25

I am working for a Fortune 500 company. A recent drop in our stock price caused, let's say, some startle.

Following that, one of our executives said in a global Q&A session in response to one question ("How can we be sure that none of our competitors will just take over our company?") something along the lines:

It doesn't matter if we would be still at our old market value or at the value we are now. If one of the big ones wanted to take us over, they have the resources to do so anyways.

That left me a little confused, and leads to my question:

Can one just forcefully acquire a company that is stock market listed?

And if so, what happens to the stocks others own? Are they just unilateral being sold for its current market value? Or are they going to be voided? Or did I just totally misunderstand the point this executive was making, and in fact there is no way to unilaterally take over a company?

7
  • 2
    I'm not going to write this as an answer because it's speculative, but my guess is that your executive was essentially saying "that's the least of our concerns right now". Not that it couldn't happen, but that it was improbable enough to not be worth worrying about. – Jared Smith Dec 11 '20 at 14:29
  • 7
    "Forcefully" is the wrong term, since a competitor buying up shares on the open market isn't illegal or violent. – RonJohn Dec 11 '20 at 18:50
  • 1
    @JaredSmith Well, it was anQ&A addressing the employees, so the intend was rather to reduce employees worries. But still I was wondering why it was phrased in such a odd way. – Zaibis Dec 11 '20 at 19:47
  • @RonJohn But being able to buy them, without others willing to sell would be forcefull (what was the presumption) – Zaibis Dec 11 '20 at 19:49
  • I'm sure there are exceptions like court-ordered sales during divorces or to settle the estates of dead people, but.. you can't just (legally; the Mafia certainly can...) force unwilling people to sell their stock. – RonJohn Dec 11 '20 at 20:48
36

Can one just forcefully acquire a company that is stock market listed?

Yes, one can. Though not on market price.

You start buying shares. Once you have a certain percentage, you can force board seats and make an offer for most. Understand that most companies have the VAST majority of shares NOT owned by people interested in the company, but as investments. If I start a company, and end up owning 51% - you can not force me to sell those. But most companies have MOST - seriously most - shares in the hands of financial investors.

And no, it would not be market price. I could make an offer buying 25% or so over market price. Hostile Takeover always pay a premium. Which puts financial investors - often funds that have to make financially sound decisions - into a bind: Trust the company grows, or take, NOW, a serious premium and invest in another company. Sometimes this goes wrong (look Yahoo and the attempted takeover from Microsoft - they rejected, TOTAL disaster). If I pay enough premium, I do not need "force", I can get enough people on the board to vote for it (because hey, I pay a premium).

Look up "Hostile Takeover" on investopedia or google for tons of examples.

15