GSK Rebuffs Unilever's Third Offer​

By Jake Rickman​

What do you need to know this week?

Unilever has been chasing after GlaxoSmithKline (GSK), making its third offer to purchase the medical conglomerate’s consumer healthcare division. Once again, Unilever has been rejected.

You may remember that we covered Unilever’s disposal of its tea-brands to private equity house CVC for €4.5bn in November.

Market analysts have commended GSK for rebuffing Unilever's most recent £50bn offer, made up of £42bn in cash and £8bn in Unilever shares.

Why is this important for your interviews?

The relationship between GSK and Unilever provides an insight into a market increasingly hostile to “conglomerate companies”.

Conglomerate companies emerged in the United States following the Second World War. Companies with substantial market share would use their market power to buy out smaller companies in associated markets and build up a portfolio of increasingly diversified brands.

GSK and Unilever are among this class of companies, along with other former titans like Johnson & Johnson and Toshiba. And while once the envy of the corporate world for their diverse portfolios and impressive returns, today they face increasing scrutiny from investors for their diminishing returns and underperformance.

“Activist investors” are some of the principal investors responsible for the downfall of the conglomerate company. These investors, which include the (in)famous hedge fund Elliott Management (who owns a considerable amount of GSK shares), believe that in today’s market, their substantial portfolios are hindering their performance rather than aiding it.

Activists operate by buying up enough shares to put sufficient pressure on a company, either by playing on certain legal rights afforded to minority investors or by drumming up elaborate press responses.

For many conglomerate companies, activist investors are pushing for these companies to sell off various parts of their business to generate cash and improve their performance.

Unfortunately, Unilever is not the suitor GSK and its activist investors are interested in. Not only do GSK’s board think the deal is undervalued, credit rating agencies like Fitch state that Unilever has too much “leverage” (i.e., debt) and that a large purchase, such as GSK, would result in Fitch downgradingtheir credit rating.

This would make it more difficult for the company to borrow from lenders because they would be considered to be at a higher risk of default.

How is this topic relevant to law firms?

The directors of a company must ensure that they act in the best interests of the company, which often means in the best interests of the shareholders. This is especially relevant when a buyer makes an offer to buy a portion of their business.

Additionally, fending off activist shareholder pressure from firms like Elliott Management is an increasingly hot area of law. Many law firms, including Latham & Watkins, Sidley Austin, and Kirkland & Ellis, sport dedicated “shareholder defence” practices. These practice groups ensure that shareholder activists do not overstep their bounds and prejudice other shareholders and stakeholders.


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