First mover or fast follower to clinch the deal

The appetite for deal making is picking up, and in no place is this clearer than the UK public takeover market. The first five months of 2024 saw 28 new offers announced for UK public companies, an increase of 27% on the same period last year, with a significant number involving U.S. bidders. Three competing bid scenarios have also arisen so far this year, all involving U.S. bidders and U.S. counterbidders. 

As potential takeovers of public companies continue apace in the UK market, the question is, as a prospective buyer, is it better to be first on the scene or to come in second if you want to achieve the ultimate goal and clinch the deal? 

Key to this question is understanding the rules of the "blue book": the Takeover Code. 

One feature of the UK regime is that the regulator, the Takeover Panel, is focused on creating a level playing field for bidders. This means that there may be no meaningful competitive advantage in launching a bid first. In the last five years, when a second bidder has emerged, they have usually won (around 90% of the time). 

This means the first mover has to take full advantage of any timing head start. Moving first with a compelling offer can discourage interlopers from entering the fray at all and tends to give first bidders at least some opportunity to shape the stakeholder narrative. Indeed, it is still the case that only a minority of takeovers become publicly contested. 

But the key for first movers is to understand that announcing the initial offer is simply just the opening move in a public game of chess with an unknown number of players — whether it be competing bidders, shareholders or the media — all of whom may have the ability to influence the outcome. 

A number of features of the UK regime facilitate this. In contrast with the United States, there is limited deal protection available on a UK takeover, meaning it is challenging to "lock in" a target's board. The rules prevent a bidder from negotiating any no shop or matching rights arrangements, and it is impossible for a first bidder to obtain a break fee if the target board withdraws its support. This means the target board is free to change its decision at any time in favour of a second offer, without suffering any financial penalty. 

Stakebuilding also comes with various challenges. Aside from legal and regulatory considerations (including not buying shares while in possession of inside information and ensuring no merger control/FDI regimes are inadvertently tripped) there will be commercial considerations to bear in mind. Stakebuilding can be seen as an aggressive tactic in the UK market, sets a floor on the offer price and at certain levels can also trigger a requirement for a bidder to make a mandatory offer under the Takeover Code. 

All of this is coupled with the target's obligation to provide the same diligence information to a rival bidder as it allows a first bidder, whether they are welcome or not. 

Consequently, the announcement of a bid — rather than closing the door — opens up a window of opportunity for "would-be" buyers, setting a hurdle price and timeframe against which they will be compared. Success as a second bidder then comes down to knowing when and how best to take advantage of that window and being ready and able to act quickly. 

In the competing offers we have seen so far this year, the interloper reacted with fully financed deals within a month of the first bid being announced. This requires considerable organisation and focus, particularly given that the Takeover Code requires a bidder to have "certain funds" prior to announcing an offer (with a cash confirmation from its financial advisers) — essentially requiring the bidder to have committed financing in place without the conditionality which lenders would typically expect in a non-public context. The rules also stipulate that an offer should only be made when a bidder has every reason to believe it can and will be able to implement it. 

To gain the target board's attention, a second bidder will need to deploy resources particularly efficiently if it is to present a superior offer in terms of price, speed and certainty. It will need to bring antitrust, regulatory, tax, financing and employment considerations to a conclusion rapidly, at the same time as undertaking the core valuation work, and any synergies analysis. 

At the same time, a second bidder should also recognise the strategic advantage of being able to read the market's reaction to the first bid and position itself more favourably. Understanding the market, sector and political dynamics in play, together with the likely perspective of the target board and broader stakeholders and the media, is essential to determining optimal strategy and ensuring a competitive advantage. For those who are well prepared to follow fast, however, as the statistics show, the opportunities abound.

Originally published on Thomson Reuters Regulatory Intelligence