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TAKEOVER Q&A

Why is the first bid price rarely the last bid price?

As mentioned, the first takeover bid for a company is rarely the last takeover bid. Why is that? There is a great deal of logic to this when you think about it. Why wouldn’t a company offer a lower price than it is ultimately prepared to pay?! If the offer is accepted, it gets the target cheaper than it was prepared to pay, and if it is required to pay more, at least it has more up its sleeve.

A suitable analogy to this is the process of bidding on a house. Why wouldn’t you start lower than you are prepared to pay when negotiating with the vendor?! You never know, they just might accept your offer and if not, at least you’ve got more to play with, you have room to move. Well, it’s the same with takeover bids; companies rarely show their best hand first.

Be aware, however, that if the bid is friendly or agreed to by the target company’s board of directors, the bid is less likely to be raised.

What about scrip bids?

When a company launches an off-market takeover bid, they don’t always offer cash in return for shares (a market bid must offer cash only in return for shares). They either offer cash or scrip (shares), or a combination of these.

It is important to understand the variable value issues involved in a scrip bid. If the bid currency is not cash but scrip in a public company, it becomes difficult to value the bid accurately, since the share price is changing all the time and, therefore, the value of the bid is also changing. This can obviously work both ways: up and down.

When trying to trade a scrip bid, investors like The Rivkin Report generally look for a better margin to reflect the higher risk involved in taking scrip, instead of cash, as currency for the bid. A scrip bid is often raised, but it does pose another variable in the equation, which must be considered.

When should you exit?

Like any trade, there must be a decision at some stage to exit. While there may be exceptions, the best rule to follow when trading takeovers is to stay long and accept the last and highest bid just before expiry.

The major exception to this is when a bid is made unconditional, and its success is pretty much guaranteed. Generally speaking though, it is best to hold back on accepting until the whole process is over. You just never know when a new bid will appear out of nowhere and, if you have already accepted a lower bid or sold in the market, you may miss out on the higher price.

Why accept just before expiry?

If a bid is launched for your shares in a company, it is, as mentioned already, important to stay long and accept the last and highest bid just before expiry.

If you sell on the market, then you obviously won’t benefit from a higher bid. If you accept a bid prematurely, you may miss out on the higher bid (if there is one), but it does depend. If the same bidder makes a higher bid, you will get the higher bid. However, if another player has entered the game, and you have prematurely accepted the original company’s offer, the original company is free to take your shares at the lower price and on-sell them to the higher bidder, which leaves you without the highest bid.

This is why it is essential not to accept a bid prematurely. It limits your options and flexibility and can result in you missing out on profits that could be yours.

How do you accept takeovers?

To accept a takeover bid, all you need to do is inform your CHESS sponsoring broker by fax or mail that you wish to accept. Your broker can then accept on your behalf, without you having to do anything else (other than fax or mail in your signed authorisation). This does not incur any brokerage or GST. Be sure to be specific about details of the bid.

Also, often you can sell in the market, if you want to get access to your funds immediately. Just remember that this will incur a brokerage charge and GST.

If you are not CHESS sponsored, you must fill out the acceptance form that is sent to all shareholders of the target company and return it to the bidder.

What is compulsory acquisition?

One question investors often ask is what happens to one’s shares if the shareholder doesn’t accept the takeover bid. If a company buys 90% of another company, it has the option to compulsorily acquire the remaining 10% of outstanding shares. This means that the bidder sends out payment to the remaining shareholders and acquires their shares at the bid price. Those shareholders have no choice in whether or not they sell their shares.

This is related to the 90% acceptance condition that is often used. It is a very common condition of bids because if the bidder gets to 90%, it knows it can acquire the rest of the shares by compulsory acquisition and consolidate the company.

Be aware that when a company reaches 90% acceptance and goes unconditional, it is wiser to accept the bid before the expiry date, as you will then usually get paid in 5 business days. If you don’t accept and your shares are compulsorily acquired, it may take months to get paid. So, for the sake of expedience, accept the bid in this situation.

Profile: Warren Buffett

Far and away the most famous and successful stock market investor of all time.

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