How Qantas and Echo could defend against a hostile takeover

When its share price was soaring in 2005, Qantas’ then chair Margaret Jackson couldn’t convince shareholders to sell to Airline Partners Australia at $5.60 a share.

But now, with the airline’s share price tanking – reaching a record low of 96c last week – CEO Alan Joyce is gearing up to fight off the bidders.

He’s revived an internal taskforce to prepare lead the defence against potential hostile takeovers, according to reports. The Australian Financial Review writes the group contains Joyce, new Qantas International CEO Simon Hickey, CFO Gareth Evans, legal counsel Brett Johnson as well as corporate affairs head Olivia Wirth. The airline confirmed today it has also bought in Macquarie Group to advise it on possible strategies.

So what are those strategies likely to be? We asked the experts for the most popular defence tactics when facing a hostile takeover.

Before the crisis: the message, the relationships

“One of the most important things that companies can do to position themselves to defend a hostile offer is ensure that they have clearly communicated their strategy to the market ahead of time,” says Dudley White, a director at MAGNUS Investor Relations.

“Once an offer has been made, it becomes harder for a company to both defend the offer, and at the same time get investors to buy-in to the director’s vision for the business.” If shareholders understand and support the strategy a company’s management has set in place, then those directors will hold greater sway when it comes to recommending shareholders accept or reject a takeover offer.

Building relationships with shareholders before the hostile offer is also crucial.

“The old saying ‘you can’t make friends in a crisis’ holds true,” White says. “If the target has spent time getting to know its stakeholders they will be better informed, and easier to engage with, once the hostile offer has been announced, rather than having to do that after the event.”

Alan Joyce has undoubtedly laid down some of this groundwork. His strategy is clearly and often restated, most recently last Tuesday, when he announced the 91% profit drop expected this financial year.

But when it comes to his relationships with key stakeholders, Raymond da Silva Rosa, the Winthrop professor of finance at the University of Western Australia, thinks Joyce hasn’t done as well.

“He’s lost a lot of goodwill,” he says, referring to Joyce’s grounding of the airline last October after a protracted war with the three unions that represent Qantas employees. Da Silva Rosa adds that perhaps Joyce’s “pugnacious style” was perhaps better suited to a low-cost airline rather than the full-service carrier that is Qantas. Joyce was Jetstar CEO until 2008, when he was appointed head of Qantas.

Trash the price

Once a bid is underway, the classical defence revolves around trashing its price, says Terry Walter, a professor of finance at UTS Business School

“Management will argue the bid is inadequate in terms of its pricing, and hopefully they will employ an independent expert who will give the same case,” he says.

It is of little importance who the bid comes from, as shareholders are generally looking to cash out. “If a target receives a $10 per share bid from a private equity firm, and a $9.50 bid from another listed company, and both were cash, it would be most unusual that they go with the cheaper offer,” Walter says.

Often, rejecting a bid as too low makes good business sense, says da Silva Rosa.

“You don’t want to lie down and just accept the offer. A company saying they’re worth more is often simply good negotiation strategy.”

Da Silva Rosa says should a hostile bid eventuate, Qantas’ management will try to convince shareholders their falling shares are suffering from short-term problems.

“And even if the shareholders are determined to sell, 96 cents is a steal,” da Silva Rosa says. For a stock with potential, selling when it’s low isn’t likely to net shareholders the best price.

The persuasiveness of this argument however is likely to come down the credibility of the management team, and this is an area that could cause problems for Joyce.

The fact that Qantas just posted a large profit downgrade may also call into question the judgement of the management team.

Capital raisings

Another tactic commonly used by companies trying to avoid a takeover is to undertake a capital raising. One company doing so is Echo Entertainment Group, which went into a trading halt today after its rival Crown Casino claimed the scalp of its chairman, and competitor Genting  Singapore snapped up 4.9% of its shares on Friday.

Da Silva Rosa says under normal circumstances, capital raisings are rarely welcomed by shareholders as they dilute their ownership share and are often accompanied by a falling share price.

“But it might be attractive in this situation if you could place the shares with a company that’s likely to remain loyal to the current board,” he says.

Capital raisings can also discourage hostile bids by making a company more expensive to buy.

“The company is larger, because they’ve raised more money, so the total cost is higher,” Walter explains. “This means the hostile bidder would have to pay more, but they would also be getting more.”

“A successful capital-raising might cause the bidder to rethink the price, or walk away.”

Poison Pills

Poison pills are things company directors do to make a company less valuable should it be bought out.

While common in some jurisdictions, legal regulations in Australia greatly restrict the actions a company can take once a takeover offer has been made.

“The poison pill might be taking on more debt that’s triggered by the success of a bid, but that kind of thing isn’t likely to fly with the takeover panel here,” da Silva Rosa says.

Voting shares and non-voting shares

Some companies structure their shares to make the composition of their shareholders irrelevant.

For example, Facebook has two separate types of shares, some with voting rights, some without. This means its founding CEO, Mark Zuckerberg, retains 56.9% of voting shares despite owning less than 30% of Facebook. He can afford to care little for who buys his company, as he’ll still be able to run it his way.

But even at companies like Qantas who give all their shareholders votes, the management team wields great power.

After all, as da Silva Rosa says, the number one predictor of the success of a takeover attempt is whether or not the target board recommends it.