Corporate and Commercial
James Lyons
February 2023
Director James Lyons examines the Dignity PLC takeover deal, and discusses the implications of this for the mergers and acquisitions market and the power of shareholders.
James’ article was published in Law360, 9 February 2023, and can be found here.
Before many bankers’ New Year’s Eve hangovers had even cleared, UK plc was given a rude awakening by the first British takeover approach of 2023. A consortium led by insurance tycoon Sir Peter Wood made an offer for funeral provider Dignity, which was immediately recommended to shareholders by the company’s management, bringing to a swift end Dignity’s near-20-year listing on London’s stock exchange.
While early investors were well-rewarded by the meteoric rise in Dignity’s share price, recent years have been less kind to holders of the stock, with the company’s value at the time of Wood’s approach a mere fifth of its 2016 peak. Steeply rising costs had hit the company hard of late, and the markets had been even quicker to punish the share price on the way down as they had been to reward it on the way up.
With no imminent change in market sentiment in sight, not least after long-running, bruising battles with activist investors agitating for change, management clearly saw little runway in maintaining its stock market listing. Wood and his backers offered a way for the board to attempt to turn the ship around and return to long-term growth and profitability, especially given all of the funds earmarked for investment by the consortium.
Dignity’s public-to-private path is one well-trodden down the years, and the companies opting to change course so drastically are not only those down on their luck. While Dignity had been on a downward spiral for over half a decade, plenty of firms riding high also prefer to go private as a way to maximise company growth and shareholder returns.
While there is a clear benefit to firms seeking investment to do so via IPO (Initial Public Offering) and listing on the stock exchange, over time there can often seem ever-decreasing benefit to remaining a public company. The vagaries of the stock market, the capricious nature of investors, and general economic volatility can all weigh heavily on a company’s share price, piling pressure on management to deliver short-term results ahead of concentrating on longer-term goals, simply to buoy the stock price.
Such measures may be entirely at odds with managements’ view of the company’s best interests in the longer term, and result in counter-productive outcomes for staff and shareholders alike. Yet many boards nonetheless end up bowing to the demands of vociferous investors, whose voices nowadays are amplified even further by instant communication and ubiquitous social media platforms to air their criticism.
Such fear of rebuke, especially for boards of mid-to-small cap companies, has inverted reality to the point that they themselves believe that the share price dictates a company’s fortunes rather than the other way around. Share prices are by definition a reflection of investors’ attitude to a particular stock, rather than a guide to how well the company is performing or will perform in the future. Management should always ask themselves what decisions they would make if their company was private and thus there was no share price to worry about, rather than feel forced to merely react to others’ reactions to the current stock value.
If the answer to the above is that they feel compelled to make certain decisions in the short term to appease shareholders that may go against their better judgment for the company’s longer term future, then there is clearly scope for considering whether a public listing is worth maintaining at all. What may have once seemed appealing as a means to access institutional investment, create share liquidity and garner prestige by having a stock market presence at the start of the company’s journey may at a later stage become the very albatross round its neck that holds it back from future development and growth.
As well as the time and money spent debating and placating disgruntled investors in times of distress, management of public companies have to shoulder the day-to-day burden of compliance with the demands of market regulation and listing rules in order to maintain their firm’s listing. Having to report results on a quarterly or half-yearly basis and constantly update the market on any significant new developments in the business is a costly exercise, and also has the effect of exposing the company to regular parsing, analysis and micro-management by exactly the type of aforementioned investors who may forego long-term company growth in favour of myopic, short-term share price flips.
Freedom from such enforced transparency can be a boon for many companies, allowing them to carry out corporate restructuring and M+A activity far from the madding crowd of investors, analysts and commentators alike. Management can thus focus on a longer-term strategic outlook, including staff retention and rewards.
However, whilst there are benefits to privacy there are also inherent potential pitfalls. The removal of market compliance and reporting requirements allows more scope for any managerial misdeeds to go unchecked, and thus the lack of public scrutiny needs to be replaced by solid corporate governance and strong reliance on watertight auditors and robust legal representation.
At the same time, if the only way for a public company to secure a private takeover is to become saddled with significant debt to help service the financing of the transaction, as is the case in many such buyouts, caution must be applied when judging how much extra financial burden the company is sufficiently equipped to take on. Leveraged buyouts of public companies have often proved a recipe for disaster in recent years, especially in cases where new owners are seen as using the purchased company as either a means to strip assets or siphon cash from the business, at the expense of long-term growth and success.
As such, custodians of a company have a keen duty to all stakeholders, not least the workforce, to ensure that any potential suitors are genuinely well-intentioned, rather than a wolf in sheep’s clothing.
2023 finds UK plc still reeling from the twin economic blows of the pandemic and the war in Ukraine, both of which have had major consequences across all sectors of the stock market, and which have left countless firms teetering on the brink of collapse. The uncertainty which abounds provides clement conditions for pairing up between private equity and public entities, and M+A activity is likely to steadily increase over the year ahead, as initially evidenced by the Dignity takeover so early in the first quarter. Given the parlous state of the global economy, it is understandable that many boards feel panicked into action to restore shareholder value, but it is important that they avoid rash, rushed decisions for their companies’ futures. Often, the private arena offers a calmer, more rational setting for strategizing for the long-term than the pressure cooker environment of day-to-day traded markets, and as such should be seen as a viable option for many companies who previously may not have given such relocation a second thought.
