Ban on ‘Break Fees’ Could Harm Takeover Competition

Nov. 24, 2011 - PRLog -- Academics claim regulatory reforms brought in by the Takeover Panel to protect investor interests in hostile takeovers could be “counterproductive” and lead to fewer competing bids for target companies and less value-creating deals.

The shake-up included a ban on so-called break fees – penalties imposed on target companies for abandoning an agreed deal in favour of a rival offer.  The fees have been blamed for deterring additional offers as targets are more likely to steer deals towards first bidders.

But a new study by Cass Business School, which is part of City University London, and EM Lyon Business School in France, failed to find evidence that break fees, if kept low, result in fewer firms chasing deals.  Co-author of the report, Senior Lecturer at Cass Business School, Dr Sonia Falconieri, said: “Our study shows that the effect of break fees on takeover competition crucially depends on their size.  If break fees are kept sufficiently low, they do not negatively impact on takeover competition.

“Previously, the standard break fee in the UK was set at just one per cent of the deal value.  At this level, our findings suggest competing bidders are not deterred from making counter offers. The lock-in effect of the target would only be a concern with much higher fees.”

Instead of boosting competition, Dr Falconieri said the ban could in fact stifle competing bids and reduce the options available to target companies.  “Under the new rules, unsuccessful bidders will be hit with substantial bills for theirs costs, which they will be unable to recover through break fees.  This means bidders may decide to stay out of the game if they cannot count on any compensation should a deal collapse,” she said.

“In this context, a ban on break fees appears to be a drastic and counterproductive measure.  Far from promoting more competition, it could lead to fewer bids and poorer returns for shareholders as it may deter bidders from initiating a takeover offer. Ultimately this could result in fewer value-creating takeovers and, therefore, a poorer market for corporate control.”

Other changes to the Takeover Code require bid approaches to be made public from the outset and all interested parties named, while the “put up or shut up” deadline has been cut to 28 days.

The study found that a tighter deadline on the virtual bid will encourage the bidder to negotiate until the deadline rather than conclude deals quickly.  “Again, this might go against the expectations of the Panel to induce more competition as in fact more aggressive bidders might crowd those who are less prepared out of the contest,” said Dr Falconieiri.

The study was carried out using a sophisticated economic model that explicitly describes the bargaining process between a target company, an initial bidder, who would possibly get the break fees, and a potential rival bidder. The innovative framework sheds light on many aspects of the takeover process, including the role played by break fees.

For more information contact Chris Johnson, Press Officer, Cass Business School on +44 (0)20 7040 5210.  Cass offers the widest portfolio of specialist Masters programmes (http://www.cass.city.ac.uk/courses/masters) in Europe.  It also has the largest faculties of Finance and Actuarial Science and Insurance in the region.

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