Forecasting a clearer future

Greater consistency in profit forecasts is vital if company takeovers are to succeed. By Roger Trapp
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The Independent Culture
Did Argos reveal all the facts during its battle to fend off a takeover by Great universal Stores? Lord Wolfson, chairman of Great Universal doesn't think so and has asked the Takeover Panel to examine his claim, showing just how acrimonious corporate takeovers can become.

Lord Wolfson's complaint focuses on trading statements made during the hostile - and ultimately successful - pounds 1.6bn bid. And, while there is no suggestion that Argos issued misleading profit forecasts, this is much the same sort of area examined by a report to be published by the Institute of Chartered Accountants of Scotland next month.

The study, by Dr Niamh Brennan of University College Dublin's department of accountancy, refrains from recommending that profit forecasts be made mandatory in takeovers. Instead it calls for greater consistency in reporting, a minimum level of disclosure and better control on disclosure of assumptions.

The report does not stop there, pointing out that while takeovers and mergers have attracted a lot of academic attention, the area is otherwise little covered. Dr Brennan identifies "issues that those about to embark on a takeover may wish to consider".

These include: Why do companies in takeover situations disclose forecasts when in normal trading situations such disclosures are unlikely? Is it in the interests of investors for companies who do not routinely disclose forecasts to do so in takeover situations?

Are amounts forecast during takeover bids different from those forecast in routine situations? Are amounts forecast during contested bids different from those forecast in agreed bid situations? Are forecasts during takeover bids as accurate as forecasts disclosed in other situations? Are profit forecasts effective in defending against hostile takeover bids? How influential are advisers in the decision to disclose profit forecasts? Is there any evidence of ritualistic or herding behaviour by advisers when publishing forecasts?

While pondering what Dr Brennan refers to as "challenges", companies and their advisers might want to take account of the report's actual findings.

They are based on an examination of 701 takeover bids for companies quoted on the London Stock Exchange between 1988 and 1992 and 11 in-depth interviews with people who had taken part in one or more of these transactions.

Some of the conclusions are obvious - such as the notion that whether a forecast discloses "good" or "bad" news is a factor influencing disclosure, or the idea that target companies use forecasts to support directors' recommendations, either to fight the bid in a contested situation or to accept the terms when there is an agreed deal.

However, it also points out that: "There was no consensus on what the benefit of disclosure is, although most commentators referred to forecasts in the context of getting an increase in offer price," and adds: "There was only one mention of a forecast defeating a bid."

Put like that, it is perhaps hardly surprising that forecasts have not been too closely examined by the academic community. But that does not prevent Dr Brennan from coming up with her various calls for action - though it appears that even she has trouble getting worked up about them. For example, while urging companies to adopt consistent disclosure practices for good news and bad news, she states: "Although desirable, in practice it would be difficult to devise regulations to ensure that good and bad news are communicated in the same way."

Moreover, she favours the publication of quarterly figures - as has been the case in the US for some time and is increasingly true of British companies with a strong international presence - over mandatory profit forecasts.

This is on the grounds that investors will interpret the absence of a forecast in the worst possible way and "are therefore not disadvantaged by their non-disclosure".

In other words, this is a bit of a murky area, but one in which the participants should be able to look after themselves. As a result - apart from a little tightening of ground rules - nothing much needs to be done to a situation where the principle "caveat emptor" rules. Lord Wolfson take note.