The UK takeover system is getting tetchier

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Mating rituals vary across cultures. That is true in finance too. In the UK, the courtship between two companies is a choreographed dance of proposal and rebuff until, with luck, a deal emerges. This back-and-forth is a feature, not a bug, of the system, essentially the local method of price discovery.

Seen in this light, Rightmove is making all the right moves. The UK property listings company has received — and rejected — three bids from Australia’s (Rupert Murdoch-controlled) REA.

REA complained anew on Wednesday that Rightmove’s board has refused to engage. But the target is simply signalling that it needs to see a higher bid before it opens its books. It does not help that REA is suffering from a disappearing premium, whereby the value of its cash-and-stock bid has been hit by a decline in its own share price.

The UK’s “put up or shut up” rules, which give bidders 28 days to come up with a formal offer after an approach is made public, were designed to stop target companies spending months under siege. But they also encourage bidders to get quickly towards their best price, in REA’s case before next Monday.

Getting to a level the board might recommend, and gaining access to information on a quasi-friendly basis, is the preferred route for most bidders. (True hostiles, going direct to shareholders without the benefits of due diligence, are now a rarity). Still, courtships seem to be becoming more fractious.

Negotiations can be protracted, as in the case of Hargreaves Lansdown which recently sold itself to a private equity consortium for £5.4bn. BHP’s encampment on Anglo American’s lawn earlier this year was hardly cosy.

A tetchier takeover process in part reflects a wider spread between what targets think they are worth and what bidders want to pay. Stock market prices are a less useful starting point given the FTSE 100’s much-bemoaned valuation discount to global indices. UK plc boards, rightly criticised for being too fast to welcome inbound interest, do not want to be seen as rolling over too easily.

Indeed, the average premium required to win a company’s affections rose from 35 per cent in 2019 to more than 50 per cent last year, according to Lex analysis of M&A Monitor data. This year, it has fallen back to about 45 per cent as the FTSE 100 has rallied. Converging expectations on corporate worth may explain why UK deal value is up 65 per cent in the second quarter, on PitchBook’s data.

This is a long way from the 30 per cent standard premium that potential acquirers were traditionally expected to stump up. Bidders for UK companies should take note.

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