By Shayndi Raice
LONDON--After news leaked that U.S. medical-device maker Stryker
Corp. was working on a bid for U.K. rival Smith & Nephew PLC,
the body here that regulates mergers and acquisitions told the
American company it had 28 days to make a binding offer, or walk
away for six months. Stryker walked away.
Stryker-- whose six months end this week--is one of several
companies that have had plans for large acquisitions thwarted by
the rule known as "Put Up or Shut Up."
It was designed to prevent U.K. companies from facing the
prolonged threat of a hostile takeover, which companies consider
disruptive to business. Though put into place in 2011, its
requirements have had a greater impact this year as the value of
mergers and acquisitions in Britain surged to $188.78 billion, up
nearly 46% from the same period last year, according to data
tracker Dealogic.
Other companies, such as Glencore PLC and Pfizer Inc., had to
walk away from deals this year because of the same rule. Deal
makers here say its forcing companies to come to the table better
prepared in case the panel forces them to put up or shut up. Some
say they see U.S. executives more cautiously approaching deals in
the U.K. because of the rule.
Representatives for the companies declined to comment.
The put up or shut up rules requires a bidder to make a formal
offer for a target within 28 days after its intentions become
public. If the target company wants to engage in negotiations with
the would-be acquirer, they can jointly request an extension.
But the rule has complicated the process of making a hostile
bid.
The short time frame means some corporate executives and
private-equity funds feel rushed and are more cautious about doing
deals in the U.K., say M&A bankers and lawyers here. It is also
uncertain terrain for some foreign executives, especially in the
U.S., where there is not a comparable set of rules, and means
companies need to act faster than ever when lining up financing and
pursuing a deal.
"It's crazy to have a 28 day limit. It's just not long enough
unless the parties are willing to come together," said a
London-based deals lawyer.
The impact is being felt just as cross-border activity starts to
rise here. Deal volume for cross-border deals into the U.K. rose to
$114.07 billion so far this year, up nearly 57% from the year
earlier period.
Rules governing M&A in the U.K. are determined by the
Takeover Panel, whose approximately 35 members include bankers,
lawyers and other industry players. Although the panel is
independent, it has statutory power and its rules are
compulsory.
Changes to the takeover rules were a specific response to U.S.
food conglomerate Kraft Foods Group Inc.'s 2010 acquisition of
Britain's Cadbury PLC. The deal drew intense political scrutiny, as
many in the U.K. felt a national champion had been swallowed
unwillingly by a foreign conglomerate.
Previously, bidders could hover over a company for an unlimited
period, unless a target explicitly asked the panel to impose a time
limit. Kraft pursued Cadbury in a hostile deal for four months.
The Takeover Panel also made other changes aimed at addressing
public and political concern, including giving greater power to
boards facing a hostile bid.
The architects of the rule changes say they stand by the new
regulations.
"I don't think there have been any unintended consequences of
what we did," said Robert Gillespie, a former director general of
the Takeover Panel, who oversaw the 2011 changes.
Some of the deals earlier this year "just looked as if somebody
ignored the fact that the panel has made very far reaching changes"
he said.
Bankers say the rules have led to a change in deal tactics.
Targets can just sit tight, forcing the potential buyer to bid
against itself as the clock ticks on, said one London-based M&A
banker.
"We used that tactic to keep [the bidder] on a tight leash," he
said. In some cases, it lead to deal being hashed out but in
others, it killed deals entirely, he said.
For example, the British construction company Carillion PLC gave
up on its more than GBP2 billion pursuit of Balfour Beatty PLC
after it was continually rejected and the PUSU period ran out.
The short time frame isn't just a problem for potential
acquirers. Shareholders in target companies also have to engage on
potential bids much more quickly, said Scott Hopkins, a London
based M&A partner at the law firm Skadden, Arps, Slate, Meagher
& Flom LLP. If they are too slow, shareholders could miss out
on deals if "their boards 'just say no' and let the [U.K. Takeover]
Code snuff deals out," he said.
The time frame means that "stakeholders have to communicate
clearly and quickly" to companies how they want to respond to a
bid, said Shade Duff, head of corporate governance for AXA
Investment Managers.
Potential buyers, meanwhile, have to get their bid in order much
earlier in the process too.
"There's a greater emphasis on preparation," said Richard
Butterwick, a London-based partner with the law firm Latham &
Watkins LLP, who was previously a member of the U.K. Takeover
Panel.
Buyers have to line up financing earlier, for instance, though
that can be challenging too. Under the Takeover Panel's rules, a
company can only talk to a maximum of six outside parties about its
plan to launch a bid, otherwise they trigger a PUSU period.
Write to Shayndi Raice at shayndi.raice@wsj.com
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