COMPANY CONTROL
AND TAKEOVERS
AS A GROWTH STRATEGY
Luboš Smrčka and Jan Plaček
COMPANY CONTROL
AND TAKEOVERS
AS A GROWTH STRATEGY
Luboš Smrčka and Jan Plaček
Company Control and Takeovers
As a Growth Strategy
Published by
Oxford Tutorials
25 Lakeside
Oxford
OX2 8JF
www.oxford-tutorials-publishing.co.uk
FIRST EDITION
Copyright © Luboš Smrčka and Jan Plaček 2015
The Authors assert his moral right to
be identified as the authors of this work
REVIEWERS
Xavier Mateos-Planas, Queen Mary University of London
http://econ.qmul.ac.uk/staff/xaviermateosplanas.html
Gijs van Dijck, Tilburg University
https://www.tilburguniversity.edu/nl/webwijs/show/g.vandijck_nl/
Cover designed by Oxford Tutorials
This work was written as one of the outputs of the research project “Research of
insolvency practice in the CR, with the aim of forming proposals for changes in
the legislation that would enable increased yields from insolvency proceedings for
creditors, which would contribute towards increasing the competitiveness of the
Czech economy”, registered at the Technology Agency of the Czech Republic
under the registration no. TD020190.
ISBN 978-0-9933254-0-3 (hbk)
ISBN 978-0-9933254-1-0 (pbk)
All rights reserved. No part of this publication may be reproduced, stored in
a retrieval system or transmitted in any form or by any means, electronic,
mechanical, photocopying, recording or otherwise without the prior permission of
the publisher.
Printed and bound in Great Britain by:
Oxford Tutorials, 25 Lakeside, Oxford, OX2 8JF
CONTENTS
AUTHORS’ FOREWORD TO THE EXTENDED ENGLISH EDITION .... 7
INTRODUCTION ................................................................................. 11
Summary......................................................................................................................15
1 PRICE, VALUE AND USEFULNESS.............................................. 17
1.1 The price of assets and the real use of assets........................................................25
1.2 Objective and subjective value .............................................................................34
1.3 Analysts and their influence on determining value ..............................................38
1.4 A Few stories from the lives of analysts...............................................................45
1.5 The deceptiveness of mergers and acquisitions....................................................49
1.6 The merger of Hewlett-Packard – Compaq ..........................................................54
1.7 Searching for the “right price” and right methods................................................66
Summary......................................................................................................................67
2 MERGERS AND ACQUISITIONS FROM A THEORETICAL
PERSPECTIVE.................................................................................... 69
2.1 A brief history of mergers and acquisitions..........................................................69
2.2 Motives for mergers and acquisitions...................................................................77
2.2.1 Economies of scale .........................................................................................78
2.2.2 Economies of vertical integration ...................................................................79
2.2.3 Other sensible motives....................................................................................80
2.2.4 Dubious reasons for mergers ..........................................................................83
2.2.5 Other reasons for mergers or acquisitions ......................................................87
2.3 Types of merger and acquisition ..........................................................................88
2.3.1 Types of merger..............................................................................................89
2.3.2 Types of acquisition........................................................................................92
2.4 Friendly and hostile takeovers..............................................................................93
Summary......................................................................................................................95
3 LEGAL FRAMEWORK OF MERGERS AND ACQUISITIONS
IN THE CZECH REPUBLIC................................................................. 97
3.1 Czech legislation and the law of the European Union........................................100
3.2 The Act on Transformations of Commercial
Companies and Cooperatives .............................................................................102
3.2.1 Specific problems of transformations of companies.....................................103
3.2.2 Approval of mergers by regulatory bodies ...................................................109
3.2.3 Further accounting and legal issues of mergers ............................................112
3.2.4 Cross-border mergers: some dubious questions and selected aspects ..........113
3.2.5 Further remarks on mergers: domestic mergers............................................121
3.3 The deceptiveness of the merger process ...........................................................124
Summary....................................................................................................................125
4 THE BEAUTY OF HOSTILE TAKEOVERS .................................. 127
