The Guinness affair

One of the most intriguing legal cases in the UK in recent years related to the Guinness take-over of Distillers. Guinness, one of the largest breweries in Europe, had decided to bid for Distillers, another giant brewery.

The Board of Directors of Guinness were offering a mixture of cash and their own shares to the shareholders of Distillers. This is a common ploy in taking over large and successful companies, because it reduces the financial burden for the bidders.

In the Guinness affair, however, a new and disturbing element was introduced. In order to raise the market value of the shares which were being offered, an artificial demand was created by a group of wealthy backers who bought large amounts of Guinness shares prior to the take-over bid. The perpetrators were taken to court, fined substantially, and sentenced to long terms of imprisonment.

Why inflict such punishments? The main reason was that the Distillers shareholders were fraudulently misled as to the real value of the shares they were being offered. The question remains how many similar incidents have gone undetected.

The Guinness affair is one which will be debated in Stock Exchange circles for many years to come, proving as it does how difficult it is to regulate take-over bids effectively.

Section D. Conference (role-play)

Your task: Prepare a talk on a topic related to Take-over Bids. Use the text below, news from the Internet and the tips to it in the sub-section “Your views”. Speakers will produce their talks in English while some students will act as interpreters and interpret the conference for the Russian-speaking delegates.

Take-over Bids

Since quoted shares are freely transferable, they can be acquired by anyone who is prepared to pay the market price for them. However, there are certain rules to be observed in the UK. One is that you may bid up to 29.9% of a company's shares before making a full bid, but after that you must make a full offer for all the remaining shares, at the highest price you have paid for the shares so far.

Another basic rule is that shareholders must be treated equally, and when an offer is announced, the share transactions must be reported by all parties to the City Take-over Panel, the Stock Exchange, and the financial press. It will be interesting to see how take-over rules are harmonised in future in the European Community.

If the ground rules for take-overs are negotiable, the reasons for take-overs are likely to remain the same everywhere in the world. Acquiring a majority of the voting shares in company gives one the power to appoint directors and thereby control the policies of that company. For what purpose?

1. To buy shares at a bargain price. If shares are good value it seems logical to buy as many as possible. This could lead to asset-stripping where the break-up value of the company is higher than the price of the shares.

2. To enjoy economies of scale as a result of the enlarged operations. If unit costs can be reduced, pricing policies can be more flexible and profits increased.

3. To eliminate competition. For example, newspapers X and Y may be in competition with each other. X finds that Y is eroding its market share. With the financial backing of its bankers X takes over Y. It then has two basic options. It can either close down Y or segment the market so that for example X goes for upmarket readers, leaving the downmarket for Y. Or X can go for family readers, leaving Y to go for sports and politics, and so on.

4. To secure future supplies at a reasonable price. Thus, a company owning a chain of supermarkets may take over a factory processing a variety of foods. This is called backward integration.

5. To ensure markets for the goods or services of the parent company. This might be where a company making shoes, takes over one owning a chain of shoe shops. This is called forward integration.

6. To benefit from a policy of diversification, a company becoming involved in a wide variety of activities.

7. To rescue an ailing company, in which case the impetus for the take-over might come from the company which is seeking to be taken over. Management buy-outs might be included in this category.

How can a company combat a suspected take-over bid? One way is to avoid a situation here shareholders are unaware of the true value of their shares. Accountants and auditors are expected to be prudent, but a policy of prudence can lead to low dividends. Low dividends can lead to low share prices, and that is the ideal setting for a take-over.

Your views

1. Do you think take-overs can be justified in economic terms? How would you feel about a foreign company taking over one of your country's banks or insurance companies?

2. Why do think shareholders need to be protected from take-over predators?

3. Do you think take-overs are likely to be more or less common in the European Community? Why? Which sorts of companies are most likely to be involved in take overs in the new Europe?

4. What problems are likely to be faced in multinational European companies?

5. What sorts of take-overs do you think a) a hotel group and b) a motor manufacturing company might seek?

Section E. Reply to a letter

Matthew Freeman, a chartered accountant, has received the following letter from one of his clients. You are asked to draft a reply for his signature. Mrs Wiseman's husband, Thomas, died last year, and she is carrying on their small tobacconist and confectionery business.

The Candy Box The Esplanade, Brighton, Sussex BN5 9JT Telephone 0504 454545 Date: Mr M Freeman ACCA

37 Marlborough Chambers

Cornhill Brighton Sussex BN4 7PQ

Dear Mr Freeman,

A few days ago I received notification from the bank that 2,000 ordinary stock units in Sentinel Security Systems had been transferred into my name. The stocks originally belonged to my husband, Thomas. I was thinking of selling them, but my daughter tells me there is likely to be a take-over bid for the company within the next couple of months. She thinks I should hold on to the stock for the time being. I do not know anything about stocks and shares; Thomas always handled that aspect of our finances. Will I lose the stocks if the company is taken over? What do you think I should do? Yours sincerely,

Alice Wiseman

Section F. Rights issues*. Methods of Acquiring Funds

Translate the textt.

One of the most popular methods for a public company to acquire funds is through a rights issue*. The existing stockholders are sent a provisional allotment letter which offers them the new shares on favourable terms. A rights issue would operate like this. Delta plc has the following structure: