Hostile aquisitions and stock prices -- what happens?

May 29, 2007 7:34 PM

What tends to happen to a large, international company's stock price post-hostile acquisition in the case of the acquired company?

Before the fact, their stock price tends to rise, as the acquisition target pumps up its stock price to make the acquisition more difficult and expensive for the predator.

What about afterwards? Is it possible to generalize?

posted by stavrosthewonderchicken to work & money (14 answers total)

More important than the stock price is liquidity. A hostile takeover requires that the acquiring party take control of most or all of the stock. What is left will be thinly traded until the new owners take the company private.
posted by b1tr0t at 7:57 PM on May 29, 2007

Yeah, there isn't really an afterward, assuming you're talking about targets that started out publicly traded.

First, remember that a "hostile" takeover is merely one done without the cooperation of the target's board of directors. The target's shareholders of course have to cooperate, and if they're offered a good price for their stock and freely choose to sell it, it's hard to describe such an arrangement as "predatory." Of course, maybe they weren't offered a good price but were instead coerced, but that isn't so common these days, when the target is large and publicly traded.

Coercive public tender offers aren't supposed to be legal, and a lot of the old holes have been plugged. It used to be that the acquiring corporation would make a public offer for, say, $50 per share, with the implicit understanding that if it gained a majority stake, the remaining minority would be squeezed out in a back-end merger for somewhat less than $50 per share. Obviously this puts the shareholders in a tight spot, since they don't want to end up as part of that minority, so they might tender their shares for $50 even if they really would've liked more.

This sort of thing is no longer allowed.

It's unusual for an acquiring corporation to purchase a majority interest in a publicly-traded corporation and leave a minority privately traded. There are tax, corporate law, regulatory, and business reasons why this is a bad idea, and no real reason to do it.

Consequently, the targets of hostile takeovers don't usually have a post-takeover market stock price.

If for some reason, a publicly-traded minority was left, there would be a couple different contrary influences on the price. The willingness of the acquiring corporation to pay a market premium to acquire a control block would signal that the target was undervalued to begin with, but the presence of a control block would tend to drive the price of minority shares down. It's hard to generalize, and the situation doesn't usually arise in the context you're describing.
posted by Mr. President Dr. Steve Elvis America at 8:23 PM on May 29, 2007

If the company is acquired, it is almost always folded into the acquiror. I must be misunderstanding you, and maybe others are too.
posted by Kwantsar at 8:24 PM on May 29, 2007

Hmm. I guess I was unclear, both in my own mind and in my question.

All I'm curious about is if I own stocks in Big Bluechip Company X, and Bigger Company Y buys Company X (and either continues to run it as a Company X or folds it into Company Y), what would happen to the value of my stocks in Company X, as a private shareholder? Would they be exchanged for Company Y stocks? Is there anything like a standard sequence of events from that perspective?

Probably too late now that I've shot my q-wad, I suppose, and Mr...America touches on my question.
posted by stavrosthewonderchicken at 9:31 PM on May 29, 2007

There is a big difference between a merger/acquisition and a hostile takeover.

In a hostile takeover, the takeover occurs against the current owners' or managers' wishes. As a result, a company acquired in this manner will typically not fold nicely in to a larger organization. A private equity group might do a hostile takeover with the intent of splitting the company up to parts, and selling those parts to various other competitors, on the assumption that they can sell the parts for more than they paid for a whole.

In an ordinary merger, the two companies court each other and come to friendly terms. Some of the management of each company will likely depart, but an effort is made to keep things friendly.

Oracel's takeover of PeopleSoft is an exception. Both were large corporations, and you might expect a friendly acquisition. PeopleSoft didn't want to merge with Oracle, so Oracle bought the company up. This worked (or may not have, I don't know if Oracle got what it wanted) because Oracle didn't care about PeopleSoft's senior management. Oracle wanted (1) customers, (2) the removal of a competitor from the market (3) some good sales people.

Note that we can only offer you very general comments on the merger process. People who can actually predict and valuate mergers make seven figure salaries, drive flying cars to work, and read Fark.
posted by b1tr0t at 10:00 PM on May 29, 2007

what would happen to the value of my stocks in Company X, as a private shareholder?

Almost always, you will receive more (either in cash, or in the market value of shares) than you had before the announcement.

Would they be exchanged for Company Y stocks?

"Consideration" paid to the target's shareholders, as it's known in the business, is almost always cash or shares of the acquiror.* One tends to see an all-cash deal when the target is relatively small, an all-stock deal when the companies are closely matched in size, and "mixed consideration" when the relationship is somewhere in between.