4.1 The influence of the cycle on the number of takeovers ......................................130
4.2 Typical hostile takeovers....................................................................................133
4.3 Some examples from abroad ..............................................................................135
4.3.1 The special case of Cities Service ................................................................135
4.3.2 The case of Porsche and Volkswagen...........................................................142
4.4 Some examples from the Czech Republic ..........................................................150
4.4.1 The old times of the Third Privatization Wave and the Včela Cooperative .153
4.4.2 The takeover of Sazka ..................................................................................157
Summary....................................................................................................................170
5 REDISTRIBUTION OF WEALTH IN THE CONTEXT
OF INSOLVENCY PROCEEDINGS................................................... 173
5.1 The substance of insolvency processes ..............................................................175
5.1.1 The macroeconomic significance of insolvency...........................................176
5.1.2 Several remarks on the relationship between asset seizure
and insolvency..............................................................................................178
5.1.3 Bankruptcy and the situation of a debtor in bankruptcy ...............................181
5.1.4 Space for profit and space for loss................................................................185
5.2 Redistribution processes.....................................................................................190
5.2.1 The insolvency raider ...................................................................................191
5.2.1.1 Criminal cases ............................................................................... 192
5.2.1.2 Information asymmetry .................................................................. 195
Summary....................................................................................................................198
6 A SUPPLEMENT ON INSOLVENCY SURVEYS .......................... 201
6.1 Some survey results............................................................................................203
Summary....................................................................................................................206
CONCLUSION................................................................................... 209
BIBLIOGRAPHY ............................................................................... 217
SUMMARY ........................................................................................ 221
INDEX................................................................................................ 223
AUTHORS’ FOREWORD
TO THE EXTENDED ENGLISH EDITION
As regards a company’s growth strategy, we have always been rather sceptical
that it might be effectively described in theory, in the sense that the result
would be a summary of generally valid principles which simply have to be followed and success will come for sure. In our lives, we have had many opportunities to observe successful entrepreneurs, investors and managers at work,
and our professional experience has been quite comprehensive, too. Yet we do
not recall having been the witnesses to a purposeful utilisation of the Ansoff
Matrix or Porter five forces analysis other than during painfully boring consultancy company presentations. On the other hand, one cannot deny that correct
strategic decision is a “science” in its own manner and most certainly stems
from an enormous foundation of knowledge and experience. This too is perhaps the reason why we do not see an endless number of clearly correct strategic decisions around us.
The mention of the Ansoff matrix is not intended as a denial or relativisation
thereof. It is in fact a theoretically precise concept which many people do follow – although more or less intuitively. Usually, it is successfully applied on
the basis of a detailed and accurate understanding of reality rather than on the
basis of theoretical cognition. The same applies to Porter’s analysis.
But this book is not about matrices or analyses; it is about real decisions
which have a higher strategic level than the daily fight for market share.
A growth strategy can be a persistent trench war for every buyer just as well as
a fast outflanking manoeuvre and a surprising move which decides the entire
tiring battle for single dollars, pounds or euros “on another playground”. For
the goal is success. If everyone around is prepared to play football, is able to
play football perfectly and has the best equipment for football, one can natural-
8
COMPANY CONTROL AND TAKEOVERS AS A GROWTH STRATEGY
ly compete with them in the game called football, although the probability of
a repeated win is small. There is, however, another method. It would suffice to
bring cricket equipment, draw up a cricket pitch and be able to play cricket
well. It is all the same to capital whether its value increases by means of the
game known as football or the game known as cricket; the key thing is that its
value increases and brings profit. Your main problem is to convince the others
to agree to a cricket tournament.
