Disclosure of Profit Forecasts during Takeovers: Evidence from Directors and Advisors

This research investigates one aspect of managerial behaviour during takeover bids - that of disclosure of profit forecasts. As forecast disclosure is largely unregulated in the UK, this can provide valuable insights into managerial voluntary disclosure decisions. This in turn may be helpful in assisting policy makers to develop regulations governing disclosure of forecasts. Forecasts are normally made during takeover bids to support arguments being put forward by directors. The nature of these arguments will differ depending on whether the bid is agreed (i.e. recommended by target firm directors) or is contested. The research is based on eleven in-depth interviews with participants in the decision to disclose a forecast in public company takeover bids. Interviews were conducted in 1993 and 1994. The eleven interviews were carried out as part of a larger empirical research project which examined disclosure of profit forecasts in 701 takeover bids for public companies listed on the London Stock Exchange in the period 1988 to 1992. Interviewees were selected from a wide variety of backgrounds, firm positions and takeover contexts, so that all the relevant issues could be explored. All interviewees were involved in one or more of the 701 public company takeover bids which were part of the research sample. Interview responses are analysed by reference to five themes: • Factors influencing disclosure; • Motivations for disclosure of forecasts by bidders; • Motivations for disclosure of forecasts by targets; • Role of forecasts in defending against hostile bids; • Information disclosed in forecasts. Managerial motives to disclose or not disclose a forecast will be influenced by whether the forecast is persuasive in supporting arguments of directors. Many factors influence the disclosure decision. Two are particularly important. Whether the forecast discloses better or worse figures than expected (by say market analysts) is likely to influence the disclosure decision. A separate but related issue is whether forecasts disclose ‘good’ or ‘bad’ news. Various other factors are also considered, including the influence of company characteristics on disclosure. Motivations underlying management decisions to disclose or not disclose forecasts are likely to be different for bidders and targets. Consequently, bidders’ and targets’ disclosure decisions are separately analysed. Profit forecasts are issued for the purpose of persuading shareholders to support the arguments of directors. Following this, an interesting question is whether, in fact, they are effective in achieving this objective. There is anecdotal evidence that target companies in contested bids use profit forecasts as a means of fighting off an unwelcome bidder. Views on whether forecasts are effective defence weapons are examined. Once a company decides to publish a profit forecast, further decisions have to be made on the detailed information to disclose in the forecast. Relevant to their persuasiveness is the amount of information included in forecasts. The factors and motivations underlying the financial items and assumptions in forecasts are also examined. Factors influencing disclosure - If market expectations of results are inaccurate a forecast is much more likely. Good news forecasts are also more likely, although bad news forecasts may be disclosed in certain circumstances. Advisors are very influential in the disclosure decision. Variability of earnings and the riskiness of the forecast are also important factors. Motivations for disclosure of forecasts by bidders - Results show that bidding companies disclose forecasts mainly to support the price of any shares issued during the bid. Motivations for disclosure of forecasts by targets - Targets companies in agreed bids disclose forecasts mainly to support directors’ recommendations to shareholders to accept the bid, or as a requirement of bidders, who want information discussed during bid negotiations validated in the form of a formal profit forecast reported on by advisors and reporting accountants. Targets in contested bids disclose forecasts to get an increase in offer price or to defeat the bid. Forecast as a defensive weapon: It is clear that, in most circumstances, forecasts are not effective defence weapons - they are disclosed by only a minority of targets in contested bids. However, where circumstances favour disclosure, most interviewees agreed that a forecast is an effective weapon in a takeover bid. There was no consensus on what the benefit of disclosure is, although most commentators referred to forecasts in the context of getting an increase in offer price. There was only one mention of a forecast defeating a bid. Information disclosed in forecasts - Accepting that the amount forecast is most important, interviewees agreed that more detailed forecasts are more credible and provide forecasters with greater protection. Forecasters had a strong preference for including assumptions in forecasts as this offered protection to the forecaster. Users of forecasts were averse to assumptions, recognising that they reduced the reliability and credibility of forecasts, especially non-standard assumptions specific to individual businesses.