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Commercial Awareness: The Fortnightly Round-Up (w/b 5th June)

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About The Author

Jack Turner (Commercial Awareness Guru)

Jack is a law graduate from the University of Manchester and is currently working for as an analyst for a 'Big 4' accountancy firm. He has an interest in current affairs, business and commercial law, while also being a talented and passionate musician.

This article is part of the 'Commercial Awareness Fortnightly Round-Up' series, edited by Jack Turner.

Every two weeks, Keep Calm Talk Law will bring you an overview of main commercial stories that have occurred. Detailing the main players involved, the interesting and salient facts, and the main points of discussion that arise from each story, this round-up is intended to be vital tool for developing that commercial knowledge and awareness demanded by the country’s top law firms.

Other articles from this series are listed at the end of this article.

Akzo Nobel – PPG Saga

PPG Industries, a global manufacturer of paints, coatings, speciality materials, and fibreglass, headquartered in the US, has been attempting to acquire Dutch paints and coatings maker, Akzo Nobel. The combination would have created a market leader in the global paints and coatings market. However, on 1 June PPG walked away from the deal after over three months of almost relentless pressure on Akzo Nobel to reach an agreement. This gives us an opportunity to break the story down, examine why the deal fell through, and think about what this might mean for law firms and their clients.

When Ton Büchner (CEO of Akzo Nobel) sat down with Michael McGarry (Chairman and CEO of PPG) on 2 March he probably didn’t anticipate that over the next three months he would face such a fierce challenge to his company’s centuries-long European heritage. Mr McGarry left the meeting having offered €20.9bn in cash and stock to acquire Akzo. On 8 March he received his first rejection with Mr Büchner contending that the bid substantially undervalued the company and contained significant risks and uncertainties. Given that this deal was a major consolidation within the paints and coatings market, it was likely to come under close scrutiny from the competition and antitrust authorities. Similarly, the first bid came just a week before the Dutch election and nationalist sentiment within the Netherlands was strong - politicians moved quickly to criticise the deal in an attempt to score political points ahead of polling day.

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For PPG this deal was about creating scale; combining resources to produce more products on a larger scale at a discounted price. It would also allow PPG to offer a broader line of products to a more diverse customer base. PPG believed there was a strong strategic rationale behind this deal and were not prepared to walk away yet. Undeterred by the first rejection, PPG made a second offer of €22.4bn on 20 March. It took just two days for Akzo to reject this offer. Again Mr Büchner claimed that the bid still undervalued the company and that there were still uncertainties and risks involved for stakeholders. This time he also added that there was a culture gap between the two companies and that the deal would lead to significant job cuts.

Navigating a takeover offer is a balancing act. Akzo’s board had to think about the interests of their employees who could stand to lose their jobs, the interests of their customers who could see products and prices change, the interests of shareholders who could receive a large pay-out as well as a stake in the combined company, and their own interests as they could also lose their jobs or see their roles change. But with such swift and obstinate rejection of two offers in three weeks some shareholders believed that the board were not taking their interests into account. Investors representing almost 25% of Akzo Nobel’s share capital urged the Dutch group to engage with PPG and to be open to talks to properly assess the strategic and financial merit of the deal. Shareholder relationships strained further as Elliott Advisors, one of the board’s most vocal opponents, requested a special shareholder meeting to remove Akzo’s chairman, Antony Burgmans, in an attempt to force the company into takeover talks. The request was dismissed for having no legal basis.

When the third, and final, bid of €26.9bn came from PPG on 24 April, Akzo must have been wary that being too quick and stubborn in their rejection of the offer would agitate shareholders even further. They responded to the bid diplomatically by saying that “in accordance with its fiduciary duties and acting under the Dutch governance code the Board of Management and Supervisory Board of AkzoNobel will carefully review and consider this proposal.” However, on 8 May, Akzo rejected PPG’s advance once again. 

Elliott Advisors took legal action against Antony Burgmans on 9 May. They filed a lawsuit with Amsterdam’s Enterprise Chamber to ask a judge to order an extraordinary meeting of shareholders in order to debate the dismissal of the chairman. They claimed that Akzo’s refusal to engage with PPG in talks despite calls from almost 25% of their shareholders was a breach of their fiduciary duties and of Dutch corporate law. The court disagreed, ruling that Akzo was not obliged to involve shareholders in its decisions regarding the PPG bid and was not required to start talks.

The assault on Akzo by PPG and the activist shareholders, led by Elliott Advisors, had failed. On 1 June, PPG announced that it was abandoning its €26.9bn pursuit. The unsuccessful bid is the latest example of a large American corporate being snubbed by a major European rival. Regular readers will remember Kraft-Heinz’s failed takeover of Unilever. That deal, like this one, involved a disinterested target who believed the bid undervalued the company and who were not prepared to subject themselves to the political and regulatory scrutiny that agreeing to the takeover would involve. However, the difference between the two deals is that the Kraft-Heinz – Unilever deal lasted three days, PPG – Akzo lasted three months.

