance had decided not to proceed with the deal after reviewing FTX’s finances and business structure. </p>
<p>A tweet from Binance (below) said “the issues are beyond our control or ability to help”. Further, <a href="https://www.bloomberg.com/news/articles/2022-11-09/us-probes-ftx-empire-over-handling-of-client-funds-and-lending">Bloomberg</a> reported that US regulators, the Security and Exchange Commission and Commodity Futures Trading Commission, have both been investigating FTX over its handling of customers funds.</p>
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<h2>Crypto winter</h2>
<p>The cryptocurrency industry has struggled in the last year, particularly since the <a href="https://www.ft.com/content/8db7e24b-5a15-4856-b81e-a2027157aaad">failure of Terra and Luna tokens in May</a>, the <a href="https://www.forbes.com/advisor/investing/cryptocurrency/what-is-celsius/#:%7E:text=Celsius%20Network%20(CEL)%20announced%20on,citing%20%E2%80%9Cextreme%20market%20conditions.%E2%80%9D">collapse of lender Celsius Network</a> in June and the subsequent bankruptcy of hedge fund <a href="https://www.coindesk.com/business/2022/08/24/singapore-high-court-recognizes-three-arrows-capital-liquidation-order-report/#:%7E:text=The%20liquidators%20of%20Three%20Arrows,order%20signed%20on%20Wednesday%20says.">Three Arrows Capital</a> in July.</p>
<p>The near-collapse of one of the biggest names in crypto, followed by the will-they-or-won’t-they nature of the Binance bailout has had an effect right across the crypto industry, with Bitcoin falling by more than 18% during these events. The failure of this rescue deal will do little to boost confidence in the sector and could accelerate a crypto winter by stoking fears of price volatility and the need for future bailouts.</p>
<p>The value of the FTT coin is down by nearly 90% and <a href="https://coinmarketcap.com/rankings/exchanges/">trading volumes at FTX</a> fell by more than 70% in the 24 hours around the rescue deal discussions. Much of this lost activity will move elsewhere, meaning the collapse of FTX could make Binance larger. This could encourage regulators to start looking much more closely at the space. </p>
<p>Of course, the ultimate irony is that one of the main characteristics of cryptocurrencies is supposed to be decentralisation, but recent events may well lead to more centralisation as activity consolidates around one exchange. This could discourage some crypto-enthusiasts from using Binance in the future.</p><img src="https://counter.theconversation.com/content/194313/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Urquhart owns some cryptocurrencies.</span></em></p>The latest market chaos is set to continue and could result in more regulatory scrutiny.Andrew Urquhart, Professor of Finance & Financial Technology, ICMA Centre, Henley Business School, University of ReadingLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1814472022-04-18T21:53:41Z2022-04-18T21:53:41ZDo poison pills work? A finance expert explains the anti-takeover tool that Twitter hopes will keep Elon Musk at bay<figure><img src="https://images.theconversation.com/files/458450/original/file-20220418-22-zqvagf.jpeg?ixlib=rb-1.1.0&rect=0%2C170%2C5631%2C3781&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Poison pills usually work, but Elon Musk appears undeterred.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/USMuskTwitter/fedcb2f8588c49438ad65a137fec18c6/photo?Query=Twitter&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=6113&currentItemNo=8">AP Photo/Ringo H.W. Chiu</a></span></figcaption></figure><p>Takeovers are <a href="https://techcrunch.com/2022/04/14/what-hostile-takeovers-are-and-why-theyre-usually-doomed/">usually friendly affairs</a>. Corporate executives engage in top-secret talks, with one company or group of investors making a bid for another business. After some negotiating, the companies engaged in the merger or acquisition announce a deal has been struck. </p>
<p>But other takeovers are more hostile in nature. Not every company wants to be taken over. This is the case with <a href="https://www.bloomberg.com/news/articles/2022-04-14/elon-musk-launches-43-billion-hostile-takeover-of-twitter?sref=Hjm5biAW">Elon Musk’s US$43 billion bid</a> to buy Twitter. </p>
<p>Companies have various measures in their arsenal to ward off such unwanted advances. One of the most effective anti-takeover measures is the shareholder rights plan, also more aptly known as a “poison pill.” It is designed to block an investor from accumulating a majority stake in a company. </p>
<p>Twitter <a href="https://www.cbsnews.com/news/twitter-poison-pill-elon-musk/">adopted a poison pill</a> plan on April 15, 2022, shortly after <a href="https://www.sec.gov/Archives/edgar/data/0001418091/000110465922045641/tm2212748d1_sc13da.htm">Musk unveiled his takeover offer</a> in a Securities and Exchange filing.</p>
<p>I’m a <a href="https://www.loyola.edu/sellinger-business/academics/departments/finance/faculty/chuluun">scholar of corporate finance</a>. Let me explain why poison pills have been effective at warding off unsolicited offers, at least until now.</p>
<h2>What’s a poison pill?</h2>
<p>Poison pills <a href="https://heinonline.org/HOL/LandingPage?handle=hein.journals/intfinr3&div=61&id=&page=">were developed in the early 1980s</a> as a defense tactic against corporate raiders to effectively poison their takeover efforts – sort of reminiscent of the suicide pills that <a href="https://www.wired.com/2013/04/oh-those-movie-spies-and-their-cyanide-pills/">spies supposedly swallow if captured</a>. </p>
<p>There are many <a href="https://www.investopedia.com/terms/p/poisonpill.asp">variants of poison pills</a>, but they generally increase the number of shares, which then dilutes the bidder’s stake and causes them a significant financial loss.</p>
<p>Let’s say a company has 1,000 shares outstanding valued at $10 each, which means the company has a market value of $10,000. An activist investor purchases 100 shares at the cost of $1,000 and accumulates a significant 10% stake in the company. But if the company has a poison pill that is triggered once any hostile bidder owns 10% of its stock, all other shareholders would suddenly have the opportunity to buy additional shares at a discounted price – say, half the market price. This has the effect of quickly diluting the activist investor’s original stake and also making it worth a lot less than it was before. </p>
<p>Twitter adopted a similar measure. If any shareholder accumulates a 15% stake in the company in a purchase not approved by the board of directors, other shareholders would get the right to buy additional shares at a discount, diluting the 9.2% stake Musk recently purchased. </p>
<p>Poison pills are useful in part because they can be adopted quickly, but they usually have expiration dates. The poison pill adopted by Twitter, for example, expires in one year. </p>
<h2>A successful tactic</h2>
<p>Many well-known companies such as <a href="https://www.cnbc.com/2018/10/22/papa-johns-ex-ceo-schnatter-asks-board-to-amend-poison-pill-plan.html">Papa John’s</a>, <a href="https://money.cnn.com/2012/11/05/technology/netflix-poison-pill/">Netflix</a>, <a href="https://www.dallasnews.com/business/retail/2020/01/24/jc-penney-amended-its-poison-pill-extending-it-to-2023">JCPenney</a> and <a href="https://www.barrons.com/articles/poisoned-pill-avis-tumbles-following-efforts-to-block-activist-guidance-1516135943">Avis Budget Group</a> have used poison pills to successfully fend off hostile takeovers. And <a href="https://www.kramerlevin.com/en/perspectives-search/covid-19-pandemic-and-poison-pills.html">nearly 100 companies adopted</a> poison pills in 2020 because they were worried that their careening stock prices, caused by the <a href="https://doi.org/10.1016/j.frl.2020.101690">pandemic market swoon</a>, would make them vulnerable to hostile takeovers.</p>
<p>No one <a href="https://lawshelf.com/coursewarecontentview/poison-pills/">has ever triggered</a> – or swallowed – a poison pill that was designed to fend off an unsolicited takeover offer, showing how effective such measures are at fending off takeover attempts.</p>
<p>These types of anti-takeover measures are generally frowned upon as a <a href="https://www.reuters.com/article/us-dealtalk-poisonpills/poison-pills-drop-to-lowest-level-in-20-years-idUSTRE62T5D320100330">poor corporate governance practice</a> that can hurt a company’s value and performance. They can be seen as impediments to the ability of shareholders and outsiders to monitor management, and more about protecting the board and management than attracting more generous offers from potential buyers.</p>
<p>However, <a href="https://trace.tennessee.edu/cgi/viewcontent.cgi?article=3267&context=utk_chanhonoproj">shareholders may benefit from poison pills</a> if they lead to a higher bid for the company, for example. This may be already happening with Twitter as another bidder – a $103 billion private equity firm – <a href="https://www.reuters.com/business/musk-tweets-love-me-tender-days-after-twitter-takeover-offer-2022-04-18/">may have surfaced</a>. </p>
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<p>A poison pill isn’t foolproof, however. A bidder facing a poison pill could try to argue that the board is not acting in the best interests of shareholders and appeal directly to them through either a <a href="https://www.investopedia.com/terms/t/tenderoffer.asp">tender offer</a> – buying shares directly from other shareholders at a premium in a public bid – or a <a href="https://www.investopedia.com/terms/p/proxyfight.asp">proxy contest</a>, which involves convincing enough fellow shareholders to join a vote to oust some or all of the existing board.</p>
<p>And judging by his tweets to his <a href="https://www.wsj.com/articles/meet-the-twitter-army-of-elon-musk-superfans-11650137427">82 million Twitter followers</a>, that <a href="https://www.reuters.com/business/musk-tweets-love-me-tender-days-after-twitter-takeover-offer-2022-04-18/">seems to be what Musk is doing</a>.</p>
<p>[<em>Like what you’ve read? Want more?</em> <a href="https://memberservices.theconversation.com/newsletters/?source=inline-likethis">Sign up for The Conversation’s daily newsletter</a>.]</p><img src="https://counter.theconversation.com/content/181447/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Tuugi Chuluun does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Twitter adopted a so-called poison pill to make it much harder for Musk to take over the company.Tuugi Chuluun, Associate Professor of Finance, Loyola University MarylandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1521902021-02-08T19:07:01Z2021-02-08T19:07:01ZWe allowed Facebook to grow big by worrying about the wrong thing<figure><img src="https://images.theconversation.com/files/382689/original/file-20210205-16-a1t566.jpg?ixlib=rb-1.1.0&rect=207%2C330%2C2368%2C1170&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">AlexandraPopova/Shutterstock</span></span></figcaption></figure><p>Australia and the United States have been waving through takeovers because the targets are small, something that’s usually good practice.</p>
<p>Under <a href="https://www.australiancompetitionlaw.org/legislation/provisions/2010cca50.html">Australian</a> law takeovers are normally permitted unless they would </p>
<blockquote>
<p>have the effect, or be likely to have the effect, of substantially lessening competition</p>
</blockquote>
<p>Under <a href="https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/merge">US</a> law they are normally permitted unless their effect </p>
<blockquote>
<p>may be substantially to lessen competition, or to tend to create a monopoly</p>
</blockquote>
<p>It means the key question authorities in both countries ask before approving a takeover is whether it is big enough to take out a substantial competitor.</p>
<p>While in most industries that’s usually the right question, it’s the wrong question when it comes to digital platforms, as Facebook’s readily-approved takeovers of Instagram and WhatsApp is making clear.</p>
<h2>Instagram, WhatsApp ‘too small to matter’</h2>
<p>They were waved through because when Facebook acquired <a href="https://money.cnn.com/2012/04/09/technology/facebook_acquires_instagram/index.htm">Instagram in 2012</a> and <a href="https://about.fb.com/news/2014/02/facebook-to-acquire-whatsapp/">WhatsApp in 2014</a> each was small. Instagram reportedly had only <a href="https://time.com/4299297/instagram-facebook-revenue/">13</a> full-time employees, WhatsApp <a href="https://theconversation.com/whatsapp-bought-for-19-billion-what-do-its-employees-get-23496">55</a>.</p>
<p>Now, well after the events, the US Federal Trade Commission in cooperation with the attorneys of 46 states is <a href="https://www.ftc.gov/news-events/press-releases/2020/12/ftc-sues-facebook-illegal-monopolization">suing Facebook</a>, alleging it has been illegally maintaining its social networking monopoly through a years-long course of anticompetitive conduct.</p>
<p>Identified as part of Facebook’s strategy are its 2012 acquisition of Instagram and its 2014 acquisition of WhatsApp. The Commission says the conduct </p>
<blockquote>
<p>harms competition, leaves consumers with few choices for personal social networking and deprives advertisers of the benefits of competition</p>
</blockquote>
<p>It is seeking a permanent injunction that could, among other things, require Facebook to divest assets including Instagram and WhatsApp and require it to give notice and seek prior approval for future acquisitions.</p>
<h2>No longer as small</h2>
<p>Why didn’t the Commission act earlier?</p>
<p>It’s because at the times of the acquisitions it was impossible for it to know whether Instagram or WhatsApp would ever have been in any position to offer Facebook much competition.</p>
<p>A 2019 <a href="https://ideas.repec.org/p/ces/ceswps/_7985.html">independent review</a> of merger decisions by the UK Office of Fair Trade confirms this, noting that back in 2012 Facebook faced much stronger competitors in photo-sharing than Instagram and that photo apps weren’t attractive to advertisers.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/facebook-is-merging-messenger-and-instagram-chat-features-its-for-zuckerbergs-benefit-not-yours-147261">Facebook is merging Messenger and Instagram chat features. It's for Zuckerberg's benefit, not yours</a>
</strong>
</em>
</p>
<hr>
<p>The authorities would have found it hard to convince a court that taking over Instagram would have substantially lessened competition.</p>
<p>Yet it did, hugely, and not because Instagram was necessarily the best target.</p>
<h2>Network effects empower the acquired</h2>
<p>Platforms such as Facebook and Google gain their market power from so-called “network effects” and the accumulation of consumer data. </p>
<p>A network effect is the benefit a network gets from having people already on it. A network that your friends aren’t on isn’t particularly attractive.</p>
<p>And the more people that join, the more data the network amasses to target ads for advertisers.</p>
<p>Looked at through the lens of network effects, the key to the successes of Instagram and WhatsApp was that they were bought by Facebook. It gave them access to a vast network of existing users and their data.</p>
