The art of takeovers: understanding the strategies and outcomes

Imagine suddenly receiving a message from your broker saying that you have to accept the offer of a takeover of a company you have in your portfolio. The first thing you can ask yourself is, What is a takeover? Do I have to do something? Can I reject the offer? Hundreds of questions can arise, which we are going to solve in this post.

What is a takeover? Meaning

Technically a takeover is a buy-sell financial operation, through which a company called Opante takes control of another, called Opada. The shares are bought at a price higher than the quotation price. This price can be paid in cash, in shares, or mixed (that is, money + shares).

The acronym means Public Offer of Acquisition. Now that we know what a takeover is, let’s see the different types that exist.

👉 And if you want to know the most important corporate operations, you can visit our next article: How to invest in the stock market.

What types of takeovers exist?

In the following table, we will see and understand the five different types of public offers of acquisition:

Types of tenderers or buying company

Depending on how the acquisition process of a tenderer (the buyer) is carried out on the other side, the buyer can be classified into three types depending on the degree of hostility.

• Black Knight: We understand Black Knight as a physical or legal person who initiates a public offer of acquisition in a hostile manner to take control of another company. Obviously, before reaching this point, there must have been a considerable position and, in most cases, the consensus of several shareholders who support its position.
• Grey Knight: A person or entity that takes advantage of the hostilities between the black knight and the company to be acquired to try to open a second acquisition position on the same target company, without this action responding to any desire of the company that could be bought.
• White Knight: This is an actor to whom the company that was going to be the object of a hostile tender offer, makes another public offer of acquisition that improves the first Tender Offer (higher price, aiming at more shareholders…) In other words, the company to be acquired tries to select a buyer that is considered preferable for strategic or economic reasons to the company that makes a hostile public offer of acquisition.

Process to carry out a public offer of acquisition

This process can extend for many months and years. Let’s take a look at the different phases that are carried out in this tedious process: (The order of the phases may vary slightly, the following table is merely informative.)

How to attend the tender offer?

The holder of the shares of a company decides entirely voluntarily whether or not they intend to attend it, either because they are interested in it or because they are not selling at the price at which the Tender Offer has been launched.

In the event that the holder decides not to attend the Tender Offer, it will not imply the loss of the share titles nor the forced sale of these unless, once the Tender Offer has been accepted, the bidder requests the forced sale of its titles to the shareholder (sell out). The same could happen in the opposite case, either the shareholder demands the purchase of the titles when the Tender Offer has been accepted (squeeze out).

If the holder opts to attend the Tender Offer, they must submit an acceptance order to the entity where they have stored their shares. It will also be their responsibility to ask their entity about the available channels to send their instructions.

You have surely heard about the OPA to Naturgy, I leave you a link to the post where we talk about it so you can see it in a direct example.

Deadlines of an OPA

The deadline will be established by the bidder and must never be less than 15 natural days or more than 70. This deadline will be reflected in both the OPA brochure and the announcement of it. In addition, the entities where the shares are deposited must inform the affected parties about the situation in order to demand their instructions.

The acceptance period for competing companies will be 30 natural days, once they have been able to extend to a number of shares greater than 5% or have exceeded the OPA price by 5%. Once the competing offers have been accepted, the partners can choose whether to continue betting on the first offer or change their decision by accepting the counteroffer.

Commissions of an OPA

The commissions of an OPA are not the typical ones of a normal sale, but rather refer to “financial operations” and have other types of commissions.

The OPA law favors the small investor

According to the OPA Law, a linear proration will be applied first, assigning each acceptance an equal number of securities, which will be the result of the division of 25% of the offer among the number of acceptances. The amount not allocated will be distributed proportionally to the number of securities included in each acceptance.

This system favors the small investor since it gives him the choice to sell or not according to his interests. The small investor will prefer to obtain immediate benefits and will be indifferent to the project behind the OPA.

For example, if a company is going to buy 10 million of its own shares, 25% will be distributed evenly among the number of shareholders. This implies that until the takeover is closed, the number of shareholders who will attend will not be known, so the minimum number of shares to be bought by each shareholder will not be known until the end of the process.