Reasons for an all-stock or mostly-stock deal are usually (perhaps likely in your hypothetical, where the company being acquired is "blue chip"):
1. The acquiror does not have sufficient cash to pay the target's shareholders.
2. The target's management actually believes the "synergy" story that underlies almost every merger, and wishes to share in the synergies.
3. Management of the acquiror believes that its shares are overvalued relative to the target.
4. Under Revlon, Paramount, and all the relevant cases that a good law student could smartly discuss, cash offers tend to produce fiercer bidding contests.**

MPDSEA is thorough and correct. I suspect that he was an investment banker, once upon a time.

*I write "almost," as very rarely an acquiror may staple more exotic instruments (such as warrants, preferreds, convertibles, et cetera) to the deal, or assign a tracking stock to the acquired company. I stress that these are rare exceptions, and I couldn't cite an example if you asked me.

**If two potential suitors are each offering cash only, management and the BoD are pretty much forced to take the higher offer. If the suitors are offering stock, a comparison of the offers relies on projected synergies, and makes disagreement (and politicking) about the quality of the offers possible.

Now that I've written all of that, I realize that I've gone off on a bit of a tangent. I hope what I've written is nonetheless useful. If you want to know more about what management of potential targets do when they do not want to be acquired, I suggest this search.
posted by Kwantsar at 10:12 PM on May 29, 2007 [1 favorite]

And if I may play the pedant card to b1tr0t, for whom I have immense respect:

Hostile takeovers are by definition "mergers/acquisitions" and take place not against the wishes of the majority of the target's owners, but against the wishes of the target firm's management, who have a vested interest in keeping their jobs. Often, this kind of deal happens because management of the target is destroying value. The seminal paper on the topic is here. If you have any interest, you should read it. It's one of the five or ten most important papers in the corporate finance theory and policy field.
posted by Kwantsar at 10:20 PM on May 29, 2007

There are a lot of possibilities. I'll try to hit some of the more common ones.

First, though, it's important to draw a distinction between corporations and businesses. A corporation is a legal person capable of holding property and entering into contracts in its own name. The shareholders of a corporation are its owners, while the corporate assets are owned by the corporation itself. The directors control the corporation on behalf of the shareholders, and management is employed by the corporation and manages its property and operations on its behalf. It's kind of complicated. Basically, the corporation is the puppet, the directors pull the strings on behalf of the shareholders, the shareholders own it (and appoint the directors), the corporate property belongs to the puppet (tricky, but that's how it works), and management is the puppet's agents (getting weird now...).

A business, on the other hand, is just an aggregation of related tangible and intangible assets and relationships directed at a particular commercial purpose. A corporation can own and control one or more business, of course, and usually does.

With this distinction in mind, it's easy to see that an acquiring corporation usually wants to acquire a business or part of a business as part of its own business. The purchase and sale of corporations is (usually) just ancillary to the exchange of businesses and business assets.

There are, generally speaking, three ways to acquire a business that belongs to a corporation.

First, the acquiring corporation can buy the business assets themselves. After the exchange, the target will no longer hold the business it used to, but it will instead hold whatever was exchanged (perhaps cash, stock in the acquiring corporation, stock in a third corporation, or another business). The target can continue to operate or it can liquidate--basically, dissolve and distribute whatever assets were received to the shareholders. If a corporation sells its business assets for cash and then liquidates, the shareholders will receive cash and their shares will disappear into the ether when the corporation ceases to exist. This option is called an "asset sale," and it has problems. The sale is taxable, it has to be approved by the directors and shareholders (usually), and passing title individually on a large number of assets is a pain in the ass and prone to error.

Second, the two corporations can merge by operation of law. Under this option, the corporations become one by operation of law. The acquiring corporations simply steps into the shoes of the target. This is a lot cleaner than an asset purchase, but the acquiring corporation is stuck with every asset and liability of the target. There's no chance to acquire just some, like in an asset purchase. In a merger by law, the target corporation's stock disappears (since the target corporation disappears), and its former shareholders usually receive cash or stock in the acquiring corporation, but could potentially receive anything at all. Such a merger cannot be accomplished without approval of a majority of the target shareholders, and if it's done without approval of the board of directors (assuming the jurisdiction of incorporation allows) it's described as "hostile."