<p>The importance of this is illustrated by the WhatsApp takeover. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/382700/original/file-20210205-24-rupp11.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/382700/original/file-20210205-24-rupp11.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/382700/original/file-20210205-24-rupp11.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=969&fit=crop&dpr=1 600w, https://images.theconversation.com/files/382700/original/file-20210205-24-rupp11.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=969&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/382700/original/file-20210205-24-rupp11.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=969&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/382700/original/file-20210205-24-rupp11.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1217&fit=crop&dpr=1 754w, https://images.theconversation.com/files/382700/original/file-20210205-24-rupp11.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1217&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/382700/original/file-20210205-24-rupp11.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1217&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">WhatsApp wasn’t to link data with Facebook.</span>
</figcaption>
</figure>
<p>In Europe the authorities allowed the takeover only after Facebook informed them that it would be “<a href="https://ec.europa.eu/commission/presscorner/detail/en/IP_17_1369">unable to establish reliable automated matching between Facebook users’ accounts and WhatsApp users’ accounts</a>”. </p>
<p>Unfortunately this statement was incorrect, and the European Commission believes Facebook knew it at the time.</p>
<p>In 2017 after the WhatsApp and Facebook data was indeed linked, the Commission fined Facebook <a href="https://ec.europa.eu/commission/presscorner/detail/en/IP_17_1369">€110 million</a> for providing incorrect or misleading information</p>
<p>The problem wasn’t that Facebook acquired WhatsApp in particular. </p>
<p>It was that once it had acquired it (or any such platform), it was able to ensure it had access to the network and data needed to dominate its part of the market.</p>
<p>In other words, a Facebook acquisition of any proven start-up in any related field would have been likely to substantially lessen competition and should have been illegal.</p>
<h2>Courts and regulators are missing what matters</h2>
<p>This truth requires a change of mindset by both competition authorities and the courts. Both deal with the specifics of the target rather than the potential for the acquirer to supercharge the target and prevent any rival emerging to challenge it.</p>
<p>It means that to protect competition, dominant digital platforms should be prevented from acquiring any business in certain markets, even if there is plenty of competition in those markets and there’s nothing special about the targets.</p>
<p>Put bluntly, in some markets, whoever Facebook acquires will smother competition and the only way to stop that happening is to stop Facebook acquiring anyone.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/facebook-is-tilting-the-political-playing-field-more-than-ever-and-its-no-accident-148314">Facebook is tilting the political playing field more than ever, and it's no accident</a>
</strong>
</em>
</p>
<hr>
<p>This needn’t mean a blanket ban on dominant platforms acquiring firms, but it will mean the range of firms they can acquire will be severely wound back.</p>
<p>Of course, there’s nothing to stop them developing their own platforms in adjacent areas, although history has shown that even dominant platforms have a hard time developing, rather than buying, the necessary technology. </p>
<p>Google had to <a href="https://en.wikipedia.org/wiki/List_of_mergers_and_acquisitions_by_Alphabet">buy</a> Android, YouTube and Quickoffice.</p>
<h2>Proposed changes the wrong ones</h2>
<p>It also means Australia’s Competition and Consumer Commission is missing the mark in its drive to expand the reasons it can use for rejecting mergers.</p>
<p>The final report of its <a href="https://www.accc.gov.au/system/files/Digital%20platforms%20inquiry%20-%20final%20report%20-executive%20summary.pdf">digital platforms inquiry</a> asks for the power to reject mergers because of the likelihood that the acquisition would result in the removal of a potential competitor and the nature and significance of assets acquired. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/382698/original/file-20210205-24-gg9lrx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/382698/original/file-20210205-24-gg9lrx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/382698/original/file-20210205-24-gg9lrx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=184&fit=crop&dpr=1 600w, https://images.theconversation.com/files/382698/original/file-20210205-24-gg9lrx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=184&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/382698/original/file-20210205-24-gg9lrx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=184&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/382698/original/file-20210205-24-gg9lrx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=231&fit=crop&dpr=1 754w, https://images.theconversation.com/files/382698/original/file-20210205-24-gg9lrx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=231&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/382698/original/file-20210205-24-gg9lrx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=231&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>The requests focus on the target rather than what the acquirer can do for it.</p>
<p>What needs to be made clear is that a merger can be anticompetitive even if the target is not uniquely placed, either in terms of its ability to grow or its assets. </p>
<p>In the digital world an acquirer can substantially lessen competition simply by transforming the market it buys into. The target needn’t be the point.</p><img src="https://counter.theconversation.com/content/152190/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Stephen King is a Commissioner with the Productivity Commission. The views expressed in this article are his alone and should not be attributed to the Commission.</span></em></p>What made Facebook grow big wasn’t what its targets would have been without it, it was what they were able to do with it.Stephen King, Adjunct professor, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1528582021-01-08T17:29:58Z2021-01-08T17:29:58ZTakeovers: a tidal wave of buyouts is coming in 2021 – here’s what it means<figure><img src="https://images.theconversation.com/files/377777/original/file-20210108-23-yy1si3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The famous jeweller Tiffany & Co has just sold for a cut-price bid. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/brussels-belgium-january-2020-tiffany-jewelry-1626019648">Grzegorz Czapski</a></span></figcaption></figure><p>Luxury goods giant LVMH has completed its US$15.8 billion (£11.6 billion) mega-deal to buy famous American jeweller Tiffany & Co. LVMH, which owns Louis Vuitton, originally agreed to pay US$16.2 billion for Tiffany in 2019, but the market has sufficiently changed since the pandemic that it was able to talk down the premium.</p>
<p>It’s just one example of the fire that the COVID-19 pandemic has ignited in many industries. There has <a href="https://www.ey.com/en_gl/news/2020/12/conditions-ripe-for-already-resilient-m-and-a-activity-to-accelerate-in-2021-and-beyond">been a surge</a> in global mergers and acquisitions since the second half of 2020 as the strong snap up the weak. Driven by the tech, media, entertainment and telecoms sectors, total deals for the year were worth US$2.9 trillion. </p>
<p>Recent moves include Ladbrokes Coral owner Entain’s £250 million takeover of Swedish gaming group Enlabs, and US group Alden Global Capital’s US$520 million bid to take full control of Tribune Publishing, owner of the Chicago Tribune. This trend <a href="https://www.ey.com/en_gl/news/2020/12/conditions-ripe-for-already-resilient-m-and-a-activity-to-accelerate-in-2021-and-beyond">looks likely</a> to snowball in the coming months. What will it mean? </p>
<h2>Houses of cards</h2>
<p>Many firms were vulnerable even before the pandemic. For over a decade, low or sometimes negative interest rates had driven businesses to reduce their rainy-day cash holdings and embark on a borrowing spree that left them <a href="https://theconversation.com/attack-of-zombie-companies-dont-let-them-eat-bailouts-that-are-vital-to-restore-the-economy-139177">heavily indebted</a>. </p>
<p>The default strategy in advanced economies like in North America and Europe was often to maximise leverage – meaning to borrow as much as possible from banks and the markets to try and maximise returns from the capital employed. You can see in the graph below how leverage has steadily increased over the decades in the US, for instance.</p>
<p><strong>US corporate debt as a % of GDP by sector</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/377774/original/file-20210108-15-5jc6qp.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Graph of corporate leverage in US, explained in paragraph above." src="https://images.theconversation.com/files/377774/original/file-20210108-15-5jc6qp.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/377774/original/file-20210108-15-5jc6qp.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=228&fit=crop&dpr=1 600w, https://images.theconversation.com/files/377774/original/file-20210108-15-5jc6qp.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=228&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/377774/original/file-20210108-15-5jc6qp.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=228&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/377774/original/file-20210108-15-5jc6qp.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=287&fit=crop&dpr=1 754w, https://images.theconversation.com/files/377774/original/file-20210108-15-5jc6qp.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=287&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/377774/original/file-20210108-15-5jc6qp.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=287&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The shaded areas indicate recessions; dark blue ≠ nonfinancial corporate; light blue = nonfinancial non-corporate.</span>
<span class="attribution"><a class="source" href="https://www.bostonfed.org/publications/current-policy-perspectives/2020/the-great-leverage-2-0-a-tale-of-different-indicators-of-corporate-leverage.aspx">Federal Reserve of Boston</a></span>
</figcaption>
</figure>
<p>But in the low-growth environment since the 2008-09 financial crisis, times have been hard. Many companies experienced disappointing returns and rising portions of profits being diverted towards interest payments. </p>
<p>This left many businesses cash-strapped and unable to invest. This further weakened their profitability – in many cases turning them into <a href="https://theconversation.com/attack-of-zombie-companies-dont-let-them-eat-bailouts-that-are-vital-to-restore-the-economy-139177">zombie companies</a> that would be put out of their misery when credit conditions tightened. </p>
<p>Many companies swapped long-term stability for short-term gains, relying on financial schemes with high hidden risks. For example, companies increasingly borrowed to buy back their own stock for an immediate uptick in the share price. With management teams often paid partly in share options, they had a personal financial interest in this strategy. </p>
<h2>Life support</h2>
<p>When COVID panic set in last spring, it threatened a financial crisis caused by corporate bonds being dumped by the markets. This could have driven up interest payments to ruinous levels and caused many corporate collapses. Central banks responded with a major new round of quantitative easing (QE), <a href="https://www.theglobaleconomy.com/rankings/money_supply/">expanding the supply of money</a> to effectively put a floor under bond prices. <a href="https://www.theglobaleconomy.com/rankings/money_supply/">They then</a> did <a href="https://seekingalpha.com/article/4392716-in-october-money-supply-growth-remained-near-all-time-highs">more QE</a> later in the year. </p>
<p>This kept many firms afloat, but <a href="https://www.bbc.com/news/uk-55538937">pandemic lockdowns</a> have also jeopardised many business models. The long buoyant conditions that many took for granted are gone. Low on cash reserves and buried by debt, companies in industries like hospitality or airlines, and manufacturers whose supply chains have been shredded, have <a href="https://www.bis.org/publ/qtrpdf/r_qt1809g.pdf">joined the zombie hordes</a>. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/377780/original/file-20210108-13-1xq43n9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Display from a life support monitor" src="https://images.theconversation.com/files/377780/original/file-20210108-13-1xq43n9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/377780/original/file-20210108-13-1xq43n9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/377780/original/file-20210108-13-1xq43n9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/377780/original/file-20210108-13-1xq43n9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/377780/original/file-20210108-13-1xq43n9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=504&fit=crop&dpr=1 754w, https://images.theconversation.com/files/377780/original/file-20210108-13-1xq43n9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=504&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/377780/original/file-20210108-13-1xq43n9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=504&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Touch and go.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-vector/heartbeat-154241006">whanwhan.ai</a></span>
</figcaption>
</figure>
<p>Numerous governments have tweaked laws to keep <a href="https://www.squirepattonboggs.com/-/media/files/services/practices/restructuring--insolvency/reset-your-business/covid19-impact-of-global-insolvency-laws-russia.pdf">companies on life support</a>. For example, Germany <a href="https://www.pinsentmasons.com/out-law/news/insolvenzantragspflicht-bleibt-fuer-einige-unternehmen-ausgesetzt">relaxed the rules</a> around over-indebted companies filing for insolvency. </p>
<p>Meanwhile, banks have made credit lines and interest payments flexible to allow companies to hang in there. And companies <a href="https://www.ft.com/content/a59c2a9d-5e0b-4cbc-b69e-a138de76a776">have been issuing</a> new corporate bonds at record levels to get the cash to survive. But in the end, collapses are often unavoidable. </p>
<h2>Distress, distress, distress</h2>
<p>We are seeing three kinds of distress: owners, lenders and buyers. When owners can’t keep their cash flows positive, are refused cheap loans or are forced to <a href="https://www.eulerhermes.com/en_global/news-insights/economic-insights/Europe-One-in-four-corporates-will-need-more-policy-support-in-2021-to-avert-a-cash-flow-crisis.html">accept higher loan rates</a> on existing debt, they often fail. It happens to listed and privately held companies alike, and even those with strong underlying assets can get into trouble. They must either restructure debts, find a buyer or do both. </p>
<p>Lenders are under pressure, too. <a href="https://www.investmentnews.com/bond-defaults-result-99-losses-198541">Corporate bondholders</a> face being left with worthless bonds. Banks must decide whether they believe in a company’s ability to pay back their loans or to accept less than the full payment and get the debt off their books. Having just cleaned up their bad loans following the global financial crisis of 2008-09, they will be experiencing a bad case of deja vu. </p>
<p>In many cases, banks are being asked to accept less as part of a takeover. Just like the Tiffany shareholders must have concluded in the LVMH deal, it’s often <a href="https://www.goodreads.com/quotes/6564585-better-an-end-with-horror-than-a-horror-without-end">better to have</a> an end with horror than a horror without end.</p>
