Introduction
The Bidvest Group Limited (commonly known as Bidvest Group or simply Bidvest) is a South African services, trading, and distribution company. The Group was founded in 1988 by Brian Joffe and listed on the Johannesburg Stock Exchange in 1990. The Group owns or has significant holdings in over 300 companies. The Bidvest Group Limited has a corporate office in Johannesburg, South Africa, and employs approximately 137,000 people. It has a strong track record of consistent delivery, returns and growth. One of its strategies is remaining confident about South Africa and maximizing diverse portfolio through a focus on broadening and innovating the product and service offering. Secondly is focusing on services and commercial products industries that have been selected as suitable targets for international expansion. Its business model diversified business that are strongly cash generative. Bidvest operates a diversified, highly entrepreneurial model with teams that are empowered to grow their respective businesses.
It is committed to conducting healthy business practices which support company values of respect, honesty, integrity and accountability, ensuring a stable employment environment and the ongoing sustainability of Bidvest
The group operates through seven divisions i.e. Bidvest services, freight, office and print, Automotive commercial products, Financial Services, Commercial services and Bidvest electrical. It holds investment in Bidvest Namibia (52%), Bidvest properties (100%) and various other assets.
It is also critical to note that a large majority of the companies within the Bidvest Group have been acquired either through a merger or an outright acquisition over the last 26 years. Bidvest’s central strategy of growth by acquisition has in the main been driven by diversification, whilst within the operating divisions, most acquisitions have been driven by synergy. An unrelated diversification strategy favors capitalizing upon a portfolio of businesses that are capable of delivering excellent financial performance in their respective industries, rather than striving to capitalize on value chain strategic fits among the businesses. Firms that employ unrelated diversification like Bidvest continually search across different industries for companies that can be acquired for a deal and yet have potential to provide a high return on investment. Pursuing unrelated diversification entails being on the hunt to acquire companies whose assets are undervalued, or companies that are financially distressed, or companies that have high growth prospects but are short on investment capital. An obvious drawback of unrelated diversification is that the parent firm must have an excellent top management team that plans, organizes, motivates, delegates, and controls effectively. It is much more difficult to manage businesses in many industries than in a single industry.
Adcock Ingram:
The company first started out as pharmacy in Krugersdorp trading under the name EJ Adcock Pharmacy in 1891.It is a South African pharmaceutical company listed on the JHB stock exchange in 2008. Adcock Ingram manufactures and markets healthcare products to both private and public sectors. It has four commercial division: Consumer, OTC, Prescription and critical care.
The analysis of these South African companies looks at value creation both from the perspective of the acquirer (Bidvest) and the target/acquired company (Adcock).
It is critical that one outlines the context and origin of mergers and acquisitions. Holl (1977) defines the market for corporate control as one characterized by the relationship between: (i) the market value of a company’s shares, and (ii) the asset value of the company. Holl (1977) further states that shareholder returns are reflected in a company’s share price, and that a company becomes a potential acquisition target when the market value of the company’s share price falls below the asset value of the company. Holl’s (1977) argument sets the scene for the emergence of mergers and acquisitions. It becomes clear that mergers and acquisitions are a route or option that corporates may choose to take in order to expand and strengthen their corporate control in the market. This potential growth and control expansion strategy is supported by Manne (1965) who states that the market for corporate control provides corporations with an opportunity to reallocate resources for better use.
LITERATURE REVIEW
The Board of Directors and Corporate Performance in hostile takeovers
The performance is affected by the company’s characteristics and the board micro decision-making mechanisms. The role of directors in corporate governance is strategic, monitor and control. The larger board members lead to communicate weak, allowing limited control of the management. Bedsides, trust and understanding between directors will be reduced. Board size affects the quality of deliberation among members and ability of board to arrive at optimal corporate decisions. The board size represents the total head counts of directors seating on the corporate board. Majority of documented evidences have demonstrated that small boards are more efficient and effective. Secondly the role of the Board of Directors in hostile takeovers is probably one of the most important factors in this transaction because boards make the recommendation to shareholders on the preferred bid. As leaders in the organization their values, attributes, and behaviors are believed to affect firms’ strategic decision making and decision implementation as a growing trend exists for integrating the micro-level behavior with the macro-level phenomena (House ; Aditya, 1997; House, Rousseau ; Thomas-Hunt, 1995), which might explain the emergence of the neo-charismatic paradigm. Such leaders are able to articulate visions based on strongly held ideological values and powerful imagery that stimulate innovative solutions for major problems and foster radical changes and high performance expectations.
