Merchant banks and corporate acquisitions

Chia, K.G. (1982). Merchant banks and corporate acquisitions. (Unpublished Doctoral thesis, City University London)

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Original citation: Chia, K.G. (1982). Merchant banks and corporate acquisitions. (Unpublished Doctoral thesis, City University London)

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1,1 ERC _{1-1 AN1BANKSAND}

c0RP0RATEA.

_CQUISIT10NS

(Vol.

1)

.P

Survey

of the Orc; ni ; atý. or , Role, And Approach, -Is

to Contester. '. Bids

_{of' the Major}

_{Uri . -Ierchant}

_Banks

ROBERT CHLL K. G.

PhD Thesis

THE CITY UNIVERSITY

_{BUSINESS SCHOOL}

LON ; ()N

This

_Thesis

_{is Suhraittec}

_for

_{the Degree}

_of

Doctor

_{of Philosophy}

_{in Management}

_Studies

For

My Dearest

Father,

Mother,

Brothers,

vol. I)

Title

Dedication

Contents

I

List _{of Appendices} XXII

Acknowied _{e!; lents} XXIII

Declaration

XXV

XXVI Abstract

Note on Definitions X! 'XTX

Abbrevia i ions

XXXI

PART I ýPý: r1RCýi OBJECTIVES,

METHODOLOGY

0Vý, i OF LIT'ERI TURF & BID FRAMEWORK

Ie

_{RESEARCH OBJECTIVES, METHODOLOGY AND PROCEDURES}

1

ev JRVk Ü-. V lt_il: and J=

v

G!:. V r! ! ". L s co

1.1 Broad Hypotheses Drwr-n -fron Literature _and 7

Discussions _{as initial} Focus _{of Study}

1.2

_{The Concept}

_{of 4 Inter-Related}

Phases

5

(A) Phase 1: Methodology

Adopted

in the Survey

6

of Me Chant Lanker

i) _{Choice of Sample} Frame 6

ii)

iii) Pilot Study 10

iv)

Redesign

_{of Questionnaire}

to Use

10

Open-ended Questions More Fully

v) Reference to Questionnaire Structure º'ý

and Append_ ix

vi)

Access to Rc3pondonts

vii) hod _Of ve ý. L: iß: 2 _. 'LnfCrmaüio. ":

Vj -; j 4-0

TT

Survey _{of Stockbrokers}

(i) _{Choice of Sample Frame} 15

(ii)

. Design of Questionnaire 16

(iii)

_Pilot

_Study

16

(iv) _{Redesign of Questionnaire to Use Open-} 17

Ended Questions

More Fully

(v) _{Reference to Questionnaire Structure} 17

& Appendix

(vi) _{Access to Respondents 17}

(vii) _{Method of Collecting Information} in 17

interviews

(viii)

_Encoding

_{of Responses to Protect}

₈

Confidentiality

(C) Phase 3: Case Studies _{in a3} Year 18

Period

(Group I)

(D) Phase 1-: Case Studies _{i_n aa} Year 19

Period (Group ie)

1.3 _{Outline of the Stages of Research: A} 19

uniriary

(i) _{Literature Survey} 20

( i) _{Pilot Survey} 20

(iii) _{Survey of Merchant Banks} 20

(iv) _{An Analysis of 40 Case Studies} 20

(v) _{The Establishment of an Integrated} 20

Empirical Framework

1.4 _{Classification of Responses According} to 21

Frequencies _{of Expressions um iarisGd}

Comments

1.5

_Research

Constraints

_{and Ramifications}

_on

21

1.6 Secondary _{Interviews with} 10 _{Flu%rch. ant} Ba.

-'-. -

1-7 _{interviews Other ý_. eci alts} in the 23

Ci _y

1.8 _{:; e`ula. tory} Bodies

'ý F9 T akeover ui i ci o

III _.:

1.10

The Iiietnodolo-

_{y of Data Evaluation}

2%

0 List

of Reference

ýý=

2.

_{LITERATURE SURVEY}

30

2.0

Introduction

30

2.1

_Literature

_{on Merchant}

Banking

in the UK

30

2.2 _{Literature on Mergers ä. Acquisitions} 31

2.3

_Literature

_Pertaining

_{to Bidding}

trateg

_es

32

2.4

_Literature

_Pertaining

_{to Defensive}

Strategies

2.5

_Literature

_Pertaining

to Profit

Forecasts

3?

2.6

_Literature

_Pertaining

_{to General}

_Questions

₃₈

3.

_{THE CITY CODE ON TAKEOVER PRACTICE: A PERSPECTIVE}

41

ON CURRENT INS`TITUTIOTyAL _{RMIEWO K}

3O

Background

41

301 _Merchant Banks _and Other Prof _{essionals, as} 42

Financial

_Advisers

3.2

_The

_{Consideration}

44

3.3 _{Negotiation and Approach} 46

3.4

_{Formal Declaration}

_{of the Takeover Bid,}

4')

'Attempt

305 _{Tho Contents of the Offer Document} 48

3.6 _{Contesting Against an Unwelcome Did} 116

PAR II: THE MERCHANT BANKING

ý1. _{BACKGROUND AND STRUCTURE OF 'THE 30 MAJOR UK} 50

11r: RCHA: i'T BAT, % S

cý _ijf

ýn

r Jý

4.1 Establishment _{of UK i-lerchant} Banks 1C

4.2 Advantages _{of Parental} Affiliation 53

4.3

Dysfunctions

_{of Affiliation}

to Larger

₅₇

Organisations

_-

4.4 Evolution _{of Corporate} Finance _Activities 6",

Within the Merchant Banking Industry in

the UK

4.5 The Scope _{of Corporate} Financial _Activities 63

Defined

4.6

_Headship

_{of Corporate}

_Finance

Divisions

68

4.7

_Line

_{of Reporting}

68

4.8 _{Corporate Finance} . Staffing _{Che_racter. isti cs} 61

4.9

_{Team Work (Corporate}

_Advisory

_Services)

