The hostile takeover of Meralco - John Mangun


Posted at Jun 03 2008 10:14 AM | Updated as of Jun 03 2008 06:14 PM


The hostile takeover of Meralco - John Mangun 1The continuing dogfight over the Manila Electric Co. (Meralco) is obviously not going to end anytime soon. These kinds of brawls are sort of fun to watch if you are not the one with a dog in the fight.


The continuing dogfight over the Manila Electric Co. (Meralco) is obviously not going to end anytime soon. These kinds of brawls are sort of fun to watch if you are not the one with a dog in the fight.

I do not, nor have I ever, owned a share of Meralco.

However, all of the talk about the Lopez group, Government Service Insurance System (GSIS) and power prices does not disguise the fact that this is, at the simplest, a hostile takeover of a public company. Certainly, the politics and conspiracy theories of this situation run wide and deep.

But as one person e-mailed me, "You, sir, are not smart enough to understand this."

Very true. I am not smart enough to comprehend, as another said, "The events surrounding Meralco right now boils down into one thing—VENDETTA," or a blood feud between different families.

This is what I do know and understand: It is highly improbable that foreign money is going to wait around to see the outcome of the war. Deutsche Regis Partners, a foreign broker affiliated with Deutsche Bank, unloaded P71.8 million on Friday.

On the opposite side, Philippine Equity Partners bought P75.2 million worth of the stock. It sure would be interesting to know whom the clients are that Phil. Equity is buying for and why they think Meralco is a good buy at these levels.

Foreign money ran for the sidelines in May with net foreign selling of Meralco shares amounting to over P1.1 billion. One foreign fund manager that I spoke with said they might reenter when the price falls below P40 a share. Maybe that is a bit too conservative. There is fairly strong support at P50. But then again, the next long-term support is at P36 a share. P40 is probably a good entry point considering current events.

The "buyout" proposal of Meralco by the government is interesting. The GSIS cannot tender for the shares owned by the Lopez group without offering to buy the shares from all shareholders. The total market capitalization of Meralco is approximately P65 billion. Were the government to tender for 50-plus percent of the outstanding shares, the price tag would be about P35 billion.

In comparison, the Department of Agriculture’s total budget in 2007 was P3.1 billion; for the Department of Transportation and Communications, P16 billion; Public Works and Highways, P94.5 billion; and Education, P146 billion.

A hostile takeover occurs when it is either impossible or economically unfeasible to actually buy a controlling or majority interest in the target company. It is much easier and cheaper to persuade nonmanagement shareholders to tender their votes or proxies to the entity that is trying to execute the takeover.

On one side of the takeover is the group that does not have enough votes to control the board of directors. On the other side is the existing management and usually the employees of the corporation. In the middle, and the object of everyone’s attention and affection, are the public shareholders. It is these shareholders who will eventually determine the outcome of the takeover fight by voting with or giving their proxies to whichever side they believe will function in the best interests of the company.

The recent takeover try of Yahoo by Microsoft is a good example of a hostile takeover. Microsoft opened the war by offering to buy a certain amount of shares at a certain price. The war then progresses after the sitting board rejected the offer, to a scathing criticism of existing management and how the new management would do better.

This puts the current board in the difficult situation of having to defend itself. It never hurts if you can claim the existing management is incompetent and crooked, not running the company efficiently and wasting assets.

As in the case of Meralco, the takeover is being made by the minority members of the board. They can comfortably say to the public shareholders, "We have been sitting here observing the company for some time and these are the problems that the existing management has created."

Very tough to defend against that tactic. No matter what the existing management says, the answer is always, "We will do better."

It is always good if the takeover team can accuse the existing management of poor social behavior, bad environmental polices, predatory pricing or poor labor practices. It helps for the takeover group to sell shares, lowering the price when the flow of the war goes against them and raising prices when they take the offensive.

This may be important for you as a MERE shareholder. If a hostile takeover succeeds, there is little long-term positive effect on the stock price unless there is a fundamental change in corporate strategy affecting profits.

According to a study in the United Kingdom, "Bidders in hostile takeovers are not superior performers in terms of profit levels, although share returns are significantly high prior to takeover."

In other words, share prices are usually higher before the hostile takeover is completed than afterward.

Further, this same study shows that there was no significant improvement in the share performance of the target company. The stock price goes up, then down, before the takeover, and whatever the price is when the takeover is finished is usually the price the shares are traded at for the following year.

Regardless if this is a hostile takeover or a clan war, it will undoubtedly be the smaller shareholders who will end up shedding the most financial blood.

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