<p>For buyers, companies with good assets that are insolvent only because of the crisis can be <a href="https://www.ft.com/content/9a9cc7e0-e406-477c-bc15-28d6d250c29b?accessToken=zwAAAXaVoBEAkdOanMfg5AZHfNO8FSjW0lDCmw.MEQCIFdyowf0WNQ89YcdNUH0t6cVoJAZWpEGTXpVA3aWWaVfAiBD3oulIK7R7Lhe2JGWupJeTRLqsRo5iFfUNazqYozVDw&sharetype=gift?token=a2a3bcc2-2459-4822-9ecc-6ad873c45a9b">a smart acquisition</a>. <a href="https://www.wsj.com/articles/blumberg-joins-rush-of-property-firms-raising-funds-for-distressed-deals-11609243201">Blumberg is to raise</a> US$1 billion to acquire prime commercial real estate from distressed sellers, for instance. </p>
<p>But many buyers are pushed to the negotiating table. Rather than seeing <a href="https://www.bendbulletin.com/coronavirus/commentary-the-pandemic-will-make-big-companies-more-dominant/article_229d16fc-88ae-11ea-bb00-5bf5f207c4b5.html">key suppliers sink</a>, doing a deal that incorporates them into your business is often preferable. Otherwise your competitor might do the deal instead, threatening your competitiveness and bottom line. </p>
<p>It’s in the interests of all three groups to survive the current crisis by negotiating compromises, so a huge wave of mergers and acquisitions is inevitable in 2021. This boom will touch many people in society. Perhaps the most important reason why governments and central banks have been keeping zombies from going under is to prevent massive layoffs. When these distressed companies are bought and restructured, it will likely cost many people their jobs and force them to search elsewhere. </p>
<p>Yet at the same time, some employees will enjoy career advances by striving in the rejuvenated subsidiaries of new parent companies. M&A can also be a relief for taxpayers if zombies no longer waste valuable public resources that can be used more efficiently elsewhere. In short, more change is coming. It will produce winners and losers, but it’s better to expect it than be taken by surprise.</p><img src="https://counter.theconversation.com/content/152858/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Combine years of ludicrous leverage and the pandemic collapse, and many companies are living on borrowed time.Karl Schmedders, Professor of Finance, International Institute for Management Development (IMD)Patrick Reinmoeller, Professor of Strategy and Innovation, International Institute for Management Development (IMD)Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1009512018-08-07T19:42:19Z2018-08-07T19:42:19ZWhat impacts do takeover defences have on shareholders?<p>It’s becoming the year of defence in Australian mergers and acquisition, with varying and fascinating defence tactics on display over the past six months.</p>
<p>Perhaps the most brazen defence this year in Australia was Healthscope’s <a href="https://www.theaustralian.com.au/business/companies/analysts-cautious-over-healthscope-outlook-after-rejected-takeover-bid/news-story/b28f8714943f33ce130955f7fab992ad">rejection of two rival bidders</a> while simultaneously announcing an earnings downgrade. Not only does this defy <a href="https://www.wiley.com/en-us/Applied+Mergers+and+Acquisitions-p-9780471395348">the maxim that the best defence is a high share price</a> but classic defence tactics also hold that rival bidders should be leveraged off each other to extract a higher offer.</p>
<p>In May, Brookfield lodged an A$6 billion (including debt) competing takeover proposal at A$2.50. This followed an $A2.36 proposal in April from a consortium that included BGH and AustralianSuper. Instead of pursuing the proposed takeovers, Healthscope launched a strategic review to explore selling its property portfolio. That prompted suggestions the move was more about creating a stalking horse defence.</p>
<p>Healthscope’s share price has partially held, trading at A$2.19 compared to a high of $A2.58 after the proposals were made public. It remains well above its $A2 level shortly before the first takeover proposal.</p>
<p>Santos is another storied defence saga involving protracted negotiations with Harbour Energy, including two improved offers over a dramatic May weekend. In all, the defence persuaded Harbour to improve its proposals five times since the A$4.55 it first offered in August 2017. </p>
<p>Harbour ended up offering A$7 if Santos agreed to hedge part of its oil-linked production. Santos still rejected the offer in a marginal decision. The <a href="https://www.fool.com.au/2018/07/19/santos-ltd-asxsto-just-flagged-a-return-to-sustainable-dividend-payments/">rise in the oil price aided Santos’s defence</a>, but its board is now exposed to shareholder pressure should the oil price fall sharply. </p>
<p>Harbour was left frustrated at what it considers the stop-go messaging of Santos, leading to the <a href="https://www.theaustralian.com.au/business/dataroom/santos-must-explain-why-it-rejected-harbour-bid/news-story/48a1271776cdeb6258f685cfb8c2b506">belief that Santos did not want to sell at any reasonable price</a>. Santos believes its existing strategy offers better shareholder value, the premium paid for gaining control of the company is inadequate and the transaction structure is too complex, risky and uncertain. Santos now trades around A$6.38.</p>
<h2>Holding out for better offers</h2>
<p>Aside from their bidders, which bought stakes in Healthscope and Santos to shore up their positions, both companies have wide shareholder registers without any anchor shareholder.</p>
<p>This is in contrast to APN Outdoor, Gateway and Mineral Deposits where a few large and decisive shareholders were clear that their boards should reject initial offers this year from <a href="https://www.afr.com/business/media-and-marketing/advertising/shareholders-say-apn-outdoor-worth-more-than-jcdecauxs-takeover-bid-20180621-h11obs">JCDecaux</a>, <a href="https://www.theaustralian.com.au/business/dataroom/hometown-eyes-gateway-as-brookfield-exits-race/news-story/130320707e8bb82bc581f3483407cfd1">Hometown</a> and <a href="https://www.afr.com/business/mining/mineral-deposits-labels-eramet-bid-inadequate-20180509-h0zvk6">Eramet</a> respectively. All three bidders improved their offers. </p>
<p>This led to a new board recommendation from APN whose defence was complicated by its <a href="https://mumbrella.com.au/apn-outdoor-ups-bid-for-adshel-to-540-million-524969">offer to buy Adshel</a>, JCDecaux’s biggest rival in Australia’s street furniture advertising segment, from HT&E. Once APN was <a href="https://www.smh.com.au/business/companies/oohmedia-boss-defends-570-million-spend-on-adshel-as-fair-value-20180625-p4znm9.html">outbid for Adshel</a> it <a href="https://www.smh.com.au/business/companies/jcdecaux-to-acquire-apn-outdoor-for-1-12-billion-20180626-p4znq0.html">negotiated improved terms from JCDecaux</a>.</p>
<p>Mineral Deposits waited for acceptances to approach 50% before <a href="https://www.reuters.com/article/us-mdl-m-a-eramet/australias-mineral-deposits-recommends-takeover-offer-as-eramet-builds-up-stake-idUSKBN1K014Z">changing its recommendation to accept</a>. This was an unusual switch for a defence board to make so late in the process. More typically a target board advises shareholders to take no action. It may suggest an offer is opportunistic or undervalued without recommending shareholders reject an offer. </p>
<p>Rather than being persuaded by a sufficiently attractive offer, Mineral Deposits was boxed in by two factors. The offer price was declared final at an early stage and shareholders were unwilling to remain invested in an Eramet-controlled company with <a href="https://www.investopedia.com/terms/d/dilution.asp">dilution</a> from likely capital-raising.</p>
<p>In the case of Gateway, disgruntled shareholders pushed the board to find a suitor. The company ended up with <a href="https://www.theaustralian.com.au/business/property/bidding-war-looms-for-gateway-as-brookfield-lobs-700m-offer/news-story/bcecd77ff78a1a4213252fb6ec67f06e">two competing offers</a> that it says it is considering. Other parties are <a href="https://www.theaustralian.com.au/business/dataroom/gic-mulls-rival-gateway-bid/news-story/c7355a5bb7712c0fcde559242302a1b8">reportedly weighing up making a bid</a>.</p>
<p>Another defence board that faced a difficult decision is Sirtex Medical. One day before a scheduled scheme meeting to approve a board-recommended A$28 offer from Varian Medical Systems, Sirtex received a A$33.60 proposal from Chinese asset manager CDH Investments. </p>
<p>Reflecting the fact that price is not the sole factor in defence, Sirtex had to weigh up complex regulatory approvals (particularly from the Committee on Foreign Investment in the United States), timing and other risks. The inclusion in CDH’s proposal of a A$200 million reverse break fee (if the bidder breaches or is unable to fulfil the acquisition agreement), Australia’s largest reverse break fee, reflects the risks Sirtex felt.</p>
<p>None of these defence tactics involved poison pills – making the target’s shares prohibitively expensive or the target unattractive to a bidder. The Australian <a href="http://www.takeovers.gov.au/content/DisplayDoc.aspx?doc=panel_process/glossary.htm">Takeovers Panel notes</a> the “poison pill” term is loosely used in Australia to refer to a defence triggered by a hostile bid that makes a target unattractive, such as pre-emptive rights or share top-up rights.</p>
<h2>So what are the impacts on shareholders?</h2>
<p>As Harvard Business School professor <a href="http://www.nber.org/chapters/c5821.pdf">Richard Ruback observed</a>:</p>
<blockquote>
<p>I wish I could conclude that takeover defences are generally good or bad for stockholders, but the answer is not that simple. </p>
</blockquote>
<p>Even where offers were improved, it depends which stakeholders are referenced (target or bidder shareholders, employees, suppliers, customers, management, competitors, among a few) and at which point one compares.</p>
<p>Ruback concluded that:</p>
<ul>
<li>defences that give managers power to veto hostile takeovers seem to be harmful</li>
<li>defences that destroy assets are probably bad</li>
<li>defences that neither give managers veto power nor destroy assets are probably not harmful.</li>
</ul><img src="https://counter.theconversation.com/content/100951/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Simon Segal is Editorial Consultant at Dealreporter </span></em></p>Australian companies have been employing many and varied takeover defences this year, including some that defy convention.Simon Segal, PhD research candidate, Business, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/802852017-06-29T17:01:41Z2017-06-29T17:01:41ZDecision to refer Sky bid to regulator a blow to Murdochs – but will it be short-lived?<p>The Murdoch Family Trust’s long-held ambition to take full ownership of Sky, the UK’s largest broadcaster (by revenue), appears to have been dealt a blow. The culture secretary, Karen Bradley, has told parliament she is “minded” to refer the <a href="https://www.theguardian.com/business/2017/jun/29/rupert-murdoch-sky-takeover-bid-referred-to-competition-authorites">£11.7 billion takeover bid</a> by 21st Century Fox for the 61% of Sky that it doesn’t already own to the competition authorities on the grounds that the deal will diminish media plurality in the UK. </p>
<p>In particular, Bradley cited concerns about the Murdoch family’s influence on the news agenda and their “ability to influence the political process” given the merged company’s unique reach across all platforms.</p>
<p>This is not news that Rupert Murdoch will have wanted to hear – not least because a full six-month inquiry by the Competition and Markets Authority (CMA) could lead to Fox having to shoulder a <a href="https://www.theguardian.com/media/2017/jun/20/foxs-117bn-bid-for-sky-should-be-referred-to-competition-authorities">multi-million dollar payout</a> to shareholders for failing to complete the deal before the end of the year.</p>
<p>The bid was originally lodged in 2011 and looked set to proceed, but revelations of phone-hacking and the widespread public revulsion they caused led to the bid being shelved. It was <a href="https://theconversation.com/murdoch-sky-bid-is-a-nasty-christmas-headache-for-the-culture-secretary-70599">revived late last year</a> and referred to Ofcom by the culture minister.</p>
<p>For critics of the Murdochs, Bradley’s decision is a welcome development – but they shouldn’t get the champagne out just yet as there are some major problems with the government’s position.</p>
<p>First, Bradley noted that the “undertakings” offered by Murdoch to sweeten the deal – such as commitments to an independent editorial board at Sky News and to maintain Sky News as a brand distinct from Fox News – were “insufficient” to allay concerns about the Murdoch family’s influence. Yet she made it quite clear that 21st Century Fox would be able to come back to her with other “undertakings” that she would consider before taking her final decision.</p>
<h2>Trust me</h2>
<p>When it comes to undertakings from the Murdochs, it is worth recalling what Harold Evans, the former editor of the Sunday Times, had to say. Evans was editor when Murdoch made his bid for Times Newspapers in 1981. He has since written that, at the time, Murdoch met with Margaret Thatcher and promised that he would maintain their tradition of independence: “He broke every one of those promises in the first years,” Evans <a href="https://www.theguardian.com/uk-news/2015/apr/28/how-margaret-thatcher-and-rupert-murdoch-made-secret-deal">told The Guardian</a>. In his <a href="https://www.amazon.co.uk/Good-Times-Bad-Harold-Evans/dp/1480449202">book</a> on the episode, he quotes Murdoch himself saying that the undertakings were “not worth the paper they were written on”. </p>
<p>James Murdoch, who holds the joint roles of chief executive of 21st Century Fox and chairman of Sky, recently was <a href="https://www.theguardian.com/business/2016/dec/15/rupert-murdoch-sky-bid-pay-tv">quoted</a> as saying, in relation to the deal, “that no meaningful concessions will need to be made”.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"880104892236476417"}"></div></p>
<p>Second, objections to the deal based on concerns around both corporate governance failures at Fox and the status of the Murdoch family as “fit and proper” holders of a broadcast licence have been waved away by <a href="https://www.ofcom.org.uk/about-ofcom/latest/media/media-releases/2017/findings-fox-sky-merger">Ofcom</a>. This is before the stalled Leveson-2 inquiry has been able to pursue <a href="https://www.theguardian.com/politics/2016/dec/14/gordon-brown-delay-murdoch-sky-takeover-leveson-part-2">further allegations of corruption</a> inside Murdoch’s UK organisation together with the <a href="https://www.forbes.com/sites/brettedkins/2017/05/22/fox-news-sued-for-racial-discrimination-sexual-harassment-by-three-more-employees/#56fbf48e5985">spate of lawsuits</a> launched earlier this year in relation to allegations of sexual and racial harassment at Fox. </p>
<p>Ofcom claims to have taken these issues very seriously, but <a href="https://www.ofcom.org.uk/about-ofcom/latest/media/media-releases/2017/findings-fox-sky-merger">concluded</a> that “we would need to see evidence of misconduct in the parent company, Fox”.</p>
<p>Fox, meanwhile, <a href="https://www.theguardian.com/media/2017/may/11/fox-news-must-let-ofcom-meet-harassment-victims-lawyer-says">revealed</a> it had spent about $45m (£35m) in relation to sexual harassment litigation in the nine months to March 2017. It said in a statement: “We take allegations of any form of discrimination extremely seriously.”</p>
