What happens when?

Gandalph

When a larger organisation takes over a smaller one? Like how does this effect the stock of each organisation, do they go up or down? Like in the case of this AT&T takeover of T-Mobile, I know it might not go through due to the DoJ but I am new to investing and was wondering this.

I would presume the shares of the larger company falls slightly but yeilds a better investment in the long run while the shares in the smaller one go up? But I'm not sure.

soddy1979

There is a consensus that the acquirer generally overpays in M&A space. Therefore, the acquirers share price will generally fall, and the acquired firms share price will generally rise.

Obviously, if the market considers the takeover as cheap to the acquirer, you can expect the acquirers share price to rise and the acquired firms share prices to fall.

alejandro1977

soddy1979 wrote: »

Obviously, if the market considers the takeover as cheap to the acquirer, you can expect the acquirers share price to rise and the acquired firms share prices to fall.

If the acquirer gets a bargain then the share price will rise - the acquired firm's price will reflect the proposed take over price - and sometimes the possibility of another potential acquirer getting in on the act.

The price of the acquired firm rarely falls - the acquirer usually pays a premium otherwise the takeover is rejected

coylemj

soddy1979 wrote: »

Obviously, if the market considers the takeover as cheap to the acquirer, you can expect the acquirers share price to rise and the acquired firms share prices to fall.

By definition you can only take over a quoted company by making an offer that is greater than the currents share price, otherwise why would anyone sell you their shares? So how can the share price of a target firm fall by reason of the fact that someone want to take it over?

And as alejandro1977 says above, normally the market anticipates a counter offer so not alone does the first bidder have to make an offer greater than the current share price, the quoted price often immediately rises to a higher level in anticipation of a second bidder arriving on the scene.

Gandalph

coylemj wrote: »

By definition you can only take over a quoted company by making an offer that is greater than the currents share price, otherwise why would anyone sell you their shares? So how can the share price of a target firm fall by reason of the fact that someone want to take it over?

And as alejandro1977 says above, normally the market anticipates a counter offer so not alone does the first bidder have to make an offer greater than the current share price, the quoted price often immediately rises to a higher level in anticipation of a second bidder arriving on the scene.

I have read some things were bids have been lower than share prices which have caused shareholder uproar but the deals still went through?

soddy1979

coylemj wrote: »

By definition you can only take over a quoted company by making an offer that is greater than the currents share price, otherwise why would anyone sell you their shares?

Yes, I agree. I was speaking more hypothetically, and from a combined value point of view. I also think in the UK (not sure about other markets) that you can't make a takeover offer at a price less than anything the bidder pays in the previous thirty days.

There is definitely consensus in the market that an acquirer generally overpays for a target, but I do think it's rational that the market would also place a premium on a share price in anticipation of a counter offer, but lets say, hypothetically speaking that an offer was made to takeover a company below the current market price. I think that the market would then append a discount to the targets share price because of a fear of information asymmetry between the acquiring firm and the rest of the market.

coylemj

Gandalph wrote: »

I have read some things were bids have been lower than share prices which have caused shareholder uproar but the deals still went through?

Feel free to quote us an example where the deal went through after an offer was made that was lower than the current share price.

Gandalph

coylemj wrote: »

Feel free to quote us an example where the deal went through after an offer was made that was lower than the current share price.

I was'nt questioning you, I was questioning my own question in a sense. I thought I had read things in Warren Buffetts book that stated he haggled share prices down with board members. Maybe it was because the asking price was significantly higher than share prices? The term buffetting spring to mind, could be wrong though.

alejandro1977

Gandalph wrote: »

I was'nt questioning you, I was questioning my own question in a sense. I thought I had read things in Warren Buffetts book that stated he haggled share prices down with board members. Maybe it was because the asking price was significantly higher than share prices? The term buffetting spring to mind, could be wrong though.

you could get a situation where say it's trading at $6 for ages - then an offer comes along for $8, but the price jumps to say $10 on speculation of an increased offer/2nd bidder ("white knight")/short covering.

The bidder may say, "I'm only paying $8, not a penny more" or maybe even $9 and the hoped for white knight doesn't materialise so the board recommends the $8/$9 offer - i.e. lower than where the price has traded.

Boards have a duty to protect shareholders and there are takeover laws that basically require the behaviour that I and a couple of other have outlined. That means trying to get the best price but also being realistic (see FBD's rejection of a takeover bid a few years back...) - sometimes shareholders are unrealistic hence the uproar and sometimes boards fail to get proper value. However if the company is that great then it should be priced into the shares prior to the bid...

The point is that the offer is usually above the historical long/medium term share price

In corrupt countries/places with weak minority shareholder protection or where a large chunk of the shares are already held by the bidder then funny things happen.

Gandalph

Ah I see, thats a good explanation thanks