₇₁

4.1`ß

_Working

_{Relationships}

_{:: pith Clientele}

Other Professionals

4.11

_Criteria

_Adopted

_{for New Clientele}

76

4,12

_Dealing

_with

_{Anonymous C? ? ents/Tih}

_{rd Par ;y}

₇₉

4.13 _{3uwrnary/review 80}

BIDDiI4G _STS

. 4TLÜIES

5.0

_Introduction

81

5.1

_Nurturing

_{of Acquisition}

_Idea

₈₁

5.2

_Acquisition

_{Study & Evaluation}

₈₃

5.3

_Acquisition

Checklist

₈₆

5.4

Loan Facilitation

87

5.5 _{Bid Timing 89}

5.6 _{The "Sighting, Shot" Strategy a2}

5.7

Acquisition

Financing

(Terms of Considera--

Lion)

5.8 _{Determinants of Premium Pricing Grp}

(-±) Factor Influencing the r'ori-nulation _{of Bid .. C}

1, reriu m

-Ut

5. y± _{re-aid ýý,} take

5.10 Improved Offer

5.11 Enlisting the Board's (Biddee Company)

Recommendation

5.12

Accessing

Key Shareholders

_{of the Target}

Company

5.13 Documentation _{and "Draft} T'leetings"

5.14 Emphasis in-the Bid (Offer) Circulars

5.15 The Press in Takeover Situations

5.16 Determinants _{of Bid Success}

5.17 Summary/Review

6.

6.0

6.1

6.2

6.3

6.4

6.5

6.6

6.7

6.8

6.9

6.10

6.11

6z12

DEFENSIVE S`I.

'RATEGIE

I `t'1

I O'ý

'i06

Introduction

Factors

Influencing

the Formulation

_of

Defensive

Strategies

Defensive Strategies Derived from the

Literature _{of Corporate}

-Finance

Share Ownership

Pattern

& Influences

_on

Tactical

Approaches

in Defence

Choice _{of Defensive} Strategy

Line _{of Emphasis} in Defence Circulars

Sectional Interests Evaluated by Financial

Advisers Before Recommending _{a Merger}

Non-Price Determinants Influencing TAJri'

Acceptance

Profit Forecasts in _{Cone ested} Bid Si suet ions

Difficulties _{? elating to Foreca. sti. ng}

Monitoring _{of rof?} tF _ore'ca is ,

Deviant Forecasts Summar _{f: eview} 171.

122

I32

35

139

146

.. Vi -

: ý,.. Tü. _

Tub' PTS, -l' r? OTTVV'W _. (T, V. n r; ý +ý! 'ur"rarxýr, Luc ,. Br ýý r.,

RELATIG i iiIIPS 'WITH

REGULATORY BODIES

7.0

Introduction

151

7.1 Merchant Bankers' Perceptions _{of their} Role 151

in Mergers/Acquisitions

7.2

_{Degree of Involvement}

_with

Stockbrokers-in

153

the City

7.3

Reasons for Their

Distinction

_{as Merger}

.

155

Acquisition

Specialists

7.4

Involvement

_with

_{the Takeover}

Panel

157

75

Working

Relationships

_{:: pith Corporate}

Clients

153

7.6

_{Summary/Review}

159

PART ! I. I: I,, '1ERCtHA. NT BANKI G SURVE Y VERSUS

CASE ßm1,

^ T P:;

8.

_{COMPARATIVE ANALYSIS OF EM1IRICAL FINDINGS:}

₁₆₁

MERCHANT BANKING ORGANISATIONAL STRUCTURE

& BIDDING STRATEGIES

8.0

_Introduction

161

8.1

_Advantages

_{of Affiliation}

₁₆₁

8.2

_Dysfunctions

_{of Affiliation}

₁₆₂

8.3 _{Credit/Loan Facilitation 165}

8.4 _{Bid Timing Mechanism 166}

8.5 _TCS'.:

ls W. V J'ý: i tlýý' Uý411 : CAS

-8.6

Opening Premium

169

8.7 _{Pre-bid Stake in Tar, et Co. wany 172}

8.

-8 The Role & ln_}'U. ence of Media in 73

8.9

Success

"

75

8.10 _SUT-Ur

-- V I. 1. -

; J.

AUAL1SIS 01' Erir iRiC _{:L r'iitiDIUGS. i} i _{ir iSu} i _}lULiS OF _{! "iýT : ý: tiýti, `ý}

BANKERS AS TAKEOVER SPECIALISTS

9.0

Introduction

178

9.1

Defensive

Strategies

in Perspective

178

(1) _Asset Revaluation 180

(2) _{Dividend Increase} 181

(3) Profit

Forecast

182

(4) _Appeal for _Loyalty 183

(5) Placing

184

(6) _{Capital Ltecoils G: eucIion} 185

(7) Scrips

Issue/Share

Split

85

(8) Undertake

Defensive

Merger

_C)

18

(9) _{Sale of Corporate Assets -} 186

(10) Legal Action

-187

(11) Acquire

_{the Bidder Is Shares}

isle

9.2 _{Share Ownership w implications} for _{Defe : ce} . f1 r. . _;ý

(i) _{Behaviour of Public Investors Discernible} -192

in Case Studies

"

(ii) _{Behaviour Of Institutional investors} 92 r

Discernible in Case Studies

(iii) _{Nominee Holdings} 196

9.3

Assumptions

Underlying

Prof

_.t

Forecasts

_1,

Q. 4

_Monitoring

_{of Forecasts}

₂₀₀

9.5 _{Litigation Arising} from Deviant Forecasts 201

9.6

_Distinction

_{as Merger/Acquisition}

_Specialists

203

9.7 _{Involvement with the `akcovor Panel} 203

9.8 _{ýiorkinr, Relationships with Clientele} 208

9.9

_Sur;,..;

_{nary/Revs. ew}

209

PART IV " COi`tCT, USIOiNS & DERIVATION OF AN

INTEGRA, '. r'ED FR1?: I: /ORK OF i'iERGn! liiý'.