Why Did the Deal Fail?

Akzo made it clear why they rejected PPG’s offers. They believed that the bids undervalued the company and that the current board were better placed to help the company achieve value than PPG were. They also believed that the deal was too risky; it would be subject to significant antitrust scrutiny which may culminate in the deal being blocked or the combined group having to divest assets in order to gain approval. Similarly, they believed that PPG didn’t understand Akzo’s culture and that there would be significant job losses and restructuring of operations following the deal. Despite all this, there were still some shareholders who were open to pursuing the deal. This pointed to the possibility of the takeover attempt going hostile.

A hostile takeover can occur when a buyer seeks to acquire a publically traded company but cannot agree on a deal with the board of management. The buyer can make an offer directly to the shareholders to purchase their shares at a fixed price in order to gain a controlling interest in the company. Alternatively, the buyer can seek to persuade shareholders to replace the existing management with a new board who will be more likely to approve the offer.

However, Akzo Nobel has a unique anti-takeover defence that makes hostile takeovers near impossible. Four Akzo directors hold 48 priority shares in the company. They can use this stock to make any nomination to the management and supervisory boards binding if they believe that the interests of the company and its stakeholders are at risk. This would have made it impossible for shareholders to remove Akzo’s board and replace it with a new one. With the Akzo board so unwilling to even discuss the offers and with such a small chance of a successful hostile takeover, PPG had no choice but to abandon the deal and walk away with nothing but a slightly higher share price. 

Talking Points

This story could illustrate that cross-border M&A between the US and Europe is facing obstacles. Nationalist sentiment in certain European countries is high causing politicians to rally against large foreign corporates acquiring national assets. Perhaps such sentiment is also appearing in boardrooms, causing target companies to be sceptical of approaches from foreign bidders.

However, this doesn’t appear to be the case. Around $171.8 billion of cross-border deals between US and European companies have been announced so far in 2017 – the highest figure at this stage of the year for a decade. US corporates appear to be awash with cheap cash as optimism over Trump tax reforms and economic stimulus have buoyed US equity markets and strengthened the dollar. Similarly, interest rates remain very low making it cheaper for companies to borrow money. All this makes foreign acquisitions cheaper for US companies. Law firms shouldn’t read too much into this story; cross-border M&A between the US and Europe still remains strong.

This story is, however, a reminder that hostile cross-border M&A is very difficult. Especially in a country like the Netherlands that has a stakeholder friendly approach to takeovers and allows for companies to form a strong defence to hostile attempts. Buyers must adapt their strategy accordingly by attempting to persuade the target board that the deal has real value. Sometimes there is nothing more a company can do to push the deal through and the best option is to just walk away.

It is unclear exactly which law firms were involved in the deal. However, it is believed that Dutch firms De Brauw Blackstone Westbroek, Stibbe, Houthoff Buruma, and the Amsterdam office of Allen & Overy all played a role in the legal action brought against the Akzo chairman.

General Election

The result of the general election on Thursday took many people by surprise. Before the election, some polls were predicting the Conservative party would win a majority of approximately 75 seats. Some Tories on the ground were even predicting a majority closer to 100 seats. However, the nation woke up to a hung parliament with the Conservatives winning 318 seats, eight seats short of the required majority of 326. Equally surprising was the fact that the exit poll was very accurate for a change.

The markets do not like uncertainty, and on the news of the exit poll predicting a hung parliament, the pound dropped against the dollar from $1.2950 to $1.2750. As the results began to come in and the markets had time to digest the news, the pound began to rise slightly. This was likely due to the belief that a hung parliament and a weak Conservative party would reduce the likelihood of a hard-Brexit.

Talking Points

The belief that a hung parliament will lead to a softer Brexit predicts that the Conservative party, who are seen as having a tougher stance on Brexit, will have to work across party lines to retain the confidence of the House. Labour, the SNP, and in particular the Liberal Democrats, have a much softer approach to Brexit. However, an important issue for many people who voted Leave in the Brexit referendum was bringing an end to the free movement of people. Both the Labour party and the Conservative party reflected this in their manifestos. The EU has repeatedly said that you cannot enjoy the other freedoms that come with membership to the union, such as free movement of capital, services, and goods, without also allowing for the free movement of people. Resolving this issue is vital for securing a soft Brexit. What outcome parties are saying they will achieve might be very different from what they actually can achieve; a negotiation is a two-way process and, now that the UK appears to have a polarised parliament and lame duck Prime Minister, its position at the negotiating table may be weakened.

Law firms will be working with their clients to combat this uncertainty by advancing their contingency plans and preparing for a worst-case scenario. While some businesses may hope for the best, in reality, the situation is very unclear; we now know even less about how the UK will position itself in negotiations. What is clear, however, is that we are in the middle of an incredibly interesting period of British political history. This will provide plenty of ammunition for interviewers to test your commercial awareness. 

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Tagged: Commercial Awareness, Commercial Law, Legal Careers

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