<p>The irony, of course, is that Bradley’s own government has failed to give a green light to the <a href="https://www.ft.com/content/3ec7f94d-c175-39b7-814a-5e91c4cb05a8?mhq5j=e1">Leveson-2 inquiry</a>, which is supposed to deal with the relationship between the press and the police. These issues have not gone away. Dozens of victims of phone hacking are taking legal action against the publisher of The Sun, News UK, in a trial that is <a href="https://www.theguardian.com/media/2016/apr/28/sun-trial-phone-hacking-damages-les-dennis">expected to start this autumn</a> – right in the middle of the CMA investigation (should it take place).</p>
<h2>Friends and influence</h2>
<p>Since the recent general election there have been claims in some quarters that <a href="https://www.theguardian.com/media/2017/jun/11/media-bias-no-longer-matters-general-election-2017">media bias is no longer an issue</a> and that – when it comes to the power of their influence – papers like The Sun have had their day. But the agenda-setting power of billionaire media moguls remains an urgent subject for public debate and action.</p>
<p>We still don’t know what Murdoch and Theresa May discussed when they had a <a href="https://www.theguardian.com/media/2016/sep/29/theresa-may-meeting-rupert-murdoch-times-sun">private meeting</a> in New York last autumn although we do know that Murdoch and his lobbyists have been the most <a href="http://www.mediareform.org.uk/featured/murdochs-lobbying-efforts-increasing-new-analysis-finds">frequent visitors to 10 Downing Street</a> at a time when the press have been desperately lobbying government not to introduce meaningful and independent press regulation.</p>
<p>The media landscape may be changing and new voices may be emerging thanks to wider political transformations but the moguls who have shaped our political culture for so long aren’t quite ready to throw in the towel. Should the deal be allowed to proceed, we would see the Murdoch Family Trust tighten its grip across multiple media platforms and strengthen the family’s position at the top of the media money tree. This story is far from over.</p><img src="https://counter.theconversation.com/content/80285/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Des Freedman is the former chair of the Media Reform Coalition.</span></em></p>Culture secretary Karen Bradley’s decision will stall the bid, but the saga is far from over.Des Freedman, Professor of Media and Communications, Goldsmiths, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/676482016-10-27T04:51:48Z2016-10-27T04:51:48ZThe problems with AT&T’s bid for Time Warner<p>Those who don’t learn from history are doomed to repeat it. So it is with a sense of familiarity that we greet AT&T’s proposed acquisition of Time Warner. </p>
<p>In early 2000, AOL acquired Time Warner for US$164 billion. Broadly, like AT&T’s acquisition, AOL’s involved a sausage maker acquiring something to put in those sausages. The AOL takeover was variously described as a “<a href="http://fortune.com/2015/01/10/15-years-later-lessons-from-the-failed-aol-time-warner-merger/">calamity</a>”, and a “<a href="http://money.cnn.com/2016/10/24/investing/time-warner-att-aol/">text book case</a>” of deal failure. AT&T’s proposed acquisition seems also to be faring poorly. </p>
<p>AT&T’s acquisition does not suffer the same problems as AOL’s acquisition, and comes at a time of <a href="http://www.smh.com.au/business/world-business/atttime-warner-may-signal-start-of-new-media-industry-consolidation-20161023-gs8vh2.html">industry consolidation</a>. </p>
<p>But already the market has sent AT&T’s share price down, reflecting the likely premium it’s expected to pay for Time Warner. Indeed, the decline occurred even before the takeover was officially announced, on the back of <a href="https://www.washingtonpost.com/news/the-switch/wp/2016/10/20/att-may-be-trying-to-buy-time-warner/">rumours</a>. Between 19 October and 26 October, AT&T’s market capitalisation had declined by nearly US$20 billion.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/143247/original/image-20161026-11268-fzt46t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/143247/original/image-20161026-11268-fzt46t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/143247/original/image-20161026-11268-fzt46t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=348&fit=crop&dpr=1 600w, https://images.theconversation.com/files/143247/original/image-20161026-11268-fzt46t.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=348&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/143247/original/image-20161026-11268-fzt46t.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=348&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/143247/original/image-20161026-11268-fzt46t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=438&fit=crop&dpr=1 754w, https://images.theconversation.com/files/143247/original/image-20161026-11268-fzt46t.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=438&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/143247/original/image-20161026-11268-fzt46t.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=438&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">AT&T’s share price at the close of trade.</span>
<span class="attribution"><span class="source">Google Finance</span></span>
</figcaption>
</figure>
<p>Before drawing any conclusions though, it’s important to consider pre-takeover deal anticipation, and (where possible) longer post-announcement returns to give the market time to fully digest the takeover. Also to look at what else the takeover might signal about the firm’s internal growth prospects, expansion plans, and stock price valuation. </p>
<h2>Understanding ‘abnormal returns’</h2>
<p>Some firms have the [mis]fortune of announcing takeovers on the day of other major events. These could include interest rate decisions, severe commodity fluctuations, and “flash crashes”. This is why it’s worth looking at the firm’s <a href="http://www.investopedia.com/terms/a/abnormalreturn.asp">“abnormal return,”</a> which is the firm’s return less that of some relevant benchmark (i.e. the stock market index).</p>
<p>Of course, not all firms are equally sensitive to market movements. One way to reflect this is to multiply the market return by the firm’s “beta,” which represents its sensitivity and responsiveness to market movements. This is commonly available via Bloomberg and online (via Google Finance).</p>
<p>Google Finance <a href="https://www.google.com/finance?cid=33312">reports</a> that AT&T has a beta of around 0.3. Though, given that the market returns around the announcement are small, whether or not we beta-adjust the market return makes little difference. </p>
<p>We can see that AT&T’s raw returns and abnormal returns have been consistently negative leading up to and following the takeover announcement. In fact, AT&T’s returns from 20 October onwards were negative, coinciding with the aforementioned rumours of the deal. From the time the deal was rumoured, the market discounted AT&T. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/143248/original/image-20161026-11236-1vpnvn5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/143248/original/image-20161026-11236-1vpnvn5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/143248/original/image-20161026-11236-1vpnvn5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=446&fit=crop&dpr=1 600w, https://images.theconversation.com/files/143248/original/image-20161026-11236-1vpnvn5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=446&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/143248/original/image-20161026-11236-1vpnvn5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=446&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/143248/original/image-20161026-11236-1vpnvn5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=561&fit=crop&dpr=1 754w, https://images.theconversation.com/files/143248/original/image-20161026-11236-1vpnvn5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=561&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/143248/original/image-20161026-11236-1vpnvn5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=561&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">AT&T’s returns.</span>
<span class="attribution"><span class="source">Google Finance</span></span>
</figcaption>
</figure>
<h2>But it gets worse over time</h2>
<p>The market’s reaction on the day of the announcement is illustrative, but can paint an incomplete picture. It ignores that the market might anticipate an announcement. More importantly, the market needs some time to fully process the deal. </p>
<p>So, it is best to look at returns several days after the announcement to get a full picture. After getting these abnormal returns, you can then sum them over an event period surrounding the takeover announcement, giving cumulative abnormal returns (or CARs). You can also <a href="http://eventstudymetrics.com/index.php/event-study-methodology/">multiply them</a> to give buy-and-hold abnormal returns (or BHARs). </p>
<p>AT&T’s returns illustrate the usefulness of looking at returns in the days after the takeover. The buy and hold return (i.e. from just buying and holding AT&T’s stock and not adjusting for other market movements) was nearly 7%. The abnormal returns are similarly negative and are in the below graph. The cumulative and buy-and-hold abnormal returns following the announcement are strongly negative. Indeed, the negative return had nearly doubled in magnitude between October 20 and October 25. By October 25, the BHARs and CARs were nearly -7%. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/143208/original/image-20161026-4721-155ypp3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/143208/original/image-20161026-4721-155ypp3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/143208/original/image-20161026-4721-155ypp3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=259&fit=crop&dpr=1 600w, https://images.theconversation.com/files/143208/original/image-20161026-4721-155ypp3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=259&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/143208/original/image-20161026-4721-155ypp3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=259&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/143208/original/image-20161026-4721-155ypp3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=326&fit=crop&dpr=1 754w, https://images.theconversation.com/files/143208/original/image-20161026-4721-155ypp3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=326&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/143208/original/image-20161026-4721-155ypp3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=326&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Google Finance</span></span>
</figcaption>
</figure>
<h2>What’s really going on and why the negative reaction?</h2>
<p>The market’s negative reaction to the deal clearly indicates some trepidation about whether it will create value. This reflects several underlying concerns. </p>
<p><strong>Overpayment</strong>: There is the fear that AT&T will over pay. Comcast’s acquisition of NBCUniversal appears to have fared well. However, CNN <a href="http://money.cnn.com/2016/10/24/investing/att-time-warner-wall-street-reaction/">reports</a> that AT&T will pay over 12 times Time Warner’s forecast EBITDA, whereas Comcast paid only 9 times in its similar acquisition of NBCUniversal. Paying an excessive takeover premium could undermine shareholder wealth even if the deal might itself create value.</p>
<p><strong>Debt</strong>: The amount of debt is also a concern. The deal will involve “<a href="http://www.nytimes.com/2016/10/24/business/dealbook/att-plans-to-shoulder-mega-debt-merger-time-warner.html">mega debt</a>” to pay for Time Warner. This involves around US$40 billion in additional debt. That debt load is, in isolation, sustainable. However, it is in addition to the debt assumed for the acquisition of <a href="http://dealbook.nytimes.com/2014/05/18/att-to-buy-directv-for-48-5-billion/?_r=0">DirecTV</a> and AT&T’s other financial commitments. It takes AT&T’s total debt to around US$175 billion, making AT&T <a href="http://www.nytimes.com/2016/10/24/business/dealbook/att-plans-to-shoulder-mega-debt-merger-time-warner.html">one of the largest</a> non-bank borrowers. This increases financial risk, especially if and when interest rates increase.</p>
<p><strong>Integration</strong>: The deal also raises integration issues. This debt, and the deal, also come at a time when AT&T is already attempting to integrate DirecTV, which it <a href="http://www.forbes.com/sites/greatspeculations/2015/07/27/att-closes-directv-acquisition-reviewing-the-concessions-and-benefits/#5d9812db7e89">acquired</a> for nearly US$50 billion (nearly 25% of AT&T’s 26 October market capitalisation). The Time Warner acquisition is around US$80 billion (around one third of AT&T’s market capitalization). Large acquisitions pose integration difficulties when executed in isolation. The need to integrate two large additional units simultaneously can pose barriers to achieving synergies in the acquisition. </p>
<p><strong>Signaling</strong>: The takeover announcement itself can also signal other information about the bidder. For example, the need to do a takeover can provide a signal to the market <a href="http://dx.doi.org/10.2139/ssrn.2517209">about the bidder’s standalone value</a>. Such diversification can be beneficial, as was arguably the case with Comcast’s acquisition of NBCUniversal. However, the need to do such an acquisition can itself be a signal that AT&T is “<a href="http://dealbook.nytimes.com/2014/05/18/att-to-buy-directv-for-48-5-billion/?_r=0">trying to compensate for slowing growth in its own core businesses</a>”, causing the market to discount AT&T’s standalone value.</p>
<p>The fall in AT&T’s share price reflects beliefs that AT&T might overpay, assume too much debt, and have difficulty integrating the new unit. Indeed, shareholders might end up thankful if the <a href="http://www.nytimes.com/2016/10/23/business/dealbook/regulatory-microscope-lies-ahead-for-att-and-time-warner.html">regulators</a> end up blocking the deal.</p><img src="https://counter.theconversation.com/content/67648/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Humphery-Jenner does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The market sends us many signals on mergers and acquisitions, and there’s a few simple tricks to understanding them.Mark Humphery-Jenner, Associate Professor of Finance, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/658842016-10-10T03:18:44Z2016-10-10T03:18:44ZPrivate equity isn’t all bad: how PE funds help companies expand overseas<figure><img src="https://images.theconversation.com/files/139154/original/image-20160926-6986-1ovr6d2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Private equity funds can provide the edge to firms looking to expand internationally.</span> <span class="attribution"><span class="source">Image sourced from Shutterstock.com</span></span></figcaption></figure><p>Private equity funds help companies to expand overseas through takeovers, according to recent <a href="http://onlinelibrary.wiley.com/doi/10.1002/smj.2623/abstract;jsessionid=2D543B82D2A0FE537CD230E12D73382F.f04t03">research</a> soon to be published in the Strategic Management Journal. </p>