VIXI -

Page

10.

CONCLUSIONS I: ANALYSIS & SUGGESTED REFORMS OF

₂₁₂

SALIENT CURRENT BID ISSUES/PROBLEMS DISCERNED

IN THE EMPIRICAL FINDINGS FROM THE CASE STUDIES

. 10.0

Introduction

212

10.1

Unidentified

Buyers,.

"Concert

_Party,

_{" and}

₂₁₂

Nominees

@@ Reform Measures

_21.4

10.2

Market

Raids & "Quick-Fire"

(Rapid)

_Takeovers

_21,8

@C Reform Measures

_21,8

10.3

_{Rise of Institutional}

_{Power and Implications}

₂₂₁

for Future

Takeover

Bids

(A) _{Institutions Having Long Term Perspective 223}

(B) _{Institutions Having Short Term Perspective 225,}

(0) _{Significance of the Decline of the Private 226}

Investor

@@

. Reform Measures

229

10.4 _{Profit Forecasts} (Trend _{towards Litigation) 230}

@@ Reform _{Measures 233}

10.5

_Conflicts

_{of Interest}

₂₃₅

(1) Corporate

_{Finance/Investment}

_Management

_21.5

(2) Fiduciary

_Duties

_23,5

(3) Merchant

Banking

_Merger

₂₃₆

(4) Parent

_{Bank & Merchant}

_Banking

_Offshoot

_G

@@ Reform Measures

_23.6

. 10.6

Self-Regulation

in the 1980s:

Appraisal

of

239

Current

_{Institutional}

_System

10.7 _{The Contemporary Merger Policy & Ramifica- 244,3}

tions for _{Future Contested Bids}

10.8

_{Summary/Review}

246

11..

.

CONCLUSIONS II:

SU11M1MARY

AND EVALUATION OIL

2.48

HYPOTHESES & EMPIRICAL, RESEARCH FINDINGS

f

-Ix-

. 1

Page

11.1 Summary _{of Research} Hypotheses/Observations _{ý. 8}

11.2 Bidding Strategies in Retrospect 255

(a)

_Objectives

_{of the Takeover}

_Exercise

(b)

_Target

_{Identification}

_{and Market}

Operation

(c) _{In-built Flexibility Mechanism}

(d)

_{Bid Timing}

_{and Financial}

_"Packaging"

(e)

_Acquisition

_Premium

(f)

_{Opportunistic}

_Bid-

(g)

_"Quick-Fire"

_Takeover

_Technique

_Supple-

mented by Market

Raid

(h)

_Incremental

_{Bid Approach}

(i)

_Legal

_{Device & Conventional}

_{Bid Approach}

(j)

_{Unconventional}

(Creative)

_Takeover

i

Approach

(k)

_{Controversial}

_Takeover

_Technique

11: 3 _{Defensive Strategies in Retrospect}

(a) _{Defensive Response to a Hostile Bid}

(b) _{Objectives of the Defensive Exercise}

(c) _{Voting Influence & Implications for}

Defence

_..,

(d)

_Defence

_Designed

_Against

_Acquisitive

Bidder

.

(e) _{The "White Knight" Defensive Strategy}

(f) _{Institutional Defence-.}

(g)

_Lobbying

_for

_{a Monopolies}

_Commission

Reference

_.

11.4 _{Summary and Conclusions of the Study of}

Merchant _{Banks and Corporate Advisory}

Services-Related _{to Contested Bids}

X

12.

POSTSCRIPT

271

12.0

Introduction

₂₇₁

12.1 Merchant Banking in the 1980s: Trend Towards 271

Conglomeracy

12.2 Implications _{of Current} Stockbrokers'Diversi- ₂₇₄

fication

Efforts

into

Corporate

Financial

Services

12.3 Competition Emanating from Merchant Banking ₂₇₇

Operations

_{of UK Clearers}

12.4

-Competition

from American

'Merchant

Banks

₂₈₀

12.5

Consortium

Banking

& Ramifications

for Fee

₂₈₄

Earning-Services

_{of UK Merchant}

Banks

12.6

The Level

_{of Merger/Acquisition}

Activity

in

₂₈₆

the UK

12.7

Transplanting

_{Merger and Acquisition}

_2g6

Expertise

Abroad

(1).

_United

_States

_{of America}

_X89

(2)

_Middle-East

_{? 92}

(3) _{Asia/Pacific Region 293}

PART V: SUPPORTIVE CASE STUDIES (1979-81)_

APPENDIX A: GROUP 1 CASE STUDIES (30)

₂₉₈

Intröduction

(1) _{Burns Philp/Hoffnung 299}

(2) _{British Tyre & Rubber/Bestobell 301}

(3) _{Cambridge Royalty Corp. /Cambridge Petroleum 304}

(4) _{Cowie/Ewer 306}

(5) _{Dalgety/Spillers 309}

(6) _{David Dixons/Montfort 313}

` (? ) Francis _{Industries/Evened 316}

- x1 -

Pie

(9) GEC/Averys

3,21

(10) GEC/Racal/Decca

324

(11) Hanson Trust/Caparo/Central

Manufacturing

&

3,27

Trading

(12) Hanson Trust/Lindustries

330

"

(13) Harris. Queensway/Hardy

333

(14) Hiram Walker/Highland

Distilleries

335

'(15) Hunting Gibson/Turnbull Scott/Stag Line

3.38

(16) Lonhro/SUITS

_-

340

(17) Marsh McLennan/C. T. Bowring

344

(18) Mining

Supplies/Laurence

Scott

3! t6

(19) Provincial

Laundries/St.

