It has been two months now since Microsoft offered to buy Yahoo.
MS chief executive Steve Ballmer is getting restive, as this letter to the Yahoo board of directors indicates.
He is giving them three more weeks to agree to his terms, or else.
Or else ... what? "we will be compelled to take our case directly to your shareholders, including the initiation of a proxy contest to elect an alternative slate of directors for the Yahoo! board."
He also wrote that his proposal reflected a "substantial premium" over market price, because he had hoped for a friendly transaction. If there has to be a proxy shoot-out, that premium will come down.
That sounds like bluster to me. If he does take the matter directly to the Yahoo shareholders, he'd likely try to woo them by increasing the price. At his most miserly, he'll keep it where it is. Cutting the size of the offer he's already put on the table sounds like a losing tactic. Accordingly, it also sounds like an empty threat.
Showing posts with label control premium. Show all posts
Showing posts with label control premium. Show all posts
Sunday, April 6, 2008
Sunday, January 20, 2008
Insider Trading
Here's a link to a discussion of insider trading -- specifically, an interview of law professor Henry Manne, who believes most such trading ought to be legal click here.
I bring it up specifically because I've been thinking about mergers, and an impending merger is one of the classic contexts in which charges of insider trading arise. I'll refer to inside traders as ITs for short.
A merger offer, as we discussed here last week, will generally involve a "control premium," i.e. a price for the stock of the target company above its market value. If one were aware ahead of time that such an offer was, well ... in the offing ... one would of course start scooping up the stock in order to sell it again after the offer has become public and the control premium is on the table.
The big question is: who does the IT cheat? and how?
The IT certainly isn't committing a fraud in the classic sense. At common law, a fraud is a misrepresentation by one party upon which the counter-party relies, to the counter-parties' legal detriment. If the IT buys up stock of a merger target through a public exchange, it seems to me just stretching a point to the point of torture on the rack to claim that the sellers of that stock are reliance upon anybody's representation (through silence) that there ISN'T any merger in the works.
Furthermore, in general the sellers will get a higher price if there has been some leakage of word of the impending merger than they'll get if there hasn't been, so clamping down on the ITs and limiting the buying in the pre-announcement period is what does them hard. Not the IT, but the prosecution thereof.
More tomorrow.
I bring it up specifically because I've been thinking about mergers, and an impending merger is one of the classic contexts in which charges of insider trading arise. I'll refer to inside traders as ITs for short.
A merger offer, as we discussed here last week, will generally involve a "control premium," i.e. a price for the stock of the target company above its market value. If one were aware ahead of time that such an offer was, well ... in the offing ... one would of course start scooping up the stock in order to sell it again after the offer has become public and the control premium is on the table.
The big question is: who does the IT cheat? and how?
The IT certainly isn't committing a fraud in the classic sense. At common law, a fraud is a misrepresentation by one party upon which the counter-party relies, to the counter-parties' legal detriment. If the IT buys up stock of a merger target through a public exchange, it seems to me just stretching a point to the point of torture on the rack to claim that the sellers of that stock are reliance upon anybody's representation (through silence) that there ISN'T any merger in the works.
Furthermore, in general the sellers will get a higher price if there has been some leakage of word of the impending merger than they'll get if there hasn't been, so clamping down on the ITs and limiting the buying in the pre-announcement period is what does them hard. Not the IT, but the prosecution thereof.
More tomorrow.
Monday, January 14, 2008
Control premiums: some theory
Let's speak in broad theoretical terms for a day. In a classic "hostile takeover," some outside entrepreneur decides that the target corporation has valuable assets which are being incompetently managed. This suggests an arbitrage play -- acquire the corporation, and with it both (a) the assets and (b) the ability to fire the incompetent managers.
By hypothesis, the acquired company will be of greater value with the new bosses, and the market price of the stock will soon reflect that higher value. So in the imagery of the old west, our entrepreneur, having ridden into town on a capital-markets horse and installed the new sheriff, sells his interest in the town for a profit, and rides back out.
The problem is that its difficult to sneak up on a town/company like that. The increase in the company stock price might come too soon. Suppose a particular turn-around artist has gained a reputation for previous gun-slinging escapades of this sort. When he starts buying stock in a new company, other market participants, checking with EDGAR, learn of this and the stock becomes more valuable immediately on the expectation that he'll continuing buying and then work his magic.
Or it becomes more valuable simply because even market participants not especially impressed by this gunslinger's reputation decide to hold out for a higher price to see if he'll pay it.
For either or both reasons, he'll end up paying a hefty "control premium" before he can install a new sheriff/management.
This, of course, raises the bar for the new management. In order for the entrepreneur to profit, it isn't enough for the new bosses to be better than the old boss. They have to be SUFFICIENTLY better to justify the control premium he's already paid. And then some.
Not surprisingly, then, there's a lot of interest in developing ways to take over the control of a company without paying a control premium.
From one point of view, waging a proxy battle for control of the board of directors is exactly that.
As Milton Friedman said, though: there ain't no such thing as a free lunch. Proxy fights have their own expenses and risks.
All of this has been by way of illuminating my comment yesterday that (a) CNET had created a new poison pill for itself to ward off a takeover attempt and (b) that the real battle will be on the proxy front and related litigation.
