Editor’s Note: Dale Oesterle (Ohio State U.) contributes an extended version of his current reflections on The Buffett Essays Symposium: A 20th Anniversary Annotated Transcript, recently published by The Cunningham Group and Harriman House. Prof. Oesterle (right) participated in the 1996 symposium’s panel on takeovers and engaged in extensive colloquy with Berkshire Hathaway Vice Chairman, Charlie Munger, sitting in the front row (left).
Much has changed since my exchange with Mr. Munger in 1996. Relevant to my comment, leveraged acquisition practice, and our view of the social utility of leveraged acquisitions has changed significantly.
First, true hostile tender offers, tender offers that close hostile, are dead. By hostile, I refer to tender offers that are made and executed (closed) without the consent of the target board of directors. An offer closes hostile when the hostile bidder, buys enough stock to replace vote out a resisting target board. Financial buyers were “raiders” funded by “LBO Funds” [Leveraged Buy-Out Funds].
We have a very infrequent current substitute in which hostile tender offers are made contingent on the success of a hostile proxy contest. But the word hostile now attaches to tender offers that are, in essence, harsh opening bargaining positions to pressure sitting boards of the target to negotiate to a friendly conclusion. These bids too are rare, however.
What now survives of the old 80s hostile acquisition is a rather timid substitute. Hedge funds buy small stock stakes so as to not trigger takeover defenses and, as “activist shareholders,” attempt to persuade a sitting board to engage in major transactions or financial reorganizations.
In most cases, the incumbent board and the new active block shareholder negotiate to some sort of compromise. Incumbent boards that refuse any and all changes face a challenge for one or two board seats and “shark attacks”, a growing group of shareholders, other hedge funds and even institutional investors, that is increasing disturbed by the board’s position. The common public attack, fueled by the same group of lawyers, politicians, and pundits that attacked raiders, now focuses on hedge funds and “activist shareholders.”
True leveraged acquisition became friendly, run by “PE [Private Equity] Funds,” and often focused on distressed companies negotiating purchases short of inevitable or impeding bankruptcy. PE Funds also attracted the scorn of the public for their often radical re-organization efforts; workers were fired, factories closed or sold, and headquarters moved. Read More