Hostile bids `fail to boost business efficiency'

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The Independent Online
The London Business School yesterday attacked the almost universal City view that hostile takeovers are a vital mechanism for improving business efficiency. Two days after Northern Electric failed by a hair's breadth to fight off a bid from CE Electric of the US, it emerged that the LBS had found that targets of hostile bids were not generally poor performers in need of a shake-up.

The LBS said the findings contradicted the received wisdom that hostile takeovers, or the threat of them, performed a valuable function in disciplining managers of poorly performing firms.

The challenge to the hostile takeover came at the end of a year in which the Forte hotels and catering group spectacularly lost its bitter fight against a bid from Granada.

The business school was in the 1980s closely associated with Conservative policymakers and the promotion of a free market in corporate control, but its research now backs some of the criticisms of the City's takeover culture made by the Labour Party.

Julian Franks, professor of finance at the LBS, agreed that the school's view on hostile takeovers had changed. He said: "I'm sure that at some period some people, possibly including myself, have been more positive about hostile takeovers than we are today."

However, a long programme of research by the LBS had led to the conclusion that the best spur to improvement of a poor performing company with weak management was the building of a large minority stake by a single shareholder.

This was such an effective mechanism that there should be changes in the rules of the City Panel on Takeovers and Mergers to allow buyers to accumulate stakes above the present limit of 30 per cent without being obliged to make a full bid.

Furthermore, insider dealing rules should be changed to allow large shareholders to collect information on the companies in which they invest without becoming insiders, which prevents them trading the shares. It was not surprising that institutions were frequently uninformed about a company's performance until late in its decline, the LBS believed.

The LBS work backs the scepticism of Labour policymakers about the benefits of hostile bids. Labour has said it will oblige bidders to show that their plans are in the public interest and has also floated the idea of relaxing insider dealing rules to allow large minority shareholders to take a more direct role in management.

Professor Franks said he did not advocate the system widely used on the Continent in which companies are controlled by a network of large shareholders - so that in Germany there were only three hostile bids between 1945 and 1994.

He said: "I would like to see large active shareholders working for shareholder value. On the Continent, [such shareholders] are not necessarily working for shareholder value. It may for their own private benefit." However, he conceded that the proposed changes would reduce the rights of small shareholders compared with large ones.

The LBS analysis is contained in an article in the influential US journal Business Strategy Review. Professor Franks and Colin Mayer, deputy director of Oxford University's school of management studies, summarised a decade of research by academics at the LBS. The research included data on performance before and after a large number of takeovers in the mid-1980s.

Their main conclusion was that the LBS work had shown that hostile takeovers were not motivated by the poor past record of target companies, whose performance tended to be in line with the average of the market.

There was some evidence that takeovers were motivated by poor expectations of future performance.

However, among poorly performing companies, a change in ownership of a significant minority share stake often led to a change of management control. The research showed that this impetus to improved efficiency was not usually accompanied by a full takeover bid.

The paper concluded that: "In other words, changes in minority stakes, rather than hostile takeover bids, are the mechanisms for improving the performance of companies with weaker management."