George

348

"(20)

Redman Heenan International/;

ellman

Engineer-

350

ing Corporation

(21) Sime Darby/Guthrie

Corporation

353

(22) _{St. Martins Industri. al (KI0)/Proprietor of}

₃₅₇

Hay's

Wharf

(23) _{Standard Chartered Bank/Hong Kong & Shanghai} 359

Banking

Corp: /Royal

Bank of Scotland

(24) _{Starwest/Allied London Property/Gough Cooper} 363

(25) Starwest/Hawthorn

Leslie

365

(26) Transport

Development

Group/Unigate/Giltspur

367

(27) _{T. W. Ward/Tiin_nel Holdings} 369

(28) Waring & Gillow/Maples

373

(29) Wereidhave/Olympia

& York/English

Property

₃₇₆

Corp.

(30) Yule Catto/Revertex

381

APPENDIX B: GROUP 2 CASE STUDIES (1C) 383

Introduction

.

383

(1) Trust House Forte/The

Savoy Group

384'

(2) Dunhill-Logida/Asprey

& Company

388

C3} Gasco/St. Piran

391

XII

Page

(4) Churchbury/Law

_Land

398

(5) BICC/Higgs

& Hill

399

(6)

: kvana/Robertson

Food

401

(7) News International/William

_Collins

40

4

(8) Berisford/British

_{Sugar Corporation/Rank}

406

. Hovis "NcDougall

(9) _{Lonhro/House of Fraser} 408

(10) A. ÄH Ltd/Kangra

International/Renwick

_Group

41.3

o APPENDIX C

4: 16

BIBL IOGRAPHY

443

XIII

bi _{; L-1- o.}

Table No. Title Pie

1.0

The Top 20 Merchant

Bank Ränking

_{as Financial}

8

Advisers by 700 UK Companies

1.1 The Comparison _{of Merchant} Banking Category 8

Against its Principal Professional Affilia-

tion

1.2 The Pilot Survey Designated by Banking Type, 10

Number & Professional Status _{of Respondents}

1.3

The

_y

_r

11,1e-chant

n! '.

Involved

in

14

This Study & the Professional Status _{of the}

Respondents

Interviewed

1.4

_Professional

Status

_{of Respondents}

Intervie..

_{ed . 1.6}

from _{Both the Merchant} Banking & ; Stockbroking

Surveys

1.5

_{Sample and Population}

Sizes

_+.;

w Contested

Bids

1

1.6 Other Financial _advisers Interviewed C 1_ass: 1 f led 24

Frofessioral Status _{and ä ember}

by Business _,

1.7

Total

_{Number, Types of Institutions,}

I rof

nals & Number of Respondents Interviewed

1.8

_{Types of Self-Regulatory}

(Quasi-Judicial),

₂₄

Pr ý" Status

of

Interviewed

4.0

_{Date of Establishment}

_{and the Merchant}

Banking

51

Category _{of the} 30 UK Merchant Banks Involved

in this _Survey

4.1 _{Establishment of Merchant} Banks in the Sariaple 51

Categorised

by Century

4.2 _Advantages (Real/Potential) Perceived by ₅₄

Independent _merchant Bens Retarding _ýF C i? ia-

to Larger

Grouping

_Analysed

by Activity

Sampling

ing Formula

40

3

_{do _-}

'; Su. bsi. r«. ax'y Merchant

_Ks)

5

4.4 _{s dv ný_'-c`'? s (Eloal.} /ot¬niial) _{; 'er!. "ei1ic} b..,

Inde_:: _{i ent ; ercý. _it}

VTtt

.. ' _{fY-V .-}

r1ýa}e lip, i:

_ G1

Sampling

Formula

4.5

_{- do -}

(Subsidiary

Merchant

Banks)

60

4.6

Titles

Assigned

to Corporate

Finance

Units

_and

62

Dates _{of Their} Creation _{of E:} he

1710 UK t'lerchaint Banks

4.7 Titles Assigned _{to the Corporate Finance Units 62}

of the 10 Stockbroking

Firms Participating

in

this _Survey

4.8

The Corporate

_Finance

_{Functions/Activities}

_of

₆₆

the 30 UK Merchant

Banks

4.9 Corporate _{Finance Functions Performed by the 6; ý}

10 Major UK Stockbroking _Firms

4.10 _{Headship Titles of Merchant Banks & Stockbrokers F8}

4.11

_Reporting

_{System of Corporate}

_Finance

_Divisions

₆₅

of UK 14erchant Banks

4.12

_Staffing

_{Characteristics}

_{of Corporate}

_Finance

₇₀

Divisions _{of Leading UUK Merchant Banks and , `. toe '}

broking

_Firms

4.13

_{Organisational}

_Approach

_{to Corporate}

_Advisor,?

_?2

Activities

(Bid Situations)

_Adopted

_{by UK}

Merchant Banks _{and Stockbrokers}

4. '14

Profile

_{of Professionals}

_Interacting

_with

_tier-

₇₅

chant Banks During Bids

4.15 _{Working Relationshin of Stockbrokers with leer-}

75

chant Banks in General Corporate Financial

Advisory

_Services

_{& Specialist}

_{Merger and}

Acquisition Transactions

4.16 _{Screening Process and* Criteria for the Acceptance 77}

of Acquisition Mandate Adopted by UK Merchant

Banks Regarding

_{New Clients}

4.17

-- do - (Stockbro'kin _UP Fir: 11s) 78

5.0

_Sources

_{of Acquisition}

_{ldeý, a}

₈₁

5*

by the 50 UK. Merchant Ban!. -. s Participai; _{in g; in g=irl}

Study 5.2

- XV -

ITI

NO- Table

5.3.

Ownership

_{of Pre-Acquisition}

Checklist

_of

86

the 30 UK Merchant Banks _{Categorised by}

Groupings

5.111"

Timing

Consideration

_{as an Integral}

_Part

_of

191

Bidding Strategy

5.5 Determinants _{and Application of the} "Sighting 192

Shot" Strategy in Aggressive _Takeovers

5.6 Determinants _{of Terms of Consideration Evalua-}

tedby _{Merchant Banks in Bid Pricing}

5.7.

