Fresh deal making tactics emerge one year into regulators' new M&A regime

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As the anniversary of rules enacted by the Canadian Securities Administrators to bring consistency to the country’s deal making process passes, what effect have they had?

Poonam Puri, a professor at Osgoode Hall Law School, and Hooman Tabesh, the general counsel at Kingsdale Advisors, tried to find out. Their report was released Tuesday, the anniversary of when the new rules took effect, rules that included a 105-day period bid, a 50 per cent mandatory minimum tender condition and a 10-day extension.

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The researchers found that the new guidelines had little effect on the number of bids that end up hostile. In the past 12 months, seven such bids were launched, the same as in 2014 and one more than 2015. “Not much of a chilling effect, that’s for sure,” the two write, noting that over the past decade there has been for a steady decline in the annual number of hostile bids.

But it’s the details that count: Of the seven hostile bids, five were launched in 2016 and two were made this year.

Of the seven, two (Hecla Mining’s bid for Dolly Varden Silver and Omnia Holding’s bid for Nordex Explosives) were unsuccessful, three (Chemtrade/Canexus; Nuri Telecom/Apivio Systems and WTF Holding/Franchise) succeeded, but only after the hostile bidder received the board’s blessing; while one (Total Energy Services’ bid for Savannah Energy) succeeded without board approval.

The seventh hostile bid (Pollard Banknote/Innova Gaming) is on-going.

The two authors also reach three other conclusions noting that the major change in the year that the rules have been in effect is the “tactics that may make for a successful outcome.”

First, companies have made it a goal not to end up before a securities regulators arguing for or against a poison pill (the regulators have never allowed one to be implemented), but to work out a transaction ahead of time.

“Given the less directly hostile nature of the relationship between targets and bidders, now is also the time for potential bidders to strategically approach the target with a win-win value proposition,” they write, noting that obtaining the blessing of the target’s board “leads to greater success.” In an interview, Tabesh said that he is aware of transactions where the bidder’s plans to go hostile changed to a friendly negotiated deal.

Secondly, it pays to own some stock of the target ahead of time. “Remember a soft lock up (one that is subject to a better offer) will count towards the minimum 50 per cent,” and hence may be part of the bidder’s ammunition.

But it’s not just the bidders, which have an advantage: the two write that private placements (which was used by Dolly Varden) may be the new “deterrent” in the target’s arsenal.

Their third conclusion is that cash is king: In all but one of the successful hostile transactions, the target’s shareholders were offered cash. As a result, they note, “an acquirer is well advised to consider the volatility in the target’s industry when structuring the consideration for a proposed bid.”

Such a consideration is front and centre for a transaction where the target is in the commodity business. Reached Tuesday, Tabesh, said the 105-day period for that sector “makes it more uncertain for the bidder to lock down a price. “In those circumstances, it benefits the acquirer to have the support of the board and transact in a short period of time.”

Financial Post

bcritchley@nationalpost.com