How British firms can fight the foreign private equity frenzy

Over a lavish breakfast in a London hotel last week, one chief executive was asking an investor for some discreet advice. Concerned about the startling number of British companies being picked off by overseas buyers, he wondered how his company could better tell its story. It was a smart thing to do. Storytelling is important in the business world and judging by the number of firms succumbing to overseas takeovers, many are not very good at it. Following Brexit and the pandemic, bargain hunters have spotted a flash sale.

In this proverbial sale, some firms are the equivalent of clothes scrunched up on the floor covered in yellow sticker discounts. As one seasoned investor puts it, companies are “more vulnerable to bids when buyers think management is under pressure and they can turn them”.

Some executives are now worried that they have failed to spin a good yarn about their business, leaving their shares trading at a discount to US equivalents. Others are questioning the advice they’re getting from investment bankers. As companies across the country are snapped up at a rate not seen in years, nobody wants to end up looking like the fool.

Of course the surging interest in UK business from foreign buyers is no bad thing, but like any sale there will be winners and losers.

The concern is that the rush of foreign takeovers, while flattering, won’t boost Britain in the long run. Boards could be signing off on cheap deals that might land them and their advisers a quick windfall now, but could later impact UK jobs and lead to seller’s regret.

There are fears that Britain’s footprint in some sectors is being hollowed out, with figures obtained by the BBC showing that foreign, private buyers have spent more buying UK-listed companies in the last eight months than they have in the last five years put together.

There is nothing wrong with a takeover, but bosses looking at how to sharpen up their company’s image in light of this flurry of foreign bids are doing the smart thing. Boards should be in a position of strength if an offer crosses their desks, rather than a target because they were seen as easy pickings. Subtly asking an investor for storytelling advice over breakfast could end up saving their bacon.

That’s because mergers are often messy. A weak board will lose its way quickly as cash-rich bidders fight to outsmart each other and grab the best deal. Recent takeover talks have played out like a soap drama involving investors publicly clashing on valuations, heated counter bids, politicians stepping in and dramatic moves from former colleagues.

Opposition against takeovers by US private equity giants for firms such as Ultra, which makes defence equipment for Britain’s nuclear submarines, underlines the political and economic threat that some of these deals pose and the conundrum that chief executives could find themselves in. Senior military chiefs have attacked the potential deal, while at least one top shareholder has said they are all for it.

Meanwhile, the UK’s competition watchdog has raised concerns about the potential £29bn takeover of British microchip company Arm by US tech titan Nvidia. And the back-and-forth bidding war for UK grocery chain Morrisons could mark a stunning comeback for former Tesco boss Sir Terry Leahy, who is a partner at the US firm leading the race, Clayton Dubilier & Rice, and used to work with Morrisons’ chief David Potts and chairman Andrew Higginson while at Tesco. Blockbuster deals are rarely without politics, personal dynamics and clashes.

Many could benefit from the latest rush of deals - the latest offer for Morrisons has left investors delighted, while City advisers are cashing in on the flurry by pocketing huge fees. Some takeovers will turn out to be for the best, others will prove to be a disaster.

Household names including Debenhams, the AA, Saga and Pizza Express, are among those to have been burnt by private equity. Yet openness to foreign investment is vital for the UK economy, and City investors do not have a blanket view on UK firms being snapped up. What they do want is boards to be able to stand firm and sell their story properly when that bid comes knocking.

As one investor moans: “Sometimes boards just want to get out, but the UK market is undervalued and in some sectors management is giving in too easily”. British companies need to learn how to tell their story better given so much of UK plc is being taken out. Having spent a year focused on steering their companies through the pandemic and Brexit, the plan now needs to be to look outwards.

Good storytelling is even more important if activists are on the prowl. Corporate lawyers have been warning for months that hostility is in the air and that aggressive bids could be ahead, particularly if differences in valuation cannot be reconciled.

This could take the form of outright approaches against a board’s wishes or by using more subtle so-called “bear hug” tactics, where a bidder goes over directors’ heads with an informal approach to shareholders. “Bid defence preparation by targets is more important now than ever,” Hogan Lovells partner John Connell Partner argued in a recent M&A report.

The private equity sector, heavy with cash and eager to spend it, has timed its shopping spree well. Boards need to stand strong and work out what their narrative is before it’s too late. A takeover might be the right move, but they will stumble without a convincing story.