Factors

Influencing

_{Premium Pricing}

'i00

5.8 Views _{of Merchant Bankers Regarding the Level 102}

of Premium Pricing

Analysed

by Activity

Sampling

Formula

(Independent

_Merchant

_Banks)

5.9 _{- do -} (Affiliated _{Merchant Banks) 102}

5. i0

_{Tac tica?}

_{Considerations}

_Related

_{to Pro--Bid.}

103

Share

. Acquisition Strategy Evaluated by UK

Merchant

_Banks

5.11' _{Factors- Influencing the Merchant Bankers' 105}

Decision to Improve their _{Bid Price}

5.12 _{Views of Merchant Bankers Regarding the Soli-- 107}

citation _{of the Biddee's} Boer(.? Approval Prior

to the Formal Takeover _Bid

5.13

_{Views of Independent}

_Merchant

_{Banks Regarding}

₁₀₉

Accessing

Key Shareholders

Before

_{a Bid}

5.14 _{- do - (Affiliated Merchant Banks) log}

5.15 _{Emphasis in Offer Documents and Its Determin-}

. 12,

ants

5.16

_{1,4'edi a Sources Used by UK Financial}

_Advisers

_ß'i6

During Mergers/Acquisitions

5.17

Determinants

_{of Success in Contested}

_{Bids as}

118

Perceived _{by Merchant Banking Respondents}

6.0 _{Factors Influencing the UK Merchant Bankers'}

ý

Fcr7. u1 ý; ii on c. 'e ensi va ,,. _.ýa üe iE;: ti to a

-- XVI -

Tft. I)1 t AO. l: L. ir.

6.1 _{Perceptions of UK Merchant Bankers & Stock--}

brokers _Regarding the Functional Applicabi-

li ty of Some Common Defensive Pleasures

Advocated by Literature _{of Corporate} Finance

6.2 _{Other Defensive Measures Advocated by the}

Merchant Bankers _Selected. for- this Study

6.3 _{Share Composition and Its Influence on Defen-}

sive Thinking & Tactical Moves of Merchant

Bankers

6.4 _{Estimated Holdings of New Yorrk Stock Ex-}

change (NYSE) Stocks,

19'i9--75

6.5 _{Facto?: s Bearing Upon the Merchant Banks'}

Choice _{of Defensive} Strategy

6.6

_Salient

_Information

_Emphasised

in Defence

Circulars

_b3

_{the 3..}

_{30 L}

LUD+aa

6.7

_interests

_Evaluated

_{by tie chant Banks Before}

Recommending

Acceptance

_{of a Bid}

6.8 _{Non-Price Determinants Evaluated by UK}

111. chant Ban'"iO. _{b B`e w. e} ieröer- Racom, _{üendat7. Gn}

6.9 _{Perceived Accruements of Profit Forecasts to}

Shareholders in Contested Bid Situa.. tions

6.10 _{Difficulties Related to Profit Forecasts as}

Perceived by the Merchant Bankers

6.11 _{Main Problems Perceived by Merchant Banks in}

Conjun+c lion _{with Profit} Forecasts

6.12 _Pe cei _{: Ted Liabilities & Implications arising}

from _{Deviant Profit Forecasts}

7.0 _{Merchant Bankers' Peirce pions of Their Role}

as Merger/Acgwis iion Specialists

7.1 _{Perceptions of Stockbrokers Reg riling} Their

'Involvement _with Merchant Banks

_n Both CiÜr- porate 1ýin8nc

.. a]. Advisor Services C' Comas ad. '; _ci Tr',. nsaetions I G-

126

129

135

138

140

146

14"?

151

154

_. Y'Ty T-

e ý: `:::

7.2 Reasons Given by UK Merchant Banks for Their ₁₅₅

Distinction _{as Merger/Acquisition} Specialists

8.0 _Bids Effected With _{and Without} Credit (Loan) 165

Facility

& Their

Outcome

8.1

Financing

_Arrangement

_{on July}

1981 for Major

166

American Corporations Embarking _{on Takeovers}

8.2 _{The Timing Mechanism of the 30 Case Studies 16}

8.3 _{Mergers and Acquisitions of industrial and -170}

Commercial

Companies In UK (1969-80)

8.4- Characteristics _{of Acquis i. tion} Financing

₁₇₀

Found in Case Studies

8.5

_Level

_{of Premium Adopted}

_{by Bidders}

in the

171

Case Studies

_{and Failure}

Rate

8.6

_{Opening Pre, nium Analysed}

by Chi-Square

Test

171

8.7

_Pre-bid

_{Characteristics}

_{of the 30 Cass Studies}

172

and Its

Failure

Rate

8.8

Pre-bid

_{Stake Analysed}

by Chi--Squai c To: -"t

_{"' 72}

8.9 _Compärative Cross-Section _{of Leading} Press

Comments on 6 Contested

Bids (1979-8.1)

8.10

Comparison

_{of Basic}

Determinants

Influencing

175

Success

_{Between Those of the Merchant. Banking}

Survey

_{& Those of the Case Studies}

(197

9.0 Correlated Data _{of the 11 Defensive} Strategies 179

9.1 _{Asset Revaluation and Implications} for Outcome 181

of Defence

9.2

Implications

_{of Dividend}

Increase

for. Outcome

182

of Defence

9.3 Profit Forecasts _{and implications} for Outcome 182

of Defence

9.4 The 4 Takeover Bids from the Case Studies 1f'8

Referred

to the Monopolies

Commission

9.5 _Shareholding (Biddee _{Com anies) Ch'eracteri sed} 191

by Ownership `T`ype, _{Do iinant} Holder & Siil_plica--

tions

for Defence

_{Outco :e}

- XVIII -

Table No.