Third, the acquiring corporation can purchase a controlling stake in the target corporation's stock. This can be done with or without the approval of the board of directors of the target (again, if not, it's called "hostile") but of course requires the consent of each selling stockholder. After the purchase, the acquiring corporation might continue to operate the target as a subsidiary, it might liquidate it, or it might merge it by law into itself. The shareholders of the target corporation usually sell their stock for cash or stock of the acquiring corporation, but could potentially exchange it for anything at all. It's up to them.
posted by Mr. President Dr. Steve Elvis America at 10:27 PM on May 29, 2007

As has been said, there is usually no stock price to speak of in terms of the acquired company. It is usually folded up into the acquiring company.

In terms of the acquiring company, it will typically see its stock price fluctuate along with its post-acquisition performance. Successful integration = up. Unsuccessful integration = down, etc.

Fun fact: According to an oft-cited KPMG study (PDF), only 17% of deals had added value to the combined company, 30% produced no discernible difference, and as many as 53% actually destroyed value. In other words, 83% of mergers were unsuccessful in producing any business benefit as regards shareholder value.

In the long run, assuming at least a semi-efficient market, this should reflect in the share price of the acquiring company.
posted by dagny at 1:47 AM on May 30, 2007

As has been said, there is usually no stock price to speak of in terms of the acquired company. It is usually folded up into the acquiring company.

OK, but see that's what I didn't understand. Say I own 1000 stocks in the acquired company. My questions (unclearly expressed) were: what does it mean to say 'they are folded up into the acquiring company' for me? What actually happens to my investment?

I think I'm getting it now, though, and many thanks to everyone for your info!
posted by stavrosthewonderchicken at 5:18 AM on May 30, 2007

(which is not meant to dissuade anybody from adding more...)
posted by stavrosthewonderchicken at 5:18 AM on May 30, 2007

MPDSEA and Kwantsar will probably be by later to give precise details on what happens with the shares. As I understand it, most, but not necessarily all shares, will be either purchased or converted to the acquiring party's shares.

As an individual shareholder with 1000 shares, you would generally expect to receive $XX for your shares or some fraction of the new shares in exchange for each of your old shares.

There are laws that prevent small shareholders from being abused in these transactions. I don't know them well, so I'll leave that to MPDSEA and Kwantsar.
posted by b1tr0t at 7:11 AM on May 30, 2007

(where $XX is the price offered by the PE house managing the takeover)
posted by b1tr0t at 7:19 AM on May 30, 2007

Say I own 1000 stocks in the acquired company. My questions (unclearly expressed) were: what does it mean to say 'they are folded up into the acquiring company' for me? What actually happens to my investment?


What follows is a very elementary example:

Company A, the acquirer, has 100 shares outstanding, at a market value $10 each. Thus, it is worth $1000. Company T, the target, has 20 shares outstanding, at $15 each. It is worth $300. Company A's management is renowned and admired. It claims that the two firms together are worth $1500. The market, broadly speaking, believes them*, and an all-stock deal takes place.

In this case, the merger creates $200 of value. T's shareholders (as a whole) will capture somewhere between $0 and $200 of this value. A's shareholders will capture $200 minus whatever T's shareholders capture.

Case 1: All the surplus goes to the target. Shares of T are exchanged for shares of A. T shareholders lose their T shares, and get 2.5 shares of A for each share of T. A's shareholders keep their shares. Total shares outstanding are 150, worth $10 each. Former T shareholders, as a group, own 33% of the new firm.

Case 2: All the surplus goes to the acquirer. Shares of T are exchanged for shares of A. T shareholders lose their T shares, and get 1.25 shares of A for each share of T. A's shareholders keep their shares. Total shares outstanding are 125, worth $12 each. Former T shareholders, as a group, own 20% of the new firm.

Case 3: The surplus is shared. Shares of T are exchanged for shares of A. T shareholders lose their T shares, and get 2 shares of A for each share of T. A's shareholders keep their shares. Total shares outstanding are 140, worth $10.71 each. Former T shareholders, as a group, own 28.5% of the new firm.

Case 2 is more or less impossible, and is presented for completeness. There's also a fourth case, where the target shareholders get all of the surplus value, and they wind up owning more than they should of the combined entity. But I'm tired, and this will have to do. If there are any errors in my arithmetic, tell me, and I will correct them.

Maybe reading a typical merger agreement would shine some light on the subject.

*This is rare; as dagny notes, mergers are net destroyers of value, and the market knows this.
posted by Kwantsar at 1:17 PM on May 30, 2007