The A to Z of defending against a hostile takeover

It was an unusually blunt admission for a smooth-talking chief executive.

But when Pascal Soriot, chief executive of AstraZeneca told MPs that a £69 billion takeover by US rival Pfizer could cost lives, it underlined how high the stakes were in this recent takeover battle.

The statement, which could yet come back to haunt AstraZeneca’s board, was also made in an unusual setting. It was the first time that companies engaged in a takeover bid had given evidence before a parliamentary committee, while the bid was still ongoing.

The fact that either of these things happened has a lot to do with the controversial acquisition of chocolate and chewing gum maker Cadbury Schweppes by American food giant Kraft four years ago.

When Cadbury fell to Kraft, it felt like another nail in the coffin of the UK’s past glory days in manufacturing and industry. But it also prompted a series of reforms to the City Takeover Code, a set of binding rules that listed companies must follow in a takeover battle, which previously appeared to favour bidders.

The biggest reform was to concentrate the bidding timetable into a shorter period. Once a bidder has been publicly identified, it now has just 28 days to make clear its intentions – the so-called ‘put up or shut up’ provision – which has led to changes in the way companies defend themselves. Previously it had 60 days after posting out formal offer documents to shareholders.

Once the bid leaks, the countdown begins. This obviously brings new communications challenges, for both sides.

Esra Erkal-Paler, head of global media relations at AstraZeneca, says: ‘It was important to communicate clearly to our shareholders [who decide the outcome of any takeover battle], as well as a diverse set of stakeholders, the rationale behind the board’s rejection of the proposal by Pfizer and to set out the factors that underpin our ongoing confidence in AstraZeneca’s ability to deliver value through its stand-alone strategy.

‘Central to all of this was our commitment to being a science-led company for the benefit of patients and investors, including a strong research and development presence in the UK.’

This commitment meant that briefing patient groups, doctors, research scientists, MPs, unions and employees took on unusual significance. And with the press amplifying the reactions of all these groups, this media strategy was central to getting a consistent message to all stakeholders.

For RLMFinsbury, the financial public relations company which assisted AstraZeneca with the defence, it was a four week marathon, with large numbers of people working long hours, day in, day out, to support the Astra board, management and communications team.

RLMFinsbury concentrated on describing AstraZeneca’s position at the forefront of British science and expanded on its heritage and commitment to the UK. It also explained the pharma company’s burgeoning drugs pipeline, particularly of cancer treatments, which will be key to its growth in the next ten years.

The defence’s main tactic was to know exactly what every shareholder was thinking – and to give them as much access as possible to the recently appointed Soriot, along with AstraZeneca’s finance director Marc Dunoyer and chief scientist John Waterton.

Conor McClafferty, partner at RLM Finsbury, says it was vitally important to know exactly what the shareholders were thinking, which involved open engagement throughout the process.

But influencing opinion formers in the media and politicians was also key. Historically, media briefings in takeover battles have concentrated on the financial press and business commentators but this time advisers also spent time briefing political journalists. Public affairs teams were also put to work, connecting with their full-range of political contacts.

‘All the stakeholder groups were important, because they were vocal with their support and all influenced each other. The political side became very important in this deal and opened up a broader debate about the importance of life sciences to the UK economy,’ explains McClafferty.

One experienced financial journalist says: ‘The defence were certainly hyperactive in press releasing everything and getting as much information as possible out there about the new strategy. But the political talk quickly dominated the debate and it became more about jobs and UK life sciences than about value.’

Parliamentarians, led by the redoubtable Margaret Hodge and Andrew Tyrie, see grilling business leaders as a quick way to look tough. When Kraft and Cadbury were summoned before the committee, they chose – on the advice of their lawyers – to decline while the bid was ongoing.

But both Pfizer and Astra quickly concluded that it would look bad to avoid this questioning. Consequently, much time was taken up by advisers on both sides, in preparing the executives to face MPs on the Business, Innovation and Skills select committee.

Astra’s Soriot may have grabbed the best headlines from the committee but Pfizer’s chief executive Ian Read also delivered a respectable performance in front of a potentially hostile audience.

Astra’s defence document, which under the old Takeover Code would have been published weeks later, was another pillar of the defence and was based on an unseen new ten-year strategy document that had luckily just been completed by the company. Its main thrust explained how AstraZeneca planned to achieve revenues of more than $45 billion (£26 billion) by 2023. Last year, it generated annual revenues just shy of $26 billion.

When it came to the financial media, the short timetable meant that it was important to get AstraZeneca’s ‘stand alone’ message out quickly. But it also left little time for journalists to pick apart Pfizer’s and AstraZeneca’s valuations.

A senior journalist comments: ‘The political debate took over. In the end there was very little consideration of the actual value of the bid.’

