BHP / RIO

There will be masses of words written about this. The whole process is going to take some time. Here's a starting point: Bryan Frith.

Tax implications for takeover targets

A couple of colleagues (Martin Bugeja and Ray da Silva Rosa) have a paper examining the impact of the change in tax treatment of capital gains in takeovers. From the abstract:

Prior to December 1999, shareholders that sold their shares into Australian takeovers have been taxable on capital gains irrespective of the form of payment. Subsequent to this date shareholders can elect to rollover gains when equity is received as consideration. We examine the effect of this regulatory change on the association between target shareholder capital gains and both takeover premiums and shareholder wealth. Inconsistent with the target shareholder taxation being important the results indicate that target shareholder capital gains are unrelated to takeover premiums and target firm abnormal returns. Additionally, we find that cash consideration increases target shareholder returns for reasons other than taxation.

SSRN link.

Value in mergers?

Where do the value in mergers come from? Here's a paper that has a crack at answering it.

We estimate that tax savings contribute only 1.64% in additional value, while operating synergies account for the remaining 8.38%. Operating synergies are higher in focused mergers, while tax savings constitute a large fraction of the gains in diversifying mergers. The operating synergies are generated primarily by cutbacks in investment expenditures rather than increased operating profits. Overall, the evidence suggests that mergers generate gains by improving resource allocation rather than by reducing tax payments or increasing the market power of the combined firm.

Mergers and capital gains tax

We were talking in class this week about the tax implications of using cash vs shares in a takeover. Looks like the relative advantage of using shares (i.e., the deferring of a capital gains tax liability) is under threat. Jane Shultz in The Oz writes:

TAX experts expect a major slowdown in takeover activity due to a controversial change in tax law, despite the federal Government yesterday tweaking its announcement in a move likely to save the demerger of James Packer's Publishing & Broadcasting Ltd.

On Friday, Revenue Minister Peter Dutton suddenly announced changes to the tax consolidation regime that significantly increased the amount of capital gains tax payable when assets bought in a scrip-based takeover were on-sold.

Mergers, and Sovereign Wealth Funds

We've discussed in class this week the fact that regulatory requirements can limit merger and acquisition activity. The sorts of regulators involved are the competition regulator (ACCC) and the Foreign Investment Review Board (FIRB). The Group of 7 are currently considering a proposal to limit the investment activities of so-called Sovereign Wealth Funds (i.e., countries, especially those like Singapore and China, who are amassing extremely large amounts of money). Let's keep an eye on this...

Link to Australian article.

UPDATE (19/10/07): I didn't mention the Takeovers Panel (hey, check out the 'old-school' website feel) as one of the relevant regulatory bodies, but should have. One of their current tasks is to decide whether Pallinghurst or Palmary should end up owning Consolidated Minerals. Bryan Frith article on this here.

Takeovers and disclosures

Paul Kerin in The Australian writes about takeover bids and the fact that management should disclose any offers they receive to their shareholders, and if the bid is rejected, explain why. Ideally companies should have explicit policies in place to deal with these sorts of issues. Link

Takeovers... Wesfarmers/Coles

Some readings for the latest in the Wesfarmers takeover of Coles: here, here and here
Something novel in the 'price protected shares'. I'd be hoping that WES shares are about $45 in 4 years...

How well will Coles have to perform to cover it's cost of capital: from John Durie (linked above):

The deal is one thing, the hard part is getting a $20billion deal to earn its keep over the next four years - and that's no easy task. On some estimates, Coles will earn $1 billion this financial year.

Wesfarmers' cost of capital with Coles will be around 10 per cent - which means Goyder will have to double earnings to make his cost of capital.

This won't be a walk in the park - but just for starters, there are some $400 million in costs that can be readily taken out of the business.

WES has a reputation for getting good managers into a business, and then letting them manage. If the Coles board accepts this revised bid, WES will be able to get on with the business of doing that.

Takeovers, disclosure, conflicts

Yep, more from Bryan Frith. This time it's PCH, trying to stop a potential buyer talking to the actual shareholders. Oh, and possibly breaching continuous disclosure rules.

Independent experts

Independent experts reports are often described as neither independent nor expert. A lot of these reports are required by law, and often seem to be a 'cover your a*** document for managers. The valuation methods used in them are often questionable (in terms of valuation methodology, valuation range etc). Paul Kerin makes similar points:

FAIRNESS opinions are primarily arse-coverers for boards. While they can help shareholders, competition helps more. Target boards should focus on maximising competition for their shareholders' shares and forget about fairness opinions -- unless legally required or sufficient competition can't be mustered.

Following a takeover bid, the target's board often commissions a "fairness opinion" from an "independent expert". The expert estimates a valuation range for the target, compares it to the bid and offers one of three opinions. "Fair and reasonable": the bid at least meets the lower valuation bound. "Not fair but reasonable": while the bid is under the lower bound, other factors lead the expert to believe that shareholders should accept. Otherwise, bids are deemed "not fair and reasonable". Half of Australian opinions are fair and reasonable; one-fifth are not fair and reasonable.

Kerin references some research that came out of Martin Bugeja's PhD thesis at Sydney University. Martin has a paper "The 'Independence' of Expert Opinions in Corporate Takeovers: Agreeing With Directors' Recommendations" published in the Journal of Business Finance & Accounting [Volume 32 Issue 9-10 Page 1861-1885, November 2005 if you're looking for it]. His abstract:

The impact of nonaudit services on auditor independence has been the recent focus of regulators worldwide. Using expert reports provided in Australian takeovers, this study investigates a context where the audit independence issue is reversed. As approximately a quarter of expert reports are prepared by the target firm's auditor, concerns have been expressed over the independence of the opinion provided. This paper finds that, relative to other experts, there is no difference in the rate at which experts with other business dealings with the target, including the target's auditor, provide an opinion that agrees with that of directors. However, the capital market reaction around the release of the report indicates that reports produced by auditors are viewed as nonindependent.

Martin finds that 50% of bids increase after a "not fair and reasonable" opinion, but only 14% of bids are increased if there is a "fair and reasonable" opinion issued. That doesn't surprise me.

Wesfarmers, Coles, strategy & takeovers

Nice little article from Matthew Stevens in the Weekend Australian (Aug 4-5; annoyingly I can't find an online reference) that links business strategy analysis with mergers & acquisitions. He's talking about the (currently) proposed takeover of Coles by Wesfarmers, and focuses on what happens if the bid doesn't go ahead. An interesting time forecast for Coles CEO John Fletcher and Chairman Rick Allert.

TPI, mergers and the ACCC

TPI's corporate strategy has been growth-focused. John Durie in The Australian suggests that the ACCC would like to know about some of TPI's proposed takeovers before they are announced. As Durie suggests, though, investors "like nothing better than a company that controls its market."

Wesfarmers and value creation

How will Wesfarmers make money out of buying Coles? Only by selling off part of the business, according to Paul Kerin in The Australian. A good article to read about trying to realise synergies in corporate acquisitions.