Title

PaEe

9.6

Tactical

Implications

_of-Ownership

_Pattern

191

(Biddee)

_{On Defence' Outcome Analysed}

_{by Chi-}

Square Test,

_

9.7. _{Willingness to Follow} Directors'Advice _About 193

Bids

9.8

Estimated

Ownership

of UK Registered

Compa-

₁₉₃

nies (1971-77)

9.9.

_{The KIO (Kuwaiti}

_Investment

_Office)

_Stakes

197

in UK Companies

9.10 _{Nominee Holdings of Shares Assumed to be 198}

Related

to the Decca's

Board

9.11 _{Assumptions Underlying 40 Profit Forecasts} 199

Related

to Mergers

& Acquisitions

1979-81

9.12

_Accuracy

_{of Profit}

_Forecasts

_{by Defending}

₂₀₀

Companies Effected

during

_Hostile

_Bids'

9.13

_Contested

_{Bid Transactions}

_candled

_{by the}

204

Individual

Merchant

Bank Discerned

in the

Case Studies

9.14

_-

do

_-

(Categorised

_{by Affiliated}

204

Status)

9.15

_Total

_Contested

_{Bid Transactions}

_Handled

_by

₂₀₄

the Different Types _{of Financial} Advisers

Discerned

in the Case Studies

_,

9.16 _{Nature of the Takeover Panel's Involvement} 206

with

Financial

Advisers

During

Contested

Bids (Group 1 Case Studies)

9.17

_{- do -}

_{(Group 2 Case Studies)}

206

10.1

_Counter

_{Measures Taken by Some British}

_Com-

2.17

panies

to Disenfranchise

Nominee Holdings

10.2

_Market

_{Raids-Executed}

_{by Some Bidders}

21.9

Constituting

_{the Case Studies}

10.3

_{1981 Survey of UK Shareholding}

_Conducted

_by

the London Stock Exchange'(LSE)

16.4 _{Portfolio Holdings of Britannic Assurance} 2.2+

Table No. 10.5 10.6 10.7

10.8

10.9

10.10

.

10.11

11.0

11.2

.

12.0

12.1

12.2

12.3

12.4

. -'XIX

Title

Page

Posture

Adopted

by Britannic

Assurance

225

Regarding

_its

_Portfolios

_During

_Takeovers

Institutional

Disposal

_{of Large Blocks}

_of

226

Shares to Bidders

Prior

to Actual

Takeovers.

Profit

Forecasts

Monitored

by the Takeover

2x1

Panel

(1976-80)

Possible Litigation Threatened by Bidders 2ý2

Against

Financial

Advisers

Connected

_with

the _{Issue of Deviant} Profit Forecasts

Out-of-Court

Settlements

Paid by Some'Major

2.2

UK Accounting

Firms in Conjunction

_with

Professional

Negligence

Lawsuits

Comparative

Institutional

Frarawork

Pres-

.

241

cribing

Mergers/Acquisitions

in the UK and-

the USA

Monopolies

& Mergers

Commission

References

₂₄₄

(1965-81):

_{Master List}

Opportunistic

Bids and Discount

to Net Asset

₂₂₅₉

Value Related

to the-Case

Studies-

Success Rate of an Acquisitive

UK Company

₂₆₆

(Hanson Trust)

Case Studies Referred to the Monopolies 268

Commission,

'their

Verdict

& Subsequent

Out-

come

. Conglomerate

Financial

Services

Mergers

in

272

.

"Wall Street"

USA (1979-81)

Takeovers

& Potential.

Mergers

in the'UK

₂₇₂

Merchant

Banking

Sector

(1979-81)

- do - (Clearing

Banking

Sector)

272

UK-Clearers

_{and British-Controlled}

Interna-

2? '7

tional

Banks & their

Merchant

Banking

Operations

Merchant

Banking

Capabilities

Arising

from

278

the Potential

Acquisition

_{of the Royal Bank}

of Scotland by the Hong Kong & Shanghai Bank

- xx -

Table No.

Title

Pa e

12.5 _{Number of Major} Foreign Banks Represented in' 281

Leading

Offshore

Banking

Cdntres

_-

12.6

Number-of

Foreign

Banks Directly

Represented

281

In London & New York

12.7

_Leading

_{UK Consortium*Banks}

& their

Financial

2B5

Performance

12.8 _{Acquisition Analysis by Main Activity,} Number 287

& Asset Size in the UK in 1979

12.9

_Analysis

_{by Size of Assets}

_{of Target}

Company

287

(1979)

12.10 _{Total Acquisition-in} the UK'in 1979 Analysed

₂₈₇

by Economic _Activity

.

12.11

_Bid/Merger

_Activity.

in the. UK Spanning

the

1970-81

_Period

12.12

_{Large Mergers}

.&

Acquisitions

Effected

in the.

_28$

UK, 1980

12.13

_Selective

_{UK Acquisitions}

_{of US Corporations}

200

1979-81

'

12.14

Selective

Merger & Bid Attempts

Effected

by

29'0

US Corporations

in the UK, 1979-81

12.15 Corpofate _{Advisory Fees Charged' by Some Major} 29-2

"Wall Street"

Investment

Banks for

C.

_onglo-

merate Takeover Transactions

12.16.

_Advisory

Fees Charged by ICFC on Merger

.

29'2

Transactions

12.17 _{UK Investments by Investors} from Hong Kong,

- 29'5

Malaysia

_{and Singapore}

(1979-81)

12.18

_Comparative

_Operations.

_{of UK Wholly-Owned}

296

or Affiliated-Merchant

Banks in 4 Major

Asia/Pacific Financial Centres

i

_'

- xXI --

List

_{of Diagrams}

Diagram No. Title Page

. 11.0 The Concept of the Four Inter-Related 6

Phases

9.0. _Növel Defensive _{Ploy Undertaken} by 189

'Rank Hovis McDougall to Neutralise

"

British

Sugar Corporation's

Takeover

Design

11.0

Highly

Controversial

Triangular

Bid

₂₀₂

Technique

_{with the Original}

Bidder-

Attempting

to Acquire

the Rival

Contender

- TUT -

4-IJ tit. _{tl.. J". _! ý:: -,}

11ppendix Table

No.

