Retail giants stand-off: what is going on?

The pages of history are littered with stories of business mergers and acquisitions—some of which successfully achieve the intended aims after consummation, most of which do not. Stories of failed attempts are far less common, especially when the suitor's advances are confidential. However, one failed attempt, of which news broke in the Australian business press over the weekend, merits further comment, particularly because it involves a corporate board that has been accused of a series of bungles of late.

The headline story concerns a proposal made by department store titan Myer to merge with its competitor David Jones. While the companies are currently trading profitably, pressure is starting to mount on both businesses as new competitors including on-line traders emerge. In October 2013, the Myer board presented a confidential merger proposal, claiming that operational savings of $85M per year would ensue. It was formally rejected by the David Jones board in November. The existence of the proposal, and David Jones' rejection of it, remained confidential—until recently.

Several questions must be asked as a result of this situation. Did the David Jones board act in the best interests of the company by rejecting the proposal, especially given claims that the situation was a "bloody fiasco" and that the directors were "just trying to protect their position"? Further, why did two David Jones directors buy shares the day after the proposal was received? (The ASIC has determined not to investigate the share transaction, despite it appearing to be, superficially at least, an instance of insider trading.)

The shareholders of both companies deserve better than this. Both companies have long and proud histories. They are publicly-listed, so the respective boards have a duty of care to keep shareholders (and the market) informed of material developments. Is the David Jones board on borrowed time? Perhaps. The response of shareholders, and the ASIC and ACCC, will be very interesting to observe.