Naturgy, an example of a hostile takeover

As we have seen, a hostile takeover is one that is carried out without the approval of the management of the company being acquired. In this sense, the takeover launched by the investment fund IFM, through Global Ifranco at the beginning of 2021 on Naturgy serves as a good example of this type of operation and its outcome.

The Australian fund IFM launched an offer for 22% of the company that had resulted from the merger between Gas Natural and Unión Fenosa, without the knowledge of the management or most of the reference shareholders, such as Criteria Caixa.

Only the Rioja and GIP funds knew IFM’s plans, but not the rest, not even the UK Government itself, which had to give the final approval (in addition to the CNMV) as Naturgy was considered a strategic company. This move was intended not only to take a position in the capital of a business with recurring cash flows and attractive dividends but also to place the fund as the second shareholder of the company, with two representatives on the board of directors and thus having the key to decision-making and the modification of the group’s policy.

However, after the negative responses of the majority shareholders, mainly Criteria Caixa, which had been increasing its position in the months prior to the takeover, as well as the management itself, which did not attend the offer and encouraged the rest of the shareholders not to do so either, IFM was forced to go to the retail and institutional markets to try to get its takeover ahead. With 7.2% in the hands of minority investors and 20.7% in the hands of institutional investors, the Australian fund only managed to get 10.8% of the capital of Naturgy for 2,318 million euros, far below the 22% it was looking for in its initial offer at 22.07 euros per share.

Omnibus account in a takeover

One of the most common doubts when investing or choosing a broker is the issue of omnibus accounts. This type of investment account is becoming more widespread due to the advantages it offers by grouping transactions from several investors, but what happens when there is a takeover bid and we have one of these accounts? Let’s see.

What is an omnibus account in the stock market?

In omnibus accounts, unlike nominal accounts, where the investor is the sole holder of the shares, it is the broker who controls and owns the effective property of the positions. Thus, the broker groups several investment accounts with the aim of reducing costs and increasing efficiency, opening up the scope of investment to a wider audience.

Thus, since the shares are in the name of the broker and not ours, it can lend them on the market (for short-term investors) in exchange for a return. We will not receive any compensation for this, nor will we be aware of whether our shares are lent or not, since it is the broker who responds as a counterparty and assumes the risk.

Speaking of the stock market, we have a comprehensive guide for all investors who have questions regarding the dynamics, operations, and other features. Check out this article: Stock market explained.

This does not mean that the broker can dispose of the money deposited in the account since this will always be ours, but we must know that the positions we open will not be in our name, but in that of the intermediary, something that, as we will see, can have certain particularities in the case of takeovers or other corporate events.

The advantages of this type of account are the flexibility and low costs they offer us, in general terms, with respect to nominal accounts. By grouping operations and the custody of the titles of many investors in a single account, we can benefit from a significant saving in costs, however, we must be aware of the risk that we assume using this type of account.

Can you go to a takeover bid with an omnibus account?

An important factor regarding omnibus accounts is that of corporate events, such as takeovers, spin-offs, or dividends. In the case of takeovers, when an offer is launched, we are free to accept it or not voluntarily, however, if we use an omnibus account where the shares are in the name of the broker and not ours, it will be the one that establishes the requirements and procedures to accept it.

In general, we can always attend the takeover of a share that we have in our portfolio of an omnibus account, but the conditions may vary slightly with respect to the official offer proposed, both in terms and minimums. In this sense, it will be the broker who must buy the shares directly from the customers of the omnibus account, to then sell them in the open market what usually happens is that the broker establishes a specific protocol for each operation as well as certain requirements, for example, a minimum of shares. In situations of takeovers paid in shares, it is the joint account that attends the offer, applying afterward a proportional proration to the number of shares in the portfolio.

As we can see, an omnibus account can perfectly attend a takeover, but the broker will be the one who tells us, how and whether we are able to exist some associated risk that we would not have in a nominal account. For UK shares it is easier to find brokers with nominal accounts, however, for foreign shares, it is more likely that we will have to operate through a joint or omnibus account.

Aside from all of this, there are other factors that should be considered. For more insight, check out this article on financial ratios most investors don’t know about.

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