City all-in wrestling MONEY
NICHOLAS DAVENPORT
These takeover fights have the morbid fascina- ion of all-in wrestling on the television box. The sight of an eminent merchant banker de- ivering a foul blow below the belt to another eminent merchant banker has the same unwhole- some fascination.
The City fathers have done their best to have it stopped. They are aware that if they do not eliminate dirty play from these takeover fights there will be a call for the Government to in- tervene and set up a statutory body like the Securities and Exchange Commission of New York. I agree with Mr Wilkinson, the Stock Exchange chairman, that voluntary control is preferable. Statutory control would be slow to adapt itself to new situations and would in the end become inflexible and restrictive. And new situations are continually cropping up. The re- structuring of British industry, to use the Wil- sonian phrase, requires more and more mergers and when they are not jointly and happily con- ceived they involve fierce battles for control. The Stock Exchange, being the market-place for capital, is the battleground. It is therefore imperative that the Stock Exchange machinery should not be abused. As Mr Wilkinson said, `a share deal must be a fair deal.'
There had been so many disquieting scenes in the takeover battles over the last two years that the issuing houses themselves decided to draw up a code of rules for good behaviour. In fact, two attempts at a code were made and were found inadequate in practice. Finally, the Bank of England was brought in and with its help the merchant banks and their brokers drew up a much more comprehensive code and set up a panel to act as guide and counsellor. The chairman of the panel is Sir Humphrey Mynors, an ex-deputy governor of the Bank, and its members are leaders of the issuing houses and investment associations. The new code was published in March last and the Governor of the Bank declared that he was wholeheartedly behind it and would give it any necessary sup- port. At the recent Mansion House dinner he added plaintively: 'I do not think it is reason- able to expect me to intervene personally and publicly in every instance where trouble arises.'
And trouble has arisen in plenty. The early life of the takeover panel, as he said, has been anything but a quiet one. And it has not been made easier by the interventions of the In- dustrial Reorganisation Corporation. That a state body with Treasury backing should take active sides in a merger or takeover is like allowing a rogue elephant to take part in a carefully rehearsed circus performance. Sir Frank Kearton, the chairman of the IRC, was himself rebuked by the panel for his behaviour as chairman of Courtaulds in the Dufay-Inter- national Paints takeover, while Mr .Villiers, the present managing director of IRC, was criticised for his intervention in the Kent-Cambridge In- struments merger when he helped to defeat the bid of the Rank Organisation. Is the state instrument for promoting mergers and take- overs to be outside the code and superior to the panel?
The new code laid down ten principles and thirty-five rules. The main principles were that the boards of directors of both bidder and `victim" should put the interests of their share- holders first and do nothing, while the bid is in progress, to prevent or frustrate the share- holders in making up their minds. All share- holders must be treated alike and be told every- thing. No section of shareholders must be given special advantageous treatment. Nothing must be done to oppress or depreciate a minority holding. All shareholders must be advised im- mediately of any approach from a bidder or when there is `an untoward movement in share prices.' The bidder must declare what he in- tends to do and what proportion of the shares of the victim he has acquired or holds. Insider dealings are permissible but the Stock Exchange Council must be advised of the size of the dealings. Any purchases in the market or out- side over the bid price must lead to an in- creased price for all shareholders.
And here is the most important part of the rules. Forecasts of profits, by which the board of the victim may try to fight off a bid, must be corroborated by the financial advisers and all the relevant documents must be sent to the panel. During the bid the board must not make any major change in the assets of the company or make any share issues without a general meeting of the shareholders. The board must justify its 'good faith' by facts and figures in rejecting a bid price which is above the market price. And it must give the same information to an unwelcome 'bidder' as it does to insiders. I am not suggesting that these rules—the most comprehensive yet devised—cover every situa- tion likely to arise but the principles are clearly stated and if the spirit of them were strictly ob- served there would be no dirty fighting.
Yet trouble has arisen and is still likely to arise when the fight is fierce. In American Tobacco's partial bid for Gallaher the brokers bought £20 million worth of shares from City institutions in the first two hours of a Stock Exchange session, at prices slightly above the bid price, and complaint was rightly•made that outside shareholders were not given the same opportunity to unload. The Stock Exchange Council ruled that a breach of the code had been made but that the brokers were not to blame. The brokers denied they had broken the code as written. The Issuing Hquses Associa- tion censured Morgan Grenfell, who apologised.
The code might technically be breached again in the Pergamon Press bid for News of the World, but Mr Robert Maxwell, advised by Hill Samuel, was careful to consult the panel and make his preliminary moves in accordance with its rules. After 'an untoward movement' in the share price the bid was hurriedly made (sec- tion 15) and after hectic dealings the details of the number of shares bought and the average price were disclosed (section 29). Pergamon then made a higher bid (equivalent to almost 50s) to match the higher average price paid in the market (section 31). Hambros, for the family (News of the World), opposed the bid by buying more shares in the market, bringing the Carr interests up to 32 per cent, and then acquiring 10 per cent on their own account.
Hambros may well be asked not to use this to per cent share holding in the battle. An interven- tion by Mr Murdoch of News Ltd. of Australia has now complicated matters. Mr Murdoch is prepared to inject some of his Australian paper assets into News of the World in exchange for so much of the share capital to bring the Carr- Murdoch holdings up to 51 per cent. This altera- tion in the assets could not be done, according to the rules, without a general meeting of share- holders. And what is now left of the main principle of the code that nothing must be done by either board to prevent or frustrate the shareholders in making up their minds on the Maxwell offer? The shareholders must be feel- ing pretty frustrated already. The position be- came so confused last week that on the advice of the panel the Stock Exchange Council sus- pended dealings in the shares when the price was around 47s. Both parties are now lobbying the panel.
It is clear that the panel has now been put —or has foolishly put itself—in an impossible position. It is being made to become an active participant in a takeover fight. Its offer of pre- bid consultation has been turned into a com- mitment to act as the referee in the ring of an all-in wrestling fight. It was never intended that the panel should tell one or other of the wrestlers how to adopt or not to adopt a certain strangling hold. This is going much too far. The panel is simply the interpreter of a code of good behaviour and its voice should not be heard until the fight is over. Then, if it declare'i that the code has been breached, sanctions should be applied_ The judgments of the panel are legally un- enforceable but there are sanctions to be ap- plied which can made highly effective. For example, there are the sanctions which can im- mediately be imposed by the Stock Exchange Council, that is, when it suspends dealings or suspends a firm of brokers. But brokers are merely agents of principals and the principals should not be allowed to go scot-free. The Issuing Houses Association could dismiss a merchant bank from the association and declare publicly why it is being pilloried. The rebuke of public opinion would be formidable. The panel, of course, must remain the father con- fessor and in flagrant cases of immorality appeal to the Governor of the Bank as the City Pope to issue an encyclical. But I have never liked the idea of elevating the Governor into a pon- tiff's throne.
Pace Mr Anthony Crosland, President of the Board of Trade, there is no sign that the Treasury wants to interfere in these City battles. It prefers to rely on the good common sense and fair play of British people—as Mr Callag- han did last Sunday. Mr Wilkinson was clearly right when he said at the Mansion House feast : 'Give the panel time. They will build up speedily both case law and expertise.' But they must not act as fussily and precipitately as they appear to have been doing in the News of the World case. The City is now talking of the reconstitution of the panel and the appointment of a full-time chairman with intimate under- standing of this wicked world. Obviously a Poacher turned gamekeeper is called fot.
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