Let us imagine two companies fiercely vying for the majority of the market
with a similar product. Their duel is hard, full of innovation and based on the
most modern insights in growth strategy, marketing, advertising, public relations, on technological development…This fight can be won (more can be
profited) in many ways; one of the truly elegant is to buy out the strategic distributor of parts which supplies both competitors. Of course, over the past
hundreds of years, modern societies have imposed regulation of such methods
and have found ways to make them more difficult, for they have quite justifiably gained the impression that after similar victories, benefits move in a direction which is unfavourable for society as a whole. It is therefore not possible for the most part to arrive at a pitch and announce at the last minute
a cricket tournament instead of one in football. Nevertheless, “There are possibilities...”, as is sung in a Czech pop song. This book concerns precisely those
remaining possibilities of surprising solutions.
Company control and takeover is an area which, given certain possibilities
and combinations of events, offers enormous space for increasing the value of
capital. Likewise, a merger or friendly or hostile takeover can lead to enormous problems and long-term stagnation of participants or to unusually surprising results which no-one expects. One of these is described in the section
on the Porsche’s attack on Volkswagen, whilst at its end we see a complex
model containing what amounts to the assumption of Porsche by the
Volkswagen concern. Incidentally, the latest development on this front is especially instructive, and could not be captured in the text as such. In April
2015, Ferdinand Piech, grandson of the founder of Porsche and VW Ferdinand
Porsche, left the Board of Trustees after he unsuccessfully tried to depose Martin Winterkorn, the Executive Chief of the concern. Other members of the Porsche clan, especially Wolfgang Porsche, President of Porsche SE, were behind
his end. This family cannibalism spanning dozens of years has thus provided
the public with a new instructive chapter. As we can see, history knows no
“personal” victors, nor does it try to focus on “historical victory” in the sense
of organisation which overcomes time.
Growth strategy therefore makes sense especially as a maximally depersonified approach which enables above-standard valorisation of capital
Authors’ Foreword to the Extended English Edition
9
within a reasonable time, not as an attempt to organise conditions over a liberally long time. A defensive strategy is the beginning of the end, and similarly,
if it is constructed as a mechanism for fulfilling personal ambitions, it necessarily collapses. From this perspective, takeover or control of companies is
a sovereign area for de-personified strategy, for – as will later be said several
times – a successful takeover is precisely the moment when all the players
around are eager to play football, but then a team equipped to play cricket arrives and drily informs them of a change of plan.
Like many other decision-making processes, strategic decision-making processes have a specific problem – they cannot be repeated. The gauge thereof is
ultimately always the dollar, pound or euro, and you either earn or lose them.
We have in specific cases tried to survey who finds success through the transaction, who is the mover, and who takes the risk. We have been especially interested in who would find mergers worthwhile and who would not. This is
a direct and simple approach; it might make numerous people flare up and
seem cynical to them, not moral enough. Nevertheless, it is the only one recognised by practice. The world is full of moral victors who, even after thirty
years, feel the bitterness of the “hand of God”. Yes, it is hard to accept when
everyone plays football and one team changes the game to handball for a moment.
On the other hand, reality has taught us to be somewhat sceptical towards
mergers and generally towards friendly approaches when taking over companies. In fact, we might find only a few solid reasons to say that such a transaction can be advantageous for all parties concerned, which is the basis of the
friendly approach. A win-win situation emerges only in relatively exceptional
cases and is more likely to be an incidental result of such a transaction. If we
want to utilise takeover as a transmission gear towards growth and abovestandard profit, it is not sufficient to understand the area of takeover and control as a classical market, where one company profits by taking the products of
another company, whilst this other company profits by supplying its products.
For in mergers and acquisitions, every single transaction is a specific market
and a win-win situation is the least frequent one. Therefore, the hostile takeover seems more interesting to us, since we sense therein a far greater profit potential for the attacker. The friendly takeover, which has to take both sides of
the transaction into consideration and find a way to share the benefits so as to
satisfy both sides, cannot generate a profit greater than what is more or less the
usual return at the given time in the given region. Hostile takeover exerts far
greater pressure on individual economic subjects participating in the event,
therefore demanding high efficiency; and although it shares benefits unequally, perhaps even unfairly, it is by all means far more interesting.