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Corporations and takeovers?

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Corporations and takeovers?

Postby harelache6 » Sun Dec 02, 2012 10:29 am

how does a typical takeover proceed?
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Joined: Mon Jun 25, 2012 7:35 am

Corporations and takeovers?

Postby burhdon9 » Sun Dec 02, 2012 10:35 am

Following is a simplified description of how a typical (friendly) corporate takeover might go. (The principles for a hostile takeover are similar, but the details vary considerably.)

Company A has a diversified portfolio of interests. Its stock is currently trading on the NYSE at $40 a share, an all-time high. While it is a good company, with a good public image, it is short of cash. It also has three million shares of unissued common stock registered with the Securities and Exchange Commission; these shares don't exist, but they can be printed up in short order as necessary. Its current earnings are $2 per share and it pays dividends of $1 per share.

With a price of $40/share and earnings of $2/share its price earnings ratio P/E = 40/2 = 20, typical of a solid company.

Now, let's look at Company B. Its shares, listed on the Toronto Stock Exchange are trading at $20 a share. Its earnings are at $2/share and it pays $0.50 in dividends. Its price-earnings ratio is therefore P/E = 20/2 = 10. It too is a solid company, but, with that kind of P/E, somewhat stodgy.

Company A would like to take over, or merge with, Company B. It offers Company B a deal by which they would give one share of Company A for each share of Company B. After all, both companies' shares trade at the same price and earn the same; in addition, Company A's dividends are twice as much as Company B's. Maybe Company A also offers some other incentives to the management and directors of Company B, e.g., management and director positions in the merged company, or whatever.

Suppose the managements, boards and shareholders of the two companies agree on the deal.

Now, here is where the unissued Company A shares come in. Company A prints enough shares to swap them 1:1 for Company B shares, goes through a whole lot of paperwork, makes a few lawyers and investment bankers rich and concludes the deal. We now have a new company, i.e., Company AB.

No cash has changed hands, and everybody is happy in terms of the shares they own. But now comes the hard part.
Company AB will have to mesh the managements, IT systems, corporate cultures, product lines, etc., of the two companies -- that costs money. To make the takeover worthwhile and pay all those extra expenses, they then have to make it more efficient. That means getting rid of "superfluous" employees, sell off unprofitable divisions, etc.

Some mergers/takeovers work, others don't.
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