CNET's present governance structure involved staggered board terms. This year, only two of the incumbents will stand for re-election. That's not enough to change control othe company. Still, on January 7, New York based hedge fund JANA Partners announced that it will nominate Paul Gardi and Santo Politi for those two seats.
Also, JANA announced it will seek an expansion of the size of the board of directors from eight to 13. This is the "loophole" I mentioned yesterday. If it can get that increase, then the company will have to hold an election for the five newly created seats as well as for the two common up for a vote anyway. Seven seats on the hypothetical board of 13 will of course be a majority.
Will CNET have to hold an election for seven seats, or only for two? We'll go a bit further into this question tomorrow.
By hypothesis, the acquired company will be of greater value with the new bosses, and the market price of the stock will soon reflect that higher value. So in the imagery of the old west, our entrepreneur, having ridden into town on a capital-markets horse and installed the new sheriff, sells his interest in the town for a profit, and rides back out.
The problem is that its difficult to sneak up on a town/company like that. The increase in the company stock price might come too soon. Suppose a particular turn-around artist has gained a reputation for previous gun-slinging escapades of this sort. When he starts buying stock in a new company, other market participants, checking with EDGAR, learn of this and the stock becomes more valuable immediately on the expectation that he'll continuing buying and then work his magic.
Or it becomes more valuable simply because even market participants not especially impressed by this gunslinger's reputation decide to hold out for a higher price to see if he'll pay it.
For either or both reasons, he'll end up paying a hefty "control premium" before he can install a new sheriff/management.
This, of course, raises the bar for the new management. In order for the entrepreneur to profit, it isn't enough for the new bosses to be better than the old boss. They have to be SUFFICIENTLY better to justify the control premium he's already paid. And then some.
Not surprisingly, then, there's a lot of interest in developing ways to take over the control of a company without paying a control premium.
From one point of view, waging a proxy battle for control of the board of directors is exactly that.
As Milton Friedman said, though: there ain't no such thing as a free lunch. Proxy fights have their own expenses and risks.
All of this has been by way of illuminating my comment yesterday that (a) CNET had created a new poison pill for itself to ward off a takeover attempt and (b) that the real battle will be on the proxy front and related litigation.
CNET's present governance structure involved staggered board terms. This year, only two of the incumbents will stand for re-election. That's not enough to change control othe company. Still, on January 7, New York based hedge fund JANA Partners announced that it will nominate Paul Gardi and Santo Politi for those two seats.
Also, JANA announced it will seek an expansion of the size of the board of directors from eight to 13. This is the "loophole" I mentioned yesterday. If it can get that increase, then the company will have to hold an election for the five newly created seats as well as for the two common up for a vote anyway. Seven seats on the hypothetical board of 13 will of course be a majority.
Will CNET have to hold an election for seven seats, or only for two? We'll go a bit further into this question tomorrow.
Monday, October 29, 2007
The Usual Arguments
There are some standard arguments that an incumbent management of a target company typically makes when a potential acquirer offers an above-market price for a controlling share of a its stock.
So, yes, the offer is for $17 a share and the stock was selling for $14 a share before the offer was made but stockholders should support our refusal to do the deal because:
1) we are working on a strategic plan that will in time have the price at or above $21., the disruption of a change in ownership will only block that plan
2) the offer isn't reliably financed, so the offering price is illusory
3) the buyers don't know how to run a company of this sort, so they'll destroy its value soon after they take over
4) the control premium they offer is too low, we can get better from another buyer.
Note that although arguments (1) - (3) can be employed to defend the continued independence of a company, argument (4) effectively concedes the need for consolidation.
In the case of BEA Systems, their rather terse public statements have suggested (1). The issue of financing hasn't arisen.
Clearly, in this case, classic argument (3) won't fly. The bidder is Oracle, after all. They are running a business of just the same sort as BEA.
Finally, (4) might avail against Oracle, but doesn't work as against Icahn's dissatisfaction. Icahn is calling, precisely, for BEA to hold an auction -- if it can get better than the $21 Oracle is offering, he'd presumably be happy to see it do so.
So, yes, the offer is for $17 a share and the stock was selling for $14 a share before the offer was made but stockholders should support our refusal to do the deal because:
1) we are working on a strategic plan that will in time have the price at or above $21., the disruption of a change in ownership will only block that plan
2) the offer isn't reliably financed, so the offering price is illusory
3) the buyers don't know how to run a company of this sort, so they'll destroy its value soon after they take over
4) the control premium they offer is too low, we can get better from another buyer.
Note that although arguments (1) - (3) can be employed to defend the continued independence of a company, argument (4) effectively concedes the need for consolidation.
In the case of BEA Systems, their rather terse public statements have suggested (1). The issue of financing hasn't arisen.
Clearly, in this case, classic argument (3) won't fly. The bidder is Oracle, after all. They are running a business of just the same sort as BEA.
Finally, (4) might avail against Oracle, but doesn't work as against Icahn's dissatisfaction. Icahn is calling, precisely, for BEA to hold an auction -- if it can get better than the $21 Oracle is offering, he'd presumably be happy to see it do so.
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