Why PPG's Bid to Take Over Akzo May Fail: QuickTake Q&A
by William Canny and Ellen Proper
24 maart 2017 17:17 CET 27 maart 2017 16:19 CEST
Dutch paint maker Akzo Nobel NV has rejected two takeover offers from U.S. rival PPG Industries Inc. Amsterdam-based Akzo is facing increasing pressure from shareholders to begin talks with PPG and has so far resisted, saying the sweetened offer is too low and holds inherent risks that are too high. Akzo can be defiant because it has a big bazooka in its war chest. It’s called a stichting, which amounts to strong anti-takeover measures that could render PPG’s efforts fruitless.
1. What is a stichting?
It literally means "foundation" in Dutch. It’s a centuries-old legal structure that can be used for a charitable group, a takeover defense or as a tax-avoidance tool. A stichting must always have a stated purpose. Many Dutch companies, including ABN Amro Group NV, ING Groep NV, Royal Philips NV and ASML Holding NV, have them.
2. What’s the goal of Akzo Nobel’s stichting?
Plain and simple, it’s to defend against takeovers. Its goal is to provide sufficient protection against activist shareholders or an outside offer that fails to consider sufficiently the various interests of Akzo Nobel.
3. What kind of power does it confer?
In short, a great deal. Akzo has three share classes: common shares, cumulative preferred shares and priority shares. The priority shares are Akzo’s ultimate weapon. They are held by the Foundation Akzo Nobel or stichting. Priority shares carry the right to making binding nominations of members to the management and supervisory boards and approve changes to the company’s Articles of Association. Any changes to the articles of association require shareholder approval. This means the foundation could design a "poison pill" defense, issuing new shares to dilute existing holders to make any takeover attempt more difficult.
4. When would a stichting come into play?
Decisions about invoking stichting powers are made by the foundation’s board, which is comprised of members of Akzo Nobel’s supervisory board who are not members of the audit committee. The members each have one vote. They are: Antony Burgmans, who is chairman of Akzo Nobel’s supervisory board, Sari Baldauf, Ben Verwaayen and Pamela Kirby. The foundation’s priority shares allow them to invoke defense measures if the continuation of the company’s management or policies are threatened. The foundation will only make use of these rights in special situations, or as the company states “exceptional circumstances only.” If PPG decides to make a hostile takeover bid, the two boards reserve the right to use all available powers.
5. How would this work?
Activist investors normally acquire stakes in companies and then agitate for change, sometimes calling for the removal of the existing management. This has already happened to Akzo Nobel. Elliott Advisors, which holds a 3.25 percent stake, has called on management to engage in talks with PPG and has threatened to try to oust management and the board if they refuse. The foundation could simply make binding nominations for members to the board that are sympathetic to their cause if this does happen. They could also change the Articles of Association, with shareholder approval, adding a "poison pill" defense if the company is subject to a hostile approach. “Regardless of Stichting Akzo Nobel, we believe shareholders hold the power to remove supervisory board and management board members,” Elliott said.
6. What happens now?
Not clear. PPG Chief Executive Officer Michael McGarry, in Amsterdam on a two-day visit to the Dutch company’s home turf to drum up support, said in an interview March 23 that a hostile bid remains an option after Akzo rejected its latest $24 billion approach. He also predicted that Akzo’s foundation wouldn’t block the takeover attempt, according to the FD newspaper. Along with Chief Financial Officer Vincent Morales, McGarry said he wanted to meet with Akzo, investors and government officials. Akzo has so far resisted efforts to engage and has the government on its side.
7. What are shareholders saying?
Shareholder pressure is growing. While PPG’s higher bid remains inadequate, it’s at a level where Akzo management should engage in discussions, according to Akzo’s largest investor, Causeway Capital Management LLC. “We believe combining Akzo Nobel and PPG would create a stronger company, and lead to improved prospects for both shareholders and employees,” Chief Executive Officer Sarah Ketterer wrote in a March 22 letter to the boards of the Dutch company. Columbia Threadneedle and other institutional investors have also called for the company to engage.
8. What other moves is Akzo considering?
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After rejecting PPG’s first unsolicited bid, Akzo said it’s considering separating its 4.8 billion-euro ($5.1 billion) specialty chemicals business. This may lead to a re-rating of the stock. If Akzo sells the unit for about 10 billion euros, then Akzo Nobel gets a sum-of-the-parts valuation of 91.20 euros a share, according to Churchill Capital. PPG’s sweetened bid values the company at 88.72 euros a share excluding a dividend.
9. Have stichtings been used in the past?
Yes. A stichting was notably used by the foundation of Royal KPN NV on Oct. 30, 2013 when Mexico’s Carlos Slim attempted to acquire the telecom operator. Its foundation used a poison-pill defense to acquire a near 50 percent interest in KPN, thereby thwarting Slim’s takeover attempt. A decade ago, Stork NV’s stichting used preference shares to fend off efforts by hedge funds to fire the board and sell off units. The Dutch maker of aircraft parts was later acquired. When ABN Amro returned to the stock exchange in 2015, after a disastrous takeover and a Dutch government rescue, it adopted a stichting.