MORRISONS TAKEOVER BID: WHY IT MATTERS
The Blogger's credentials and sources are at the end of the post
(but she did manage to score 97% on a UK Bankers Exam)
Summary
Morrisons' Board of directors has accepted an offer from American private equity firm Fortress to buy the supermarket, lock stock and barrel. Other American Private Equity firms have also made offers and more could be on the way.
Media coverage - much of it negative - has been impossible to ignore.
Morrisons - established 1899 - is not just any old supermarket. In line with its core value to focus on British products, it owns and runs farms, fishing fleets and manufacturing facilities.
The deal is not done yet; the offer has to be accepted by more than half of Morrisons' shareholders. But already Legal & General (a Top 10 Morrisons shareholder) has expressed concern, as have other City bigwigs, including senior financial journalists. History shows that shareholders usually rollover, take the money and damn the consequences... so long as the money's good enough.
Governments usually don't intervene in this kind of thing unless the 'public interest' (eg. defence, financial stability) is threatened. Boris' office says it's a 'commercial matter' but Business Secretary Kwasi Karteng has asked for a meeting with the Morrisons Board.
Although staff now get a say in such momentous decisions, consumers don't and both are hampered by lack of financial knowledge. But they're not stupid. They want to know why Morrisons was so quick to accept the offer.
Morrison's senior execs didn't really fight at all, unlike other major companies like M&S, Unilever and Astro-Zeneca (yes the vaccine makers!) who fought takeover bids and went on to do well.
The public also want to know how this huge change to one of the UK's Big Four supermarkets - so long established as part of the UK's food infrastructure - can happen so suddenly?
More to the point: what, if anything, can be done about it?
This post attempts to answer those questions in everyday language. Any opinions expressed and errors made are the Blogger's own.
Sections:
- What is Private Equity
- Private Equity takeovers have earned their lousy reputation
- Why Morrisons is such a popular Private Equity target
- Why didn't Morrisons fight back?
- Morrisons & Fortress: Their Side of the Story
- What now?
- What happened to the companies who fought back
- And one more thing...
1. What is Private Equity?
Private Equity (PE) in the UK has been around since the 18th century when wealthy individuals informally loaned money to starter enterprises. In the 1970-80's, PE was formally recognised as part of the UK financial industry.
Private Equity involves a lender (usually a group of partners who share gains and losses) who provides money in exchange for owning some or all of a company. PE is different from bank loans; PE firms have the legal right to interest and loan repayments whether or not the venture succeeds.
PE isn't all about unwelcome takeovers and mergers. Private Equity helps start-ups, provides venture capital (eg taking a punt with a small stake on baby tech companies) and helps established companies expand.
There are benefits. Companies backed by private equity often grow faster; the money comes with experienced private equity boffins who have the skills and focus to achieve goals more efficiently.
The growth continues while the going is good and the economy remains robust. But if a cyclical downturn does happen, an acquired company can find it difficult to pay its debts. The takeover field is littered with the corpses of acquired companies that died a drawn-out, pitiful death.
It is true that many private equity companies operate ethically and run investments responsibly - financially and socially.
But it is equally true that some don't give a fig about ethics or being responsible; they just want to make money - lots of it - within a 5-year timeframe. After that they will up sticks and sell at what they hope will be a good profit.
One can never tell in advance exactly how a buy-out like Morrisons will turn out. But history shows that PE involving buy-outs/takeovers as spectacular as Morrisons can employ brutal, predatory tactics.
And some buy-out firms have a distinctly unsavoury whiff.
Lavish promises are made in the run-up to a shareholder vote but are not legally enforceable.
Remember Chocolate maker Cadbury? It was taken over by the American firm Kraft quite awhile back. A week after promising to keep a Somerdale factory open, Kraft announced its closure. Worse, Cadbury UK headquarters was moved to low-tax Switzerland. The effects of the takeover were so traumatic, the UK's Takeover Board changed the rules to try to prevent a similar debacle in the future.
What about Boots the chemist, founded by UK Methodists in the 1840s? In 2007, several big investors banded together and bought Boots for £11bn. Almost £9bn of that sum was borrowed to pay for it and the debt was put on Boots' balance sheet. Within a few months, the new Alliance Boots moved its corporate headquarters from Nottingham to Switzerland and pays taxes there, not in the UK.
If you think new takeover rules to prevent another Cadburys made a difference, look at the sale just 5 years ago of UK super-chipmaker Arm to Japanese PE firm Softbank (who incidentally owns Fortress, accepted bidder for Morrisons). Despite promises to the contrary, Arm was quickly dismembered. When some of Softbank's other investments went very badly wrong, leaving them with vast losses, Arm was sold to American rival Nvidia in 2020. The UK Government is investigating.
2. Private Equity Takeovers have earned their lousy reputation.
It's the way this kind of takeover works.