Winning huge support from the scientific community for keeping Astra Zeneca was another coup for the defence. This support also highlighted an apparent lack of independence in the Government’s early comments on Pfizer’s approach, when the Prime Minister David Cameron appeared to back the company calling its bid ‘robust’. Ministers were forced to row back from this stance, as questions arose about whether Pfizer would protect British jobs and research.

Meanwhile the shorter bid timetable, meant that AstraZeneca was spared the difficulty of having to report several sets of results during an offer period, which can often provide ammunition for a hostile bidder. It also meant that the distraction to the company’s work could be kept to a minimum, which was an important message to convey to an internal audience.

‘In a longer offer window, there are obviously more opportunities for a hostile bidder to attack a company’s defence. With a shorter window, the company was able to keep disruption to a minimum so it could continue to focus on bringing medicines to the market,’ says McClafferty.

It was also notable how many institutional shareholders went on public record about their views of the bid, observes Philip Gawith, managing partner at StockWell Communications. At one point, about 20 per cent of AstraZeneca’s shareholder register had publicly stated the outcome they preferred.

Some of its top ten shareholders, such as Legal & General and BlackRock, urged the board to resurrect talks, while others, including the Swedish fund Investor AB, supported the decision. Gawith suggests that institutional investors may be getting more comfortable with expressing their views publicly.

Gawith adds: ‘The 28 day timetable accelerates the conversation. Lots of shareholders wanted a deal and didn’t get it. I’m sure some would say it all happened too fast. But there are more people out there ready to say it’s not just about price. Boards feel they have a pressing sense of having a broader responsibility than just to get the highest price for shareholders.’

Indeed, article 25.2 of the revised Code says just that. Boards can now take factors other than just price into consideration, when deciding whether to recommend a bid or not. This means communicators defending a company against a hostile bid have even more reason to emphasise negatives surrounding their suitor. And so Pfizer’s track record on protecting

British jobs was brought into question by newspaper articles about the closure of its research laboratory in Sandwich, Kent three years ago, with the loss of 1,500 jobs. The 60 year old facility had been the site of Viagra’s discovery.

Andrew Grant, founder of Tulchan, the financial PR consultancy, says that the revised Code should not be a hindrance to companies, on either side.

Last summer Tulchan defended Midlands-based water company Severn Trent, against a bid from LongRiver, a Canadian consortium of investors.

LongRiver eventually walked away when Severn Trent rejected its third and ‘final’ offer, which it claimed undervalued the company at £5.3 billion.

‘It was not clear why they (or Pfizer) made that offer their final one. In both cases, it seemed that they were hoping that by going final it would encourage the shareholders to force the board to engage,’ says Grant.

Grant doubts whether boards’ behaviour has fundamentally changed, with regard to considering other factors. ‘I think it would be a brave board that rejected an offer that was clearly at the right value, on the basis of some other stakeholder argument. I don’t believe that clause 25.2 can be interpreted as in the national good, either.’

Another person familiar with the AstraZeneca defence says that the revised Takeover Code has merely codified what was good practice, in an attempt to take the heat off the target board.

But the revised rules can also be used flexibly. Two years ago, defence company Chemring for two extensions to the 28-day ‘put up or shut up’ deadline in an attempt to secure an agreed deal with private equity group Carlyle. Alas, the talks eventually fell apart.

Pfizer was offering shares rather than cash for AstraZeneca, but Grant believes that, had the offer included a cash element, the outcome might have been different.

Another person familiar with the AstraZeneca defence agrees that where there is a stock component to a deal, then investor relations and communications are more potent and more useful. ‘If you’re going to receive stock in the bidding company, the question of whether this deal is right becomes far more subjective.’

With the dust hardly settled on Pfizer’s foray, its financial PR advisers Brunswick are understandably wary of talking about their tactics.

But one banker says: ‘It was a good old fashioned bear hug, just done in an accelerated format. They used the full tool kit of investor relations and public relations but I don’t think the 28 day deadline made it harder. The reason it didn’t succeed was that they [Pfizer] played their hand wrongly.’

Other people familiar with the bid insist that 28 days left little time for ‘price discovery’ and that a significant number of shareholders were disappointed when Pfizer walked away.

The political interest also wasted ‘close to two weeks’ of that short time, and was ‘not very productive’.

One City expert says: ‘The Code was revised to make it harder for bidding companies but now shareholders need to wake up to how things will run under a shorter timetable. It now clearly favours the defending company. It’s just much easier to put your tin hat on and keep saying no.’

The ball is now in AstraZeneca’s court but the new rules mean that Pfizer could return in less than six months. Meanwhile, saying no has not been without consequences.

Those AstraZeneca shareholders who were prepared to engage or even sell at £55 per share are now holding shares worth closer to £44.

As for that line about how a takeover could cost lives, well it seems to have been unscripted but, needless to say, the chief executive firmly believes it.