If you are an executive or director of a public company, a key
question to consider is this: as stewards for the shareholders, do
you think you and your board are prepared to react properly to an
M&A transactions involving public companies can surface
and evolve in unpredictable ways. This is particularly so if a
company is the target of an unsolicited takeover bid - where
the stakes are high, events move quickly, and the timelines are
very tight. At Crosbie & Company, we have found that some
boards are surprised to find themselves organized or ill prepared
for such an event.
A hostile takeover bid is a possibility for any public company,
but the risk is greater for companies whose shares are widely-held
and particularly when the shares are trading at a “low” valuation.
However, if an unsolicited bid is managed effectively, not only
can shareholder interests be protected, but it can in some cases
serve as a favourable catalyst. Having said this, the board’s state
of preparedness is critical to its ability to respond quickly and
be able to steer the company through this complicated and very
time-sensitive process. In today’s world, where the performance
of Boards and good corporate governance is coming under
increased scrutiny, shareholders of public companies have come
to expect their boards to be prepared for the unexpected.
At Crosbie, over the course of numerous board advisory
engagements, we have experienced first-hand the difference that
a prepared board can make. The takeover defense of Virtek, an
industrial technology company based in Waterloo, Ontario, is an
excellent example of the benefits of preparation. Virtek was the
subject of a hostile takeover and was able to turn the tables on the
hostile bidder, to the great advantage of its shareholders. Virtek
had two divisions – its well established and profitable imaging
division and an earlier stage, cash flow negative division. Roughly
a year prior to the hostile bid, Virtek had received an unsolicited
but friendly offer for its profitable imaging division. At the time, the
board retained Crosbie as its financial advisor to evaluate the offer
and consider appropriate alternatives.
As a result of this review, Virtek’s board and management
developed clear perspectives on the value of the imaging division,
who the other possible buyers could be, the economic and
strategic considerations associated with breaking up Virtek and
selling the company in parts, and the implications of various other
courses of action.
A few months after this work was completed, a second
party made an unsolicited takeover bid for the whole company
that was hostile. As with most hostile situations, time was of the
essence. The Virtek board had thirty-five days under Canadian
securities laws to implement its defence tactics. Equipped with
the information from the prior process, the board immediately
retained Crosbie to pursue a sale of the imaging division.
Crosbie knew which buyers would likely be most interested
and could move quickly. We began discussions with buyers the
day we were hired and, over the next 35 days, ran a successful
auction resulting in two strategic buyers bidding aggressively
for the imaging division and the execution of a sale agreement
with a “fiduciary out” (i.e. allowing the Board to accept a superior
proposal from a competing bidder if one should arise).
While this would have been a successful outcome by itself,
the group that lost the auction for the imaging division returned to
the table and made a successful bid for the entire company at a
60% premium to the original hostile bid. In the final analysis, the
shareholders of Virtek received a 110% premium to the trading
price the day prior to the hostile bid!
The Difference a Prepared Board Can Make
By Colin Walker, Managing Director, Crosbie & Company Inc.
Romit Malhotra, Vice President, Crosbie & Company Inc.
M&A CORPORATE ADVISING