Title Fie

C. 1 Questionnaire (Merchant Barkin)

C. 2

Questionnaire

(Stockbrokers)

0.3

Merchant

Bankers'Bid

inclination:

"One

Shot Offer" Versus the "Sightin _Shot

Offer"

C. 4 Specimens _{of Bid Documentation}

4.1. _{Guthrie Corporation}

4.2.

_British

_{Sugar Cozýný.;}

_ration

4.3.

_{Royal Bank of. scotiand}

4t4.

_{T. S'I. 'Ward}

G. 5 _{Hig niiý;} hts _{of he jU Oase Studies}

o. 6

_{Fin.. nci l}

_Advisers

_{Gonr_ected with the}

Group 2 Case. Studios

0-7 Dawn Raids &t neir

. Subsoquont Develop-

rl, ents

CL8

_Bidder

_{and Biddee Companies}

Founding Family/Entrepreneurial Lnfluen-

ces on their Boards as -Reflected in

the Case Studies

0.9

_{Co. nparative'}

_{_nal sis of International}

Banks Ranked According to Asset Size

: '1980-51

C. 10 Merger ! rend in the USA

C. 1'1

_Acquisitions

Handled

_{By a Leading;}

American Investment Bank, Credit _{Suil: se}

Fi rs t Heston in '1981

44

4'

.

36

.1c

Lr?

_'9

44 2

i48

/1-9

450

4.51

452

-- `: N'TTT _- T /ýH. .r ts +-rtTTn Li li iýlll+\)Ycl/iýýi _U iýý. _l

i would like _{to express my deep gratitude}

to Prof. Peter H. Grinyer, Esmee Fairbairn Professor _{of Finance}

and Investment, my research supervisor and mentor, who has

patiently and skilfully guided me from the embryonic stage

to the final fruition _{of this} doctoral. _study. His _encou-

ragement, far-sightedness and challenge inspired and sustain-

ed my enthusiasm in what is to many, a very difficult area

of research.

This dissertation _{would not have been pos-}

sible without the assistance of the numerous leading _authori-

ties

.; professionals and experts of the City. Tile waratth . 3.:? d

wit of the irerchaati bankers; international banikers; k'"ýJt^ýihio

kers s acknowledged

takeover

_specialists,

_corporate

_{la: "ry ry}

acccountant s and very -onion ot'. f ic=ýa _{D. of} the various s at; u-

toxy _{anct seit'-ireL; ulatory bodies who shared their knowledge}

with _{me was particu? arº_y, valu? edo} For reasons _{of cons: i d_en-: -}

tiaiity, _{these participants must remain anonymous, but i owe}

them a great. debto

I wish to _{record my thanks} to _{the various}

staff _{members of} the Business School, _especially Prof. John

Treasure (ex-Dean), _{Mr. Philip Davis (Director of Post E:: pe-}

rience Courses), Mr. D. G. Hanson (Visiting Fellos,, CUBS) _and

Mr. Nicholas _Stacey (Chairman, _{Chesham) who very kindly assis-}

ted _{me with access to the multitude of professionals in the}

City. _{Additionally, I have also benefited from the contri-}

butions- _{;; nd comments of Frof. Clive Schmitthoff, Dr. Derek}

Owles, _{ilr. Robert Grant, and am especially indebted to iir. S. H.}

Lee, _{Miss Sandra , young Chee and Mrs. Dianne Shafruddin. I am}

also _{very. grateful} to _{iýir. Leslie} Baldwin, Librarian _at City

University _{Business School Libr-ar_; and his}

s , a_'f , `1iz, 'a; l

Claire, _{Jill and Sylvia who der. onstrated awui '? Cýl e üN __: lýýrs}

,: ath T'= r is to :yJ. n sa t. i. iibb1 tt or s, IC; ci. _{_} 1... _.'

W XXTV -

Finally, _{i would like to pay tribute to}

my parents, brothers and sisters for their patience, finan-

cial support and encouragement that sustained me through

--r c-

DECLARATION

I grant powers _{of discretion} to the

University _{Librarian to allow this thesis}

(Volume _{I only) to be copied in whole or i::}

part without further _reference to me. Th

.3

permission _{covers only sni. e copies made for}

study _{pug. poses, subject} to n. ormal _conditions

of acknowledgement:.

- XýM ---

A 13 S7RAC1

The aim of this dissertation is to provide

a comprehensive analysis of how British merchant banks organ--

i se and approach contested bids ; ithin the institutional

framework

_{of the City.}

To this _{end., a number of exploratory} hypo-

theses _{were derived} from _{a pilot study with} five _merchant

banks in the City _{as well as discussions with} the project-

super: Tisor. Interviewe were the carried out w i"- 10 i eadin ;

UK mcrchor - banks belonging to either the Acceptin or Issue n

houses _{associations regarding} their _{role, organisational strnc"--}

ture, _approaches to bidding _{and defensive} issues _related t0

contested b: ýds. The main perceptions and empirical i'i Y. d _{. ngs.}

from this _{major survey are then compared with results o}

analysis of 30 c Gso studies spanning the 1979-81 pe: ci _{i (. skip. -}

ported by _anal sý.. s of another 10 cases with respect to some

issues)and _{the results are then} discussed _{and analysed} in

chapters 8 and 9. _. To obtain _{an overview:} of how self-

regulation

_prescribos

bid behaviour

_{and practices,}

interviews

were also held with various

City

bodies.