<p>Private equity funds often receive criticism for cynically extracting value from companies to the disadvantage of investors. Recent examples include the <a href="https://foragerfunds.com/bristlemouth/dick-smith-is-the-greatest-private-equity-heist-of-all-time/">Dick Smith</a> and <a href="https://www.crikey.com.au/2010/03/18/myer-over-priced-as-shareholders-find-out-the-hard-way/">Myer</a> IPOs, and the <a href="http://www.afr.com/brand/chanticleer/asx-blocks-guvera-initial-public-offering-20160617-gpls0i">aborted</a> Guvera IPO and its associated <a href="http://www.afr.com/technology/guvera-places-two-subsidiaries-in-administration-after-asx-rejected-ipo-20160627-gpsj5l">financial woes</a>. </p>
<p>This begs the question of what exactly private equity funds do to create value. One way is by using their experience and connections to help facilitate companies’ international expansions. This could occur through cross-border <a href="http://dx.doi.org/10.1057/jibs.2013.22">IPOs</a>, but it can also occur through overseas investments. </p>
<p>Cross-border takeovers are a key example. They have become increasingly common and valuable in monetary terms over time (see the below figure). However, cross-border deals are difficult to <a href="http://dx.doi.org/10.1016/j.jbankfin.2004.05.018">execute</a>, involving the challenge of identifying targets and navigating differences in language and regulations. These problems are amplified when acquiring targets in environments where information and corporate regulation is poor.</p>
<p>Private equity funds can help to mitigate these problems through their experience in cross-border deals, and connections with other intermediaries. This can help firms to navigate different legal, regulatory, and cultural environments. It can also help firms identify valuable targets, which might otherwise be obscured. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/138753/original/image-20160922-11652-kt6njw.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/138753/original/image-20160922-11652-kt6njw.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=437&fit=crop&dpr=1 600w, https://images.theconversation.com/files/138753/original/image-20160922-11652-kt6njw.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=437&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/138753/original/image-20160922-11652-kt6njw.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=437&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/138753/original/image-20160922-11652-kt6njw.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=549&fit=crop&dpr=1 754w, https://images.theconversation.com/files/138753/original/image-20160922-11652-kt6njw.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=549&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/138753/original/image-20160922-11652-kt6njw.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=549&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">This figure contains the number of completed domestic and cross-border takeovers for at least USD 1m by publicly listed acquirers in the US, by announcement year.</span>
<span class="attribution"><span class="source">SDC Platinum Data</span></span>
</figcaption>
</figure>
<h2>What we looked at</h2>
<p>We sampled around 4,450 cross-border takeovers conducted by acquirers in 37 countries, and identified whether an acquirer was private equity backed. The study also measured the information available within the country of the takeover target, using measures from the <a href="http://epub.prsgroup.com/products/international-country-risk-guide-icrg">International Country Risk Guide</a> (ICRG) and the World Bank. </p>
<p>We then assessed if private equity backed acquirers gained an advantage when acquiring targets in poor information environments. In so doing, we collected information on the private equity funds’ prior experience in cross-border deals and the intermediaries used in the deal. </p>
<p>We used relatively standard metrics to assess takeover performance. First, the study looked at how the market responded to the takeover. This captured whether investors thought the deal created value. Second, the study examined post takeover operating performance. </p>
<h2>When and why is private equity support important?</h2>
<p>The study found that private equity backed acquirers do significantly better than other firms when acquiring targets in poor information environments. And the worse the information environment, the higher the stock returns on a deal announcement for private equity backed bidders.</p>
<p>For deals in poor information environments, private equity backed acquirers also perform better post takeover. This suggests the deals are potentially more synergistic and that private equity backers help with target selection. Further, private equity funds seem most beneficial when helping firms undertake relatively more difficult-to-execute transactions. </p>
<p>The study identifies several avenues through which private equity backers help to create value. These include through the private equity backers’ experience conducting cross-border transactions, including in the target’s country. Private equity backed acquirers also tend to use other financial advisers (i.e. investment banks) that have more prior cross border deal experience. So experience and connections significantly influence value creation in cross-border deals.</p>
<p>There are clear implications for corporations: support from a private equity fund could help firms to expand, especially into relatively poor information environments. </p>
<p>The clear policy follow on is that private equity funds can create value, and a small set of high-profile failures need not be representative of the benefits of private equity funds as a whole.</p><img src="https://counter.theconversation.com/content/65884/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Humphery-Jenner receives funding from Australian Research Council Grant DP140103039</span></em></p>Companies looking to expand through overseas acquisition do better with a private equity fund on their side.Mark Humphery-Jenner, Associate Professor of Finance, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/288832014-07-10T20:16:05Z2014-07-10T20:16:05ZTakeovers should require go-ahead from shareholders<p>The fastest growing sector in the economy today is not mining, retailing or even education. It’s superannuation, which accounts for almost 30% more than the total savings held by the banking and mutual sector. </p>
<p>Self-managed superannuation is the fastest growing form of investment vehicle.</p>
<p>This has altered the landscape of both property and share investment. In the property market there are well-established regulations and safeguards. The stock market is a different story. </p>
<p>The proposed takeover of David Jones by the South African-based Woolworths and the deal made by Woolworths to buy Solomon Lew’s stake in David Jones, who happens to own an equally large share of Country Road (another takeover target of Woolworths), highlights the problem.</p>
<p>The board of the takeover target recommends to its shareholders what to do, but there is no formal requirement for shareholder approval. It’s assumed if the shareholders sell, that’s their approval. If they don’t sell, they don’t approve.</p>
<p>In the case of David Jones, a wealthy, assertive investor is getting a side deal not available to other investors.</p>
<p>Why should this happen? </p>
<p>In other countries, a formal takeover requires shareholder approval, thus discouraging side deals to occur where some walk away with large profits and others get what they can. </p>
<h2>David Jones</h2>
<p>The David Jones takeover provided an opportunity for some to simply profiteer, to the extent they could make more money linking this deal with others, thus cornering Woolworths to pay for deals it may not have planned.</p>
<p>If anything, the David Jones scenario raises questions as to whether a takeover of this nature is manipulative, unfair to ordinary shareholders and a distortion of the market mechanism. </p>
<p>The Australian Securities and Investments Commission (ASIC) has intervened, asking questions about the side deal protecting the interests of David Jones’ shareholders by intervening in Woolworths’ $2.2 billion takeover bid for David Jones.</p>
<p>As ASIC threatens to withhold its consent to the scheme of arrangement, a core part of the $2.2 billion takeover is arguing that a collateral benefit to one shareholder is not available to the other shareholders. The board is so keen to push the takeover that they are prepared to sell the takeover on the basis that the millions made on the side by Lew should not kill the deal. </p>
<p>Directors should of course be supporting the interest of the company as a whole and of all the shareholders. In the past the <a href="http://www.theguardian.com/business/2006/dec/14/australia.theairlineindustry">Allco Finance Group takeover of Qantas</a> had the same set of facts. A takeover favouring those few in particular linked to the board is a further reason for ASIC’s intervention.</p>
<p>ASIC is not about increasing share prices - it’s about access to a fair price. If one shareholder gets a huge side bonus which increases the prices, should those getting the crumbs be happy? Are their shares the same of those getting the bonus?</p>
<p>ASIC had failed in the Federal Court to force David Jones to secure an <a href="http://www.smh.com.au/business/retail/asic-steps-into-david-jones-country-road-battles-with-demand-for-independent-valuation-20140702-zstnq.html">independent valuation of the “collateral benefit”</a> that Woolworths was offering to one of its shareholders simply to buy his support for the David Jones scheme of arrangement. ASIC can always withhold a letter of consent for the scheme, on the grounds that all David Jones shareholders are not being treated equally.</p>
<p>In response, David Jones has provided shareholders with additional information to help show shareholders how this deal was done.</p>
<p>All this could be resolved if shareholders were given the complete, true facts in an accessible manner, and if takeover predators were forced to make the same offer to all and let shareholders decide.</p>
<h2>Why the loophole exists</h2>
<p>Law reform in the area of takeovers is well overdue and belongs to another age. Unlisted companies don’t require shareholder approval for takeovers on the presumption that shareholders don’t have enough information. The idea is public information and scrutiny aren’t as readily available as for listed companies.</p>
<p>This thought process belongs to a pre-internet era and is not very relevant today. The rule has been kept as it tends to favour larger investors who play the game of takeover and sales. Allowing other smaller shareholders more power would complicate the game, which explains why governments have kept their distance from changing these laws.</p>
<p>The world has moved on, and it’s only a matter of time before the predators and profiteers further manipulate the hordes of superannuation investors in the market to extract extraordinary profits.</p>
<p>It’s time for a closer look at shareholders’ rights, together with the regulation of the market place, to discourage two-tier takeover offers - one for the well-connected and aggressive market operators and another for the other shareholders.</p><img src="https://counter.theconversation.com/content/28883/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Peters does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The fastest growing sector in the economy today is not mining, retailing or even education. It’s superannuation, which accounts for almost 30% more than the total savings held by the banking and mutual…Michael Peters, Lecturer, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/218342014-01-12T19:03:20Z2014-01-12T19:03:20ZCanada’s loss is Australia’s gain in Saputo bid for WCB<figure><img src="https://images.theconversation.com/files/38785/original/xp9jm42w-1389311896.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Milk prices are more expensive in Canada than Australia, which makes WCB an attractive takeover target for Quebec-headquartered Saputo.</span> <span class="attribution"><span class="source">dugspr/Flickr</span></span></figcaption></figure><p>Canadian dairy giant Saputo Inc has lifted its stake in Warrnambool Cheese & Butter, as it creeps up the register following its A$504 million bid for Australia’s oldest dairy producer. </p>
<p>Saputo is pitted against well-known Australian dairy cooperative, Murray Goulburn, which is seeking approval from the Competition Tribunal, arguing the net public benefit of its takeover would outweigh any anti-competitive effects. Saputo’s bid is favoured by WCB’s board.</p>
<p>Australians are probably curious about who Saputo is and what it is trying to do in attempting to enter the Australian market, so far from its home base in Canada.</p>
<p>The strategic issue facing Saputo is fundamentally the issue facing many firms in Canada. Europe represents Canada’s past while the US represents Canada’s present but Asia represents Canada’s future. Of course Australia understood this much earlier than other western countries.</p>
<p>In a remarkable speech given by the Bank of Canada Governor Mark Carney shortly before he departed for the UK to become the Governor of the Bank of England, he strongly urged Canadian firms to adopt “trade diversification” strategies by seeking business opportunities in Asia. Throughout the 20th century and to the present, the US accounts for 75% to 80% of the totality of Canada’s exports.</p>
<p>Saputo understands that Asia, and more specifically China, is its future. </p>
<p>And this is where the policy history facing Saputo comes in. The critical input – milk – is far too costly in Canada due to our destructive supply management policy, meaning Saputo’s leaders have realised they need to enter Australia to establish a base there to target exports to China.</p>
<h2>Against all odds</h2>
<p>Saputo started out as a small family-owned company established by Italian immigrants to Canada in 1954, led by the family patriarch Giuseppe Saputo who had been a master cheese maker in Italy. That in itself is not unusual. What is unusual is that the Saputo family firm grew in the following 70 years from its base in Montreal, Quebec – Canada’s second largest city – to a very successful multinational with over CA$7 billion in sales.</p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/38782/original/69nm58qx-1389310667.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/38782/original/69nm58qx-1389310667.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=900&fit=crop&dpr=1 600w, https://images.theconversation.com/files/38782/original/69nm58qx-1389310667.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=900&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/38782/original/69nm58qx-1389310667.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=900&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/38782/original/69nm58qx-1389310667.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1131&fit=crop&dpr=1 754w, https://images.theconversation.com/files/38782/original/69nm58qx-1389310667.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1131&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/38782/original/69nm58qx-1389310667.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1131&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Saputo chief executive officer Lino Saputo now heads the family business first established by Giuseppe Saputo in the 50s.</span>
<span class="attribution"><span class="source">AAP</span></span>
</figcaption>
</figure>
<p>However, even more unusual is that Saputo was not acquired by a larger firm – so often the case in Canada - but continued to grow while being led by père Saputo and then his children.</p>