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One of the critical aspects in hostile takeovers is the role of the board of directors. According to Section 76(3) of the Companies Act (Republic of South Africa, 2008), directors must at all times act in good faith, act in the best interest of the company and act with care, skill and diligence. An extension of acting in the best interest of company is provided by Dewhirst and Wang (1992) who state that Board of Directors must act in the best interest of shareholders. In the Bidvest – Adcock transaction, it is interesting to note that the board of Adcock openly supported an alternative bid by a Chilean company called CFR Pharmaceuticals (CFR). Mokhele (2013) stated that the Adcock board believed that an Adcock-CFR combination would be in the best interest of shareholders. This statement was contrary to the positions of Adcock’s major shareholder, the Public Investment Corporation (PIC) and Bidvest who at the time already owned approximately 4% of the issued ordinary shares in Adcock. Whilst the Adcock board was intent on their strategic support of the CFR bid, the PIC, a 20% shareholder in Adcock, vehemently disapproved of this decision and acted on their non-support of the CFR bid by supporting Bidvest in voting against the CFR offer. The board of Adcock effectively held a position (support of the acquisition by CFR) that was not supported by two shareholders who collectively owned 24% of the company
Linda M. Cohen (2010) pointed that better understanding how physical asset decisions can affect M&A out- comes, and how these assets can be used as a powerful tactical and strategic resource, will help managers achieve desired out- comes when faced with M&A.
The decision to either vote for or against a particular offer remains the shareholders’ responsibility. One cannot discount or ignore the strong influence of board recommendations in the shareholder decision making process. This statement is supported by Dewhirst and Wang (1992) whose research found that Boards of Directors play a critical role in the probability of receiving an offer and most importantly, the eventual outcome of the offer. Their finding is that Boards must act in the best interest of shareholders. This is also a principle of the Companies Act (Republic of South Africa, 2008) and King III (Institute of Directors Southern Africa, 2009).
According to Subrahmanyam, et al. (1997) boards of directors play a critical role in decisions that need to be made on large transactions or in cases where the agency problem between management and shareholders is worsened. Subrahmanyam, et al. (1997) further note that the wealth accruing form mergers and acquisitions is statistically related to the composition of the board, and that target company shareholder gains are higher when the board of directors is composed of a minimum of 50% independent directors. Their research details the importance of boards of directors, it does not deal with the role of the board in a hostile takeover. The research does not endeavor into the behaviour of the board, decisions the board would make, or the recommendations the board would make to shareholders, when the acquisition is not supported by management.
Mallette and Fowler (1992) argue that whilst target firm shareholders experience wealth gains, as result of share price appreciation, of between 20% and 30% post a takeover, directors of the target firm usually do not retain their positions. This high probability of job losses provides an incentive to target firm directors to attempt to stop takeovers, even though proceeding with the takeover would be in the best interest of shareholders. Unlike a negotiated amicable engagement process and agreement for an acquisition, a takeover creates huge uncertainty. A hostile takeover where directors are not even consulted and offers are sent directly to shareholders isolates directors and management, and this fear of exclusion and uncertainty about the future can drive the behaviour described by Mallette and Fowler (1992), which also includes directors of target firms using “poison pills” as a defence mechanism. These “poison pills” are defined as provisions that impose new difficult and undesirable conditions that the acquiring company must comply with in order to effect the takeover.
Common practical challenges to the partnering process are an inadequate understanding by the potential partners’ representatives of what the parties could offer each other. An unwillingness to modify or compromise; ineffective attempts to institutionalize the partnership within the participating organizations and insufficient orientation of newcomers to the partnership.
Even where common interests can be identified, the partners’ culture, working methods and organizational objectives are often very different.
The kind of communication between people that underlies effective partnership cannot be taken for granted.
Tactics identified by Hall (1977) that management of the target company can implement in an effort to discourage a takeover bid include attempts to get shareholder support and increase the market share price; buying back its own shares on the open market to reduce the number of shares valuable for purchase by the takeover bidder, and by so doing also increasing the share price; bringing in external consultants to assist with a “defence” strategy; calling for an enquiry into the bid by the relevant governing body in that country; or taking legal action against the bidder to prevent the bidder from communicating with and making a direct offer to target company shareholders.
The value statement clearly state how managers and employees should conduct
themselves. Benefits of clear strategic direction creates confidence that the intended strategies will not compromise the interests of the various stakeholder groups in the organization. Communicating and linking strategic objectives and measures allows managers to communicate their strategy throughout the organization, and to link it to departmental and individual objectives. Lastly PESTEL analysis can be used to monitor macro environment that have impact on organization which then the results can be used to identify threats and weakness which are used in a SWOT analysis.
The above studies suggests that the board’s responsibility to act in the best interest of shareholders is severely challenged when uncertainty is created and in cases where management fears loss of control and possible unemployment. It therefore seems necessary for shareholders to play a more active role in the process of choosing the preferred bidder or acquiring company, because management is more likely to take decisions that protect their own interests as opposed to acting in the best interest of the shareholders.