Volume _{1 of this} dissertation is divided

into _{5 parts. Part i outlines the research objectives, me-}

thodology _{and literature survey. Part II} then _examines the

results _{of a survey of opinion of merchant} bankers. In Part

III, _{main results of the literature survey and merchant} bank--

ing _{field work are compared with evidence derived}

. from the

case studies. Important research findings _pertaining to

organisational _{structure of leading} UK merchant banks,

approaches to strategies _{and related} issues _{are then} identi-

fied _{and highli}

, heed. Contemporary takeover issues which

became apparent during this _{research project are then analysed}

an _{, i, ssib?. e : ý: ý'crms ý. n estýd} (Pa,:. L The _{..:: ýý. section}

i

, e, 'art V considers sc_::, current- trend; in

or,

XXVlI

ai: _{eo'i PI'S in} the 1980s. In the discussion, details of 'bc)4I

the survey of merchant banking and tho 40 case studies are

used to illustrate the main trends.

Volume 2, which is _not to _{be generally}

available to readers gives a cross section of'transcripts of

the interviews held _{with more} than 90 merchent bankers, _stock-

brokers, takeover _specialists, American investment bankers,

merchant banking analysts, authors, foreign wer_ chant bankers,

officials of self-regulatory bodies as well as relevant

financial _{and non-financial} data _of the _merchant banks inter-

viewed during this survey,

Findings _{of this study are numerous and.}

it _{has d er_iunstrated} the fact that _{UK merchant} banks _approach-

ed their takeover assignments through team work ith a mi nirn--

mum of 2, a favoured norm of 3 and the maximum team size is

dependent _{on the size,} time factor _{and complexity of the}

transaction itself. _{Their approach to contested} bids _which

are invariably multi-disciplinary _{and complicated} should

not be viewed purely from the financial perspective alone.

In both bidding _{and defending capacities, the merchant} týari-

hers _{subscribe to the hypotheses that while there are general}

financial _{and non-financial principles guiding their approa-}

ches, flexibility _{and creativity are essential.} Although

the bidder _{has more control over timing in 6pringing the}

takeover _{Did, however, the findings of this survey have}

shown that in a tair _{n. umber_ of " cases,} this factor _{[nay not}

always favour the buyer because _{of the emergence of rival}

bidders. _{*Moreover . timing is but one element of a bidding/}

offensive _strategy.

In essence $ the defensive posture is

necessarily

_{a response}

_appropriate

_to

_{the offensive}

_{st. - ate`ry_}

The share o nershi_p

structure

of the defending

co: lapafl plays

a crucial _role in the final _{outcome of the bids uanc: L Eliv}

the :; erchant; banks _perceive that, it is relatively _easier to

des end 'a, client when '. her: e aý, e no institutional Ihoi dens _I, i. ez

, st

-s

; ýr

ý, ý c . *. --

when _n he _ownership ? _{spread s'mc r} the

- xviII -

are thought to be more loyal to their boards. This is nar-

ticul. arly important,

for

the

an appeal to shareholders' loyalty. This is but one aspect

of defensive strategies for, although the literature of cor-

porate finance tends to dwell on. only a few defensive strafe

gies, this st-udy'finds that their range is wide.

Another import-ant finding _{was the fact}

that _{UK : teckbrokers} (as agents) _{work very closely with} the

merchant banks ('as principals) in advising on contested bids.

The former _{are normally consulted} for their _{market expertise.}

One of the leading stockbroking firms interviewed served 8

of the '!? _. LC (Accepting Houses Committee) _members. Owing

to this

_special

_relationship

_{between these two types}

_{of IL.}

_{J_,.}

_{Ian_}

cial

institutions

_{and possibly}

their

lack

_{of financial}

_power

comparable

to that

_{of the merchant}

banks,

the stockbrokers

är e

_{genera_lýr}

_constrained

in takeover

_situations.

_However,

_with

_{the impending;}

_struo,

tural _changes ?n _{the sto kb oking 'ß us ý. ness in the mi}

. A980 _, there _{is a possiU äit: y that}

. of hei. ' the merchant bank. or f tcc: C

broking

firm

_assuming

_{dual capacity,}

Finally, _{UK merchant} banks _{in the 119803}

will be characterised by a trend towards _{congiomeracy and the}

development _{of fee-based} international _merchant banking _acti-

vities _{especial:! y in the} USA and. the Asia/Pacific _{Yreg: ions} in

view of the constriction _{and competition} in domestic corpor-

r

I AT

This _{study endeavours} to knit together

two quite distinct but related components viz., merchant bank-

ing _{and corporate} acquisitions. From the literature survey

and wide reading on this subject, it became clear that both

terns _{are rather} ambiguous and they generally give rise to

confusioll. Thus, before proceeding further, it is" cr it i.: ß. 1.1 r Ü

important to clarify both terms _{as used in the} context of this

study.

Of the two terms _{mentioned, ' uioxých t ai}

banking' is the _more i iimrecise. The late Sit Edward Reid

cautioned _against taking a purist approach to defining its

meaning because the tern, "'merchant banking' s sometimes _-app--

lied to banks _{who are not merchants, sometimes to merchants}

who arä be:, -1-1. _{s and sc'mmmetimes f"c; :, ou es who are neither}

c3oc s llc);

pretend to prbffer'äny precise definition to an age-old enigma

but rather, attempts to delineate the criteria for the se? ec--

tion _{of merchant banks to represent the population}

_sample,

The criteria _{cie. iineating} the term, 3 merchant bank' in the _con-

text _{of-this study are:}

1) The merchant bank must be in the UK,

2) The merchant

bank must be based in London,

3) It must either

belong

to the Accepting

Houses

Committee

_{or she Issuing}

_{souses ý'ý sociation,}

_and

finally,

4) It must have a corporate finance division deal-

ing with

f

_advisory

including

_mergers

_{and acquisitions.}

The term, 'rtakeOver,

u is ire

_{tz nii}

sed in _{vo''^v äi,:. '_ýý"':.. ý. i : ri v: ä ýý.:;} li _and iiac: _ltlisi

liion" Ln this

Si-?

_- Ed; ar i :: 'eid. "T. he =', cle of : ion char_ gin'-. s

'ý.:.. _i _.. o

It