<p>The success of this company was improbable because it was based in Quebec. Shortly after Saputo’s founding in 1954, the French-speaking province underwent “la revolution tranquille” or the Quiet Revolution with the election of a new interventionist Liberal government in 1960, based on the principle of “maîtres chez nous” or “masters of our own house”.</p>
<p>Over the next 50 years, successive Quebec governments – both separatist and federalist provincial governments - steadily ratcheted up corporate and personal taxes to finance state intervention in the economy such as Hydro Quebec. Quebec now has the dubious distinction of having some of the highest tax rates in North America, coupled with restrictive laws that compel the use of the French language in the workplace, making it difficult to recruit people from outside Quebec.</p>
<h2>Supply management</h2>
<p>If this was not a hostile enough climate for business, in the late 1960s the federal liberal government in partnership with provincial governments and aggressive lobbying by the dairy farmers led to the adoption of “supply management” designed to restrict the supply of milk using quotas to drive up the price of milk to farmers. Australians have their own experience with supply management and indeed wisely decided to terminate it in 2000.</p>
<p>However, sadly, in Canada, every political party continues to support supply management, milking and plucking 35 million Canadians to enrich 12,000 multimillionaire dairy farmers. Numerous economists, every think tank, and even the OECD have condemned this pernicious, destructive, and irresponsible policy, which has increased the price of dairy products in Canada by 50% to 100% over equivalent US products. All to no avail.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/38783/original/mg5xntqw-1389310828.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/38783/original/mg5xntqw-1389310828.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/38783/original/mg5xntqw-1389310828.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/38783/original/mg5xntqw-1389310828.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/38783/original/mg5xntqw-1389310828.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/38783/original/mg5xntqw-1389310828.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/38783/original/mg5xntqw-1389310828.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Warrnambool Cheese and Butter, located on Victoria’s Great Ocean Road, is Australia’s oldest dairy producer.</span>
<span class="attribution"><span class="source">AAP</span></span>
</figcaption>
</figure>
<h2>A formidable investor</h2>
<p>Notwithstanding the significant increases in milk prices, Saputo has grown gross revenues to CA$7.3 billion, becoming one of the 10 largest dairy processors in the world, the largest in Canada, third largest in Argentina and one of the top three cheese producers in the US.</p>
<p>Today, Saputo produces and distributes a broad range of dairy products in Canada, the US, Argentina and Europe. Its products include cheese, fluid milk, yoghurt, cream products, culture products, dairy ingredients and snack cakes.</p>
<p>However, dairy products account for 98% of Saputo revenues while grocery products account for only 2%. Canada, Europe and Argentina account for 56% of its dairy revenues while US dairy sales account for 42%.</p>
<p>Saputo’s brands, sold in more than 40 countries, include Alexis de Portneuf, Armstrong, Baxter, Dairyland, Dragon, DuVillage 1860, Friendship, Frigo Cheese Heads, Great Midwest, King’s Choice, Kingsey, La Paulina, Milk2Go, Neilson, Nutrilait, Ricrem, Salemville, Stella and Treasure Cave.</p>
<p>If Saputo acquires WSB, it will invest in new capital equipment in Australia to target the Chinese market, thereby benefiting Australia’s economy and workers.</p>
<p>Canada’s destructive agricultural supply management policies could be Canada’s unwitting gift to Australia.</p><img src="https://counter.theconversation.com/content/21834/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ian Lee does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Canadian dairy giant Saputo Inc has lifted its stake in Warrnambool Cheese & Butter, as it creeps up the register following its A$504 million bid for Australia’s oldest dairy producer. Saputo is pitted…Ian Lee, Assistant Professor, Carleton UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/82272012-07-12T07:39:37Z2012-07-12T07:39:37ZASIC’s review of creep provisions puts corporate raiders on notice<figure><img src="https://images.theconversation.com/files/12895/original/chtz3zz4-1342072447.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">James Packer's raid on Echo Entertainment has put Australia's takeover laws under the spotlight.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>It’s been an interesting time for Australia’s corporate watchdog. <a href="http://www.abc.net.au/am/content/2012/s3543211.htm">Financial manoeuvres by Gina Rinehart and James Packer</a>, which saw them increase their holdings in Fairfax Media and Echo Entertainment respectively, have thrust the issue of creep provisions into the spotlight. There was also the failed takeover bid of David Jones - now the subject of an ASIC investigation surrounding continuous disclosure - which descended quickly into farce.</p>
<p>It’s unsurprising, then, that ASIC has now flagged a <a href="http://www.smh.com.au/business/asic-pitches-takeover-law-changes-20120711-21vj9.html">sweeping review of Australia’s takeover laws</a> in its submission to Treasury. Michael Quilter, senior lecturer in accounting and corporate governance at Macquarie University, explains the significance of ASIC’s proposals to Australia’s takeover laws. </p>
<hr>
<p><strong>What do you think has prompted ASIC’s rethink of Australia’s takeover laws?</strong></p>
<hr>
<p>I think the recent issues surrounding Fairfax and Echo have to have something to do with it, although the ASIC chairman avoided pointing fingers.</p>
<p>The recent David Jones issue, where the share price spiked quickly due to a proposed takeover, has also raised ASIC’s interest.</p>
<p>The purpose of the takeover provisions is the protection of investors, and ensuring confidence in the market. We have a lot of mum-and-dad investors, and there’s an increasing requirement for ASIC to think about their protection, particularly in an unpredictable market,. All of these things would have added together to give ASIC an incentive to revise the takeover provisions.</p>
<p>National takeover law has existed for just over 30 years. The issues arising out of the Fairfax etc matters have obviously brought Item 9 of s 611 (the creep provision) into focus. Laws change because regulators perceive that community or equity issues should be addressed. It should be noted though that ASIC’s proposals in this regard will not necessarily translate into amendments to the Corporations Act. The process of reform has many stages and the raising of issues about the creep provisions by ASIC is merely the beginning.</p>
<hr>
<p><strong>The mention of those three companies highlight two prominent issues in takeover law: creep provisions and continuous disclosure. Let’s start with creep provisions. How effective are they in securing control? Aside from Kerry Stokes and SevenWest, have there been many instances in Australian corporate history where they have been used to acquire control?</strong></p>
<hr>
<p>There probably hasn’t. In most cases, the creep provisions have been sneaking under the radar. When they are taught in company law courses at universities, they are referred to as slow ways of edging towards control; ways in which large shareholders can gradually increase - in small increments - their holdings. </p>
<p>You wouldn’t often expect that bidders would creep 3% at a time. In most large public listed companies, 3% of the shares requires a fair bit of money. There is creeping going on, where shareholders who have exceeded the threshold increase their holding, but this does not necessarily involve the overt challenges to the board as has occurred in relation to Fairfax and Echo.</p>
<p>Certainly the ability to creep by 3% each 6 months can provide a useful base to a bidder, to either initiate a takeover bid or to accumulate a holding sufficient to significantly influence the election, or removal, of directors. In instances when the person/company seeking control has the ability to acquire a full 3% it may only take a few years before a commanding holding is achieved. All the while pressure may be increasing on the existing board, as in the Rinehart/Fairfax matter. </p>
<hr>
<p><strong>One of the proposals calls for lowering the creep to 1% and capping that provision at 30%. Do you think that will have any significant implications on takeovers, and will it affect some companies more than others?</strong></p>
<hr>
<p>Although the creep provisions are relevant to control they normally wouldn’t be seen as a method of acquiring control; they are currently viewed that way because they have been associated with pressure on boards, and particularly the conflicts widely reported upon at both Fairfax and Echo.</p>
<p>Normally, creeping upwards puts you in a better position, perhaps, to make a jump to control. Statistics suggest that most large listed companies don’t get anywhere near their total number of shareholders voting in relation to directors. At AGMs you have directors elected by a proportion of investors - usually the institutional investors hold the biggest sway. Holding 30% may be relevant in this regard. Yet, in situations where control is sought by creeping upwards a 1% limit will make a difference.</p>
<hr>
<p><strong>Another contentious proposal is the “put-up, shut up” rule, which is already in place in the United Kingdom. Essentially, this requires bidders to make a formal offer within 28 days of the approach or withdraw. The David Jones farce seems relevant here. Is the move a significant departure from our current laws?</strong></p>
<hr>
<p>Rule 2.6 of the Takeover Code in the UK has this 28 day provision. It’s not dissimilar in Australia: section 631 of the Corporations Act sets out that you have to come up with a takeover bid within 2 months after the proposal. </p>
<p>I suppose the worry from a David Jones type situation is that the market can be manipulated when the indication of offers and approaches are made. In a sense, this is all connected to the issues arising from continuous disclosure. Continuous disclosure has been dealt with in a number of big cases: a recent one was the Fortescue Metals matter. As was seen the approach to David Jones made the market move. Certain investors may well benefit from these situations and this is why ASIC will likely look into the matter. </p>
<p>If investors do not have equal access to levels of information confidence is affected. Continuous disclosure issues are going to dominate legislative measures now and into the future. I would presume that any referral that is made by ASIC to the government to consider issues relating to takeovers and the creep provisions in particular would include matters concerning continuous disclosure. </p><img src="https://counter.theconversation.com/content/8227/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Quilter does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>It’s been an interesting time for Australia’s corporate watchdog. Financial manoeuvres by Gina Rinehart and James Packer, which saw them increase their holdings in Fairfax Media and Echo Entertainment…Michael Quilter, Senior Lecturer, Department of Accounting and Corporate Governance, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/81302012-07-09T04:20:41Z2012-07-09T04:20:41ZPaying a premium could shore up Rinehart’s control of Fairfax<figure><img src="https://images.theconversation.com/files/12702/original/fwqmxsmw-1341799832.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">If she is unable to gain seats on the board, Gina Rinehart can still establish a control base by initiating a takeover of Fairfax and offering a premium to shareholders.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>Fairfax Media Ltd’s constitution enables the board to allocate board places in addition to the existing directors up to the maximum number of directors allowed in the constitution - not more than 12 unless the company in general meeting determines otherwise. </p>
<p>Gina Rinehart has dropped her holding to just below 15%. This 15% threshold is relevant to the coverage of the company’s director’s and officer’s insurance policy. (Directors indemnity and insurance is dealt with in Clause 12 of the constitution.)</p>
<p>Protection under the policy is compromised if a director is also a shareholder, with a stake of 15% or more in the company. Given the climate of dispute swirling over Rinehart’s intentions so far, litigation following a transition of Rinehart associated interests to the board can’t be ruled out. With a range of shareholder rights under the Corporations Act, including those relating to the board or majority shareholders acting oppressively, the removal of uncertainty in relation to professional insurance cover would be critical to the incumbent directors. However, how far this reduction in shareholding goes in achieving Rinehart’s overall objectives is uncertain. </p>
<p>The Corporations Act places certain restrictions on director insurance. Sections 199A, 199B and 199C combine to prohibit companies paying or agreeing to pay for insurance that encompasses coverage for various matters including wilful misconduct or contravention of s 182 (misuse position for gain) or s 183 (misuse information for gain). The Fairfax Media Director’s Report, contained in the company’s annual report for 2011, contains information regarding the payment of premiums under contracts insuring the directors and officers of the company, to the extent allowed by the Corporations Act, against liability incurred by them in their respective capacities in successfully defending proceedings against them. This inclusion in the Directors Report is required by s 300 of the Corporations Act.</p>
<p>Regulation of corporate governance can be roughly divided into soft law and hard law. Soft law includes recommendations of the many reports on governance compiled for the last 20 years, whereas hard law includes the relevant sections of the Corporations Act (such as s 180: care and diligence), most of the other directors duties sections, as well as sections such as s 606 (providing for the regulation of control once acquisitions exceed the 20% threshold). The other relevant level of governance is a hybrid between these two divisions, and most importantly includes the ASX Corporate Governance Principles and Recommendations. Where listed companies don’t comply with the ASX Corporate Governance Principles, this departure - and any alternative approach - must be explained.</p>
<p>Fairfax Media’s annual report for 2011 indicates compliance with the ASX Corporate Governance Principles. Recently the company issued a media statement confirming its own board governance principles which include: “At Fairfax a key value is editorial independence. Day to day editorial direction and decisions on stories is a matter for the editors, not the board.” This, of course, has been the most widely publicised hurdle. As Hancock Prospecting is still the largest shareholder in the company, it seems Rinehart wants not only board presence but control that may encroach on editorial independence. </p>
<p>Of course, even if Rinehart secures the board seats sought, this does not mean that her interests necessarily control the company or the board. Companies are artificial and overall control is measured in shares; this is why the takeover provisions focus on shareholding and why election and removal of directors require a requisite percentage of shareholder votes.</p>
