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What is significance of Bull-Dog action?

by Kaho Shimizu

Bull-Dog Sauce Co. on Wednesday became the first company in Japan to implement takeover defenses, issuing rights for new shares to block Steel Partners’ takeover attempt.

Steel Partners Japan Strategic Fund (Offshore) L.P., which launched a tender offer for Bull-Dog shares in May, claims the sauce maker’s poison pill contravenes shareholder equality.

The Tokyo High Court ruled the defense plan is legal and characterized the U.S. investment fund as a predatory acquirer trying to exploit the Japanese firm for a quick profit. Steel Partners has filed an appeal with the Supreme Court.

Following are answers to some basic questions about Bull-Dog’s defense plan and its implications for the market:

What is Bull-Dog’s takeover defense against Steel Partners and what may be its consequences?

Bull-Dog is using a poison pill, aiming to dilute the U.S. investment fund’s stake in the sauce maker to less than 3 percent from over 10 percent.

Bull-Dog is issuing three equity warrants for each of its shares to all shareholders, including Steel Partners. The fund, however, is not allowed to convert its warrants into shares. Instead, Bull-Dog is offering the U.S. fund 396 yen in cash per warrant, which will total about 2.3 billion yen.

The sauce maker calculated the ¥396-per-warrant offer based on the 1,584 yen per share Steel Partners initially proposed in its takeover bid, about 19 percent more than the average share price for 30 days to May 16.

Bull-Dog shares stopped trading on the Tokyo Stock Exchange on Wednesday when the price fell by the maximum daily amount allowed to 725 yen. Investors rushed to sell their shares, fearing their value would be diluted with the equity warrant issuance.

Some market experts also have said that paying Steel Partners 396 yen per warrant is expensive and could hurt Bull-Dog’s other shareholders.

Bull-Dog President Shoko Ikeda admitted the company may log a loss due to the costs of fending off the unwanted takeover bid. Steel Partners has said Bull-Dog should use the money it will spend stopping the takeover to improve its business.

Despite the losses the poison pill is expected to cause, the plan was approved by more than two-thirds of the votes cast at Bull-Dog’s general shareholders’ meeting on June 24.

Why does Steel Partners say Bull-Dog’s defenses run counter to the principle of shareholder equality?

Steel Partners has charged that the takeover defense is discriminatory because it singles out the U.S. fund in taking away its stock acquisition rights.

Steel Partners will receive 2.3 billion yen in return for the loss of its stock acquisition rights.

However, Shinichiro Takaya, president of Capital Frontier Co., which consults on mergers and acquisitions, said that merely getting compensation does not in itself mean Steel Partners is being treated fairly. Shareholders’ rights are not just about monetary benefit, Takaya said.

“The (poison pill) plan deprives Steel Partners of its right to participate in management” of the sauce company, he said.

The Tokyo High Court ruled that the principle of shareholder equality does not apply if an acquisition attempt is deemed harmful to the targeted firm’s corporate value.

What implications does the high court ruling have for Japanese business and foreign investment?

The decision gives guidelines for a company to determine if an acquirer is a greenmailer and to decide about whether to use takeover defenses to stop a hostile acquisition, according to Capital Frontier’s Takaya.

“The ruling is sure to make it easier for companies to activate their takeover defenses,” he said.

Atsushi Nojima, managing director at Abeam M&A Consulting, pointed out that the high court did not consider all of Steel Partners’ current market behavior when making its decision that the U.S. fund is an abusive acquirer.

“The high court referred to Steel Partners’ past investment records — not its approach to Bull-Dog in the latest bid — in categorizing the fund as an abusive acquirer,” Nojima said.

Despite the decision against the U.S. fund, he said the recent decision will not discourage foreign investors’ M&A activities.

“It may affect the activities of activist investors who only work to make a quick profit,” Nojima said. “But many investors are not like that.”

What are other firms doing to stop hostile takeovers?

About 380 companies, or roughly 10 percent of the listed firms in Japan, had officially adopted takeover defense plans as of the end of May, according to Nomura Securities Co.

Every one of them introduced a poison pill option to dilute share values and drive off hostile acquirers.

More than 90 percent of the companies have implemented an “advance warning system,” which sets out the procedures to ascertain the motives of an acquirer in attempting a takeover.

If the buyer is considered to be predatory, the targeted company can then exercise its defense measures.