<p>Commentators have raised the concept of the “spirit” of the Corporations Act, which stipulates that if control in a company passes, it should do so by bringing the shareholders a premium on their shares. This usually happens during a takeover, but it is not a requirement of the sections regulating takeovers. It is a result of market forces. From a shareholder’s perspective, appropriate governance and investment security should co-exist and there is certainly protection during takeovers for target shareholders in the Act by way of the provision of information, and time, to make a decision. </p>
<p>But this regulation is only relevant where acquisitions exceed the threshold in s 606 and are not exempted from the formal requirements in some other way (such as in the creep provisions). If Rinehart wishes to gain a substantial control base in the company, she may very well have to initiate a takeover and offer a premium. But if she gains board seats, this will not be the case, because the company constitution allows for this to occur at the discretion of the board. The idea of a shareholder’s premium is perhaps not pertinent in this instance. Yet it still may be that shareholders do derive some benefit if board seats are offered: the conclusion of the turmoil may bring a rise in the share price.</p><img src="https://counter.theconversation.com/content/8130/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Quilter does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Fairfax Media Ltd’s constitution enables the board to allocate board places in addition to the existing directors up to the maximum number of directors allowed in the constitution - not more than 12 unless…Michael Quilter, Senior Lecturer, Department of Accounting and Corporate Governance, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/80902012-07-06T01:49:53Z2012-07-06T01:49:53ZWhat’s behind Gina Rinehart’s Fairfax sell-down?<figure><img src="https://images.theconversation.com/files/12654/original/8bmdrz8k-1341537899.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Certain obstacles - such as Fairfax's 51% shareholding in New Zealand incorporated company Trade me - play a role in Gina Rinehart's decision to lower her stake in Fairfax to 15%.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>Hancock Prospecting’s <a href="http://images.smh.com.au/file/2012/07/05/3431444/c161fb82-c669-11e1-a581-8db5d6b72229_HPPL%252520Statement%25252005072012.pdf?rand=1341473498432">explanation for selling down</a> to 15% of Fairfax suggests it is unlikely either to bid or sell down further in the short term. </p>
<p>Its stated reason was to clear an obstacle - arising from Fairfax’s directors and officers (D&O) insurance - stopping Gina Rinehart joining the board. For the time being, she appears focused on that rather than <a href="http://bit.ly/K9c5K5">acquiring control through options</a> such as making a full takeover offer. Hancock’s statement expressly denied “unsubstantiated rumours” that it is about to “make an offer”.</p>
<p>One factor that may make a takeover less attractive is New Zealand’s “upstream” takeover laws, which are relevant due to Fairfax’s 51% shareholding in Trade Me. Although Trade Me is listed on the ASX, it is New Zealand incorporated, meaning that it is governed by New Zealand (rather than Australian) takeover laws. </p>
<p>Under those laws, an “upstream” takeover of Fairfax would require a contemporaneous takeover offer for Trade Me unless an exemption is obtained from the NZ Takeovers Panel. Given the size and value of Fairfax’s stake, any exemption is quite likely to be conditional on the acquirer, either, causing Fairfax to sell down its stake in Trade Me to 20% or less within 6 months, or making a “follow on” downstream bid for the remaining 49% of Trade Me. </p>
<p>Both these alternatives may be unattractive. Gina Rinehart has already expressed concerns about Fairfax’s recent partial sell down of its stake in Trade Me. And a bid for the remainder of Trade Me would significantly increase the cost of acquiring Fairfax, given Trade Me’s market capitalisation is not much less than Fairfax’s.</p>
<p>This would not be an issue if Trade Me was an Australian company. In comparison with the New Zealand requirements, Australian takeover law is much less likely to require a downstream bid, provided the upstream company is listed on ASX or an ASIC-approved foreign stock exchange. That was why no offer needed to be made to Leighton shareholders when control of its holding company, Frankfurt-listed HOCHTIEF, was <a href="http://www.smh.com.au/business/grupo-acs-secures-hochtief-20110513-1eme2.html">acquired by ACS in 2011</a>.</p>
<p>The New Zealand requirements provide good reason for Gina Rinehart to avoid acquiring “effective” control of Fairfax and seek instead to exercise influence through a large shareholding and representation on the board.</p>
<p>As it happens, the influence conferred by a 15% to 20% shareholder has probably been increased recently, albeit unintentionally, by the new “two-strikes” rules. </p>
<p>These reforms were proposed by the Productivity Commission to strengthen the non-binding vote on remuneration reports. Under the provisions, a resolution requiring a board spill must be put if, at two successive AGMs, 25% of votes cast are against adoption of the remuneration report. </p>
<p>The holder of a 20% stake can single-handedly trigger a “strike” if 80% of the shares or less are voted - as is often the case. With a 15% stake, support from other shareholders is needed if more than 60% of the shares are voted. The Productivity Commission found that 54% was the median percentage of shares voted for an ASX200 company. In Fairfax’s case, given the attention it has attracted, a high percentage is to be expected.</p>
<p>Curious, isn’t it – the things that affect control. The Trade Me stake has a “defensive” effect for Fairfax, whereas reforms aimed at a different purpose altogether arguably shift the balance in the other direction.</p><img src="https://counter.theconversation.com/content/8090/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Bruce Dyer has in the past received ARC funding. He is a partner of law firm Ashurst Australia (which has advised Hancock entities in unrelated matters).</span></em></p>Hancock Prospecting’s explanation for selling down to 15% of Fairfax suggests it is unlikely either to bid or sell down further in the short term. Its stated reason was to clear an obstacle - arising from…Bruce Dyer, Sessional lecturer, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/80642012-07-04T05:38:53Z2012-07-04T05:38:53ZDJs takeover farce highlights issues surrounding continuous disclosure<figure><img src="https://images.theconversation.com/files/12595/original/25yybm77-1341375752.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The circumstances surrounding EB Private Equity's takeover bid for David Jones were highly unusual.</span> <span class="attribution"><span class="source">AAP </span></span></figcaption></figure><p>It’s been an extraordinary week for upmarket retailer David Jones. Last Friday, the company announced that it had received a $1.65 billion takeover bid from UK firm EB Private Equity, and its shares rose by almost 15%. But by Monday <a href="http://www.abc.net.au/news/2012-07-02/dj-takeover-bid-withdrawn/4105234">the bid had collapsed</a> spectacularly, and the value of its shares had sunk by more than 6%.</p>
<p>This week, ASIC has <a href="http://www.abc.net.au/worldtoday/content/2012/s3537724.htm">announced an investigation</a> into the failed takeover bid, which has prompted questions over the issue of continuous disclosure and market manipulation.</p>
<p>Ian Ramsay, professor of commercial law at the University of Melbourne, sheds some light on the unusual circumstances surrounding David Jones, the takeover bid, and its mystery suitor. </p>
<hr>
<p><strong>Can we start off by explaining what a company’s obligations are under the ASX’s continuous disclosure rules?</strong></p>
<hr>
<p>The key requirement in the listing rules is one that requires any listed company, once it becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the company’s securities, to immediately tell ASX. In other words, it must tell the market that information - and that is listing 3.1.</p>
<hr>
<p><strong>Let’s look at the David Jones scenario. David Jones has defended disclosing an unsolicited bid by EB Private Equity on those grounds. But some people are saying that given the lack of credibility surrounding the bid, it should not have been disclosed at all. Others are saying that David Jones could have been a subject of market manipulation. What are your thoughts?</strong></p>
<hr>
<p>One preliminary point I need to mention is that there’s an important carve-out in listing rule 3.1A. This is quite important because David Jones claimed the carve-out. It basically says you don’t need to disclose information under rule 3.1 if a number of requirements are satisfied. One of them is that a reasonable person wouldn’t expect the information to be disclosed. You need to prove some other things as well – you could, for example, show that the information concerns an incomplete proposal or negotiation.</p>
<p>That’s very important because David Jones received the first letter from the potential bidder in May. They only disclosed the proposal last Friday on 29 June. Throughout that time, David Jones claimed – and I’m sure they are right – that the carve-out applied. All that they had received was information that concerned an incomplete proposal.</p>
<p>What changed, of course, was that information leaked into the marketplace. David Jones was concerned that it needed to put out information to counter other information that had leaked in the most extraordinary way, including through an anonymous UK blogger. That blogger contacted some prominent news services and mentioned the possible bid for David Jones and these news services then contacted David Jones.</p>
<p>It’s important background information because it explains why David Jones didn’t disclose the information they had until June 29. Come June 29, when David Jones became aware of the leaking of information, I think they did the best they could in a difficult situation. </p>
<p>It’s worthwhile noting that companies are particularly sensitive to continuous disclosure obligations at the moment for at least two reasons. The first is that ASIC has clearly indicated continuous disclosure is an important priority for it. It is becoming more active in issuing infringement notices for alleged breaches or contraventions of the continuous disclosure rules. Second, we are seeing more shareholder class actions. Most of these class actions in recent times concern allegations that companies haven’t complied with their continuous disclosure allegations.</p>
<p>There have been some very big settlements recently in these class actions. Only a month ago - the Centro settlement - was $200 million. Multiplex in 2010 - the allegation was breach of the continuous disclosure rules - $110 million. Aristocrat in 2008 - same situation - $145 million. Oz Minerals, $60 million. Australian Wheat Board, $40 million.</p>
<p>The message is clear for companies. They don’t want to be seen to sit on information that might be viewed as “material information”. </p>
<p>And in relation to whether any market manipulation occurred, that is an important issue for ASIC as it investigates the trading in the shares of David Jones.</p>
<hr>
<p><strong>If we could revisit last Friday for a moment. There was a market surge of about 20% on DJs shares on Friday morning after the bid was disclosed. Given the concerns over credibility, would it have been more prudent to call a trading halt in the interest of market integrity?</strong></p>
<hr>
<p>There are several important issues about the events of last Friday.</p>
<p>What we saw was the continuous disclosure rules not working in the way that they should have worked. I say that because in its guidance note 8, ASX says that the purpose of the continuous disclosure rule is to “elicit disclosure of the highest quality which is of benefit to the market”. That clearly didn’t occur, because what David Jones reluctantly put out into the market was all the information they had, but it was seriously inadequate information - it wasn’t of the high quality that the continuous disclosure rules are aimed at achieving.</p>
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<p>But you’ve highlighted another important point: the David Jones share price goes up almost 15% by the end of Friday - closer to 20% at a certain point in the day. That volatility in the share price where the market is trading on rumour, speculation and seriously inadequate information then creates the possibility of manipulation. </p>
<p>There are two further issues that warrant consideration. The first is the trading halt issue. With the benefit of hindsight, it certainly would have been preferable to have had a trading halt on Friday. But that would have been hard to assess as of Friday as David Jones no doubt struggled to find out what information had been leaked into the marketplace - not through any fault of its own - but through the actions of an anonymous person. You don’t want to go into a trading halt too soon or without some good justification; companies are sensitive about trading halts. They think it can be viewed as negative for the company’s reputation.</p>
<p>But there’s another issue worth teasing out. David Jones made two announcements on Friday. The first one was before the market opened, and was just one paragraph: it said they had received “an unsolicited letter from a non-incorporated UK entity about which no usual public information is available, indicating its interest in making an offer for the company”.</p>
<p>Then, two sentences: “The directors do not believe they currently have relevant information to enable them to quantify or value this approach but should this change, will advise the market accordingly. In the meantime, the directors recommend that shareholders treat any related market comment cautiously.”</p>
<p>That’s what set the market running. Shareholders, at that stage, were unsure of what was happening and many no doubt considered the possibility of a full takeover bid being launched.</p>
<p>Later on that same day, when David Jones became aware of further leakage of information, including that some international news services had details of the possible bid as published by the UK blogger, David Jones then released a three-paragraph announcement, in which they gave the name of EB Private Equity - the potential bidder. If anyone searched the company’s website, you’d be put on notice straight away: there was a real issue with credibility of EB Private Equity. An investor who went on the website would have seen it is a very superficial website. There’s no contact information on it at all. </p>
<p>The second paragraph talks of the David Jones announcement refers to the structure of the possible bid – but the numbers in this paragraph don’t add up. The third paragraph says: “No details of EB Private Equity’s financial capacity, its management, or any of the terms of the residual equity have been made available. No further details of the proposal have been provided”. </p>
<p>This is what then causes the market to go down. These statements tell us: there are credibility issues with the potential bidder and with the structure of the possible bid; and that these three short paragraphs contain all the information David Jones has received from the potential bidder. And in the time between those two announcements, you have an extraordinarily volatile market. </p>
<p>The question is: would it have been better for David Jones to put in its first announcement, that it sent to ASX on Friday morning before trading started, what it put in the second announcement? Would we have had the same volatility in the market? I don’t think so because investors would have quickly seen the problems with the bidder and the inadequate information it had given to David Jones. So looking back on it, it would have been preferable for all the information David Jones had to be in one announcement that was given to ASX before trading commenced on Friday – but we can only say that with the benefit of hindsight. </p><img src="https://counter.theconversation.com/content/8064/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ian Ramsay does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>It’s been an extraordinary week for upmarket retailer David Jones. Last Friday, the company announced that it had received a $1.65 billion takeover bid from UK firm EB Private Equity, and its shares rose…Ian Ramsay, Professor, Melbourne Law School, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/41882011-11-08T19:41:49Z2011-11-08T19:41:49ZQantas is waving the Australian flag … goodbye<figure><img src="https://images.theconversation.com/files/5292/original/qantasbehind.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">There is more behind the Qantas lockout than short-term industrial disputes.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>As the initial shock of the Qantas lockout of its workforce abates, it is time to consider the wider implications of this action. </p>
<p>One lesson is the folly of national identification of companies that are increasingly chasing each other across the globe in search of ever-higher profits. In order develop this insight it might be useful to take a step or two back in time to see how corporate Australia has been evolving.</p>
<p>The first part of the story takes us back to December 2006, when a private equity firm called Airline Partners of Australia launched an $11 billion ($5.60 a share) takeover bid for Qantas. </p>
<p>Airline Partners of Australia was a consortium of companies that included Macquarie Group, the now-failed Allco Finance and the Texas Pacific Group. The bid, which was almost $1.50 above the prevailing share price (and $4.00 a share premium on the current share price) was supported by the then board of Qantas. </p>
<p>But when the bid closed in May 2007, after widespread public opposition, it failed to gain majority shareholder support and was withdrawn. One of the key lines of opposition was that a private equity buyout might mean Qantas would no longer call Australia home.</p>
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<img alt="" src="https://images.theconversation.com/files/5295/original/joycepoint.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/5295/original/joycepoint.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=902&fit=crop&dpr=1 600w, https://images.theconversation.com/files/5295/original/joycepoint.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=902&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/5295/original/joycepoint.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=902&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/5295/original/joycepoint.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1133&fit=crop&dpr=1 754w, https://images.theconversation.com/files/5295/original/joycepoint.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1133&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/5295/original/joycepoint.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1133&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Alan Joyce is looking to expand offshore operations.</span>
<span class="attribution"><span class="source">AAP</span></span>
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<p>Since the failed takeover bid, Qantas has pretty much followed the plans laid out by the private equity firm, expanding its low cost carrier, Jetstar, offshoring more of its workforce and leveraging its successful Frequent Flyer program (more on the way this is playing out shortly).</p>
<h2>Flags of convenience</h2>
<p>The next step back in time is to 1985, when BHP had to defend a bid from the corporate raider Robert Holmes a’Court’s, Bell Group. Back then, BHP was a diversified company with activities in manufacturing as well as mining and oil and gas.</p>
<p>There is an interesting financial story here because in the early 1980s BHP used its retained earnings to pay down debt. Sound finance, but it created the capacity for a small company like Bell Group to borrow against BHP shares to launch its bid.</p>
<p>The Bell Group’s strategy was to break up BHP, sell off its manufacturing business, and concentrate on international mining. </p>
<p>In defending the takeover bid BHP made much of itself as the “Big Australian”, even though the takeover was from a local, albeit West Australian, firm. </p>
<p>In the end, BHP teamed up with another Melbourne-based corporate raider, John Elliot’s Fosters Brewing, in an exchange of shares (which later unravelled in spectacular fashion). In this takeover battle, played out as national and regional identity politics, John Elliott was reported as saying that he was invited to join the takeover bid but thought he would be finished in corporate Melbourne if he had done so.</p>
<p>BHP itself also launched a number of takeovers of international mining activities, partly to increase its debt and to make leveraged takeovers more difficult.</p>
<p>BHP has since sold off its manufacturing activities, become more focused on global mining, oil and gas activities, and merged with the South African global mining giant Billiton. It long ago shed its marketing image as the Big Australian, and has become in many ways the company Holmes a’ Court foreshadowed. </p>
<p>BHP’s approach to matters Australian is situated within this logic of global profitability. BHP Billiton has driven a very hard bargain on mining royalties, on industrial relations and despite being the beneficiary of some of the world’s lowest-cost mines during a long-term boom in commodity process, it was instrumental in the campaign to soften the Rudd Government’s mining tax.</p>
<h2>Job departures</h2>
<p>Qantas has been busy offshoring its work for some time. Its wholly owned subsidiary Jet Connect runs all its New Zealand flights and although badged with the Qantas kangaroo, is run out of New Zealand and pays staff about 30% to 40% less than comparable Qantas employees.</p>
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<p>Pilots and cabin crew flying for Jetstar out of Singapore are reportedly paid about half of Australian rates. </p>
<p>This is a firm that clearly sees wages as matters that can be lowered by starting new enterprises, or locating to lower-cost countries. Until recently, Qantas denied it was using this strategy, with management promising to still call Australia home. Now, management is being much clearer about its long-term agenda.</p>
<p>But Qantas is now as much a financial institution as it is an airline. Its Frequent Flyer program has expanded from a humble loyalty program to a major seller of bonus plans for retailers and banks. </p>
<p>The Frequent Flyer business is a major contributor to the profitability and value of the company. As one analyst <a href="http://www.macrobusiness.com.au/2011/02/tie-me-kangaroo-down/">recently noted</a>, “the Woolworths-linked points program brought in $189 million (pre-tax) in 2010 versus $143 million for Jetstar and $165 million for Qantas.” </p>
<p>Qantas is keen to “convert” the points to flights for the lowest possible cost, and herein lays a major driver for strategies that put downward pricing pressure on Qantas the airline. </p>
<p>Not only does Qantas increasingly think and act like a global firm scouring the world for profitable opportunities in the air, its profit calculations are calibrated like a risk-managing private equity fund. Board remuneration policies are just another expression of that development.</p>
<p>This highlights another longer term implication of the Qantas dispute. It is further reminder that the (contested) link between economic growth or productivity and rising wages that characterised most of the 20th century has been broken.</p>
<p><figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/5296/original/jetstarstairs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/5296/original/jetstarstairs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=902&fit=crop&dpr=1 600w, https://images.theconversation.com/files/5296/original/jetstarstairs.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=902&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/5296/original/jetstarstairs.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=902&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/5296/original/jetstarstairs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1133&fit=crop&dpr=1 754w, https://images.theconversation.com/files/5296/original/jetstarstairs.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1133&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/5296/original/jetstarstairs.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1133&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Overseas-based Jetstar workers are paid below local rates.</span>
<span class="attribution"><span class="source">AAP</span></span>
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</figure> </p>
<p>Qantas is saying that not only will wages not grow along with company profits, future profits will come from finding ever cheaper labour wherever it can. This is probably what makes capital markets so excited about the symbollic significance of this dispute.</p>
<h2>Another takeover bid?</h2>
<p>However, with the Qantas share price now languishing at around a $1.50, Qantas may actually be worth more in bits than as a whole. </p>
<p>There has been murmuring for some time that another private equity bid <a href="http://www.news.com.au/business/labor-red-flag-for-qantas-suitors-as-takeover-speculation-rises/story-e6frfm1i-1226120920811">could be in the offing</a>, and this time the price will not be anything like $6.00 a share. </p>
<p>Faced with this sort of scenario, corporate boards tend to get jumpy. When it is also recognised that key members of the Qantas board have form in anti-union action, conversations at Qantas meetings about ways of defending the firm and showing the share market it is still a virile action-oriented board can be easily imagined. </p>
<p>One of the clear implications of this history and continuing developments in the international corporate world is that in thinking about commercial activity, it is less and less helpful to use labels (including marketing labels of corporations) that invoke country or nation. </p>
<p>While the Qantas board is saying it is just looking after its future as an Australian-based firm, detractors charge it with “betraying” the nation, or worse still “Asian-ising” the airline.</p>
<p>Such labels can however also have negative implications for individual managers as well. In the current conflict, Alan Joyce, unmistakeably Irish in accent, has made Australian industrial relations the battle ground. For his leadership, nothing less than a decisive victory will do. As his namesake and compatriot James Joyce once warned, “Come forth, Lazarus! And he came fifth and lost the job.”</p><img src="https://counter.theconversation.com/content/4188/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Rafferty does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>As the initial shock of the Qantas lockout of its workforce abates, it is time to consider the wider implications of this action. One lesson is the folly of national identification of companies that are…Michael Rafferty, ARC Future Fellow 2012-2016, School of Business, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/19772011-06-24T03:55:27Z2011-06-24T03:55:27ZCould SABMiller’s bid for Foster’s signal last drinks for boutiques?<figure><img src="https://images.theconversation.com/files/1871/original/beer.jpg?ixlib=rb-1.1.0&rect=120%2C32%2C1763%2C1426&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Line 'em up: boutique beers could fall if SABMiller's takeover attempt of Foster's succeeds.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>It’s difficult to believe that the iconic Foster’s beer brands, which include VB, Crown Lager and Cascade, could be next to fall into the hands of foreign owners.</p>
<p>If they do, this will mean that over half of the industry –in terms of market share – will be either directly or indirectly owned by foreign interests.</p>
<p>This week’s takeover offer from SABMiller is part of the South African brewer’s move to create global brand, and even boutique global beer brands.</p>
<p>Foster’s rejected the bid, but this story is far from over. SABMiller will no doubt make further offers, and it is likely that other global brewers will make rival bids.</p>
<p>For Australia, this has far reaching consequences well beyond what beer we drink, how it’s made and who owns it.</p>
<p>Global brewers like SABMiller tend to be aggressive buyers of domestic brands and opportunities. </p>
<p>They see value in national brands, an the opportunity to expand their market power well beyond the brands they purchase.</p>
<p>Such brewers have the ability to market and distribute brands on a global scale, squeezing all the value from the brand they acquired.</p>
<p>It’s important to note that Australia has enjoyed a boom in boutique beer over the past couple of decades, despite a heavy concentration in beer retailing in the hands a only a few players.</p>
<p>The two major retailers, Coles and Woolworths, account for more than a third of all the beer sold, which leaves the boutique brands – along with diversity and choice –constantly under threat. It also means that the smaller distributors and resellers are always under pressure from the larger suppliers and retailers.</p>
<p>A foreign takeover of Foster’s has the potential to place more strain on this sector of that market, and consequently, poses significant challenges for new ACCC Chairman Rod Sims.</p>
<p>It will also test how well the new restructured competition law will be enforced.</p>
<p>If SABMiller is successful, then the new owners will be able to execute a strategy that may include a move to further dominate shelf space, bars and hotels. Slowly, diversity will be limited.</p>
<p>The lessening of competition is not a remote consequence. It is the well-worn path of any new owner of a supplier in a market which is prone to market concentration. </p>
<p>In the past two decades there have been many mergers authorised and blessed by the regulator and in many instances by government.</p>
<p>Often there were many undertakings made to preserve competition, access to markets, in support of the public interest. </p>
<p>In the world of commerce, budgets, sales, market share tend to dominate the agenda of suppliers who control the dominate supplier. </p>
<p>The entrance of a new large player could spell and end to the boom in boutique brewers, and stifle what is becoming – against all odds – one of Australia’s most vibrant industries.</p><img src="https://counter.theconversation.com/content/1977/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Peters does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>It’s difficult to believe that the iconic Foster’s beer brands, which include VB, Crown Lager and Cascade, could be next to fall into the hands of foreign owners. If they do, this will mean that over half…Michael Peters, Lecturer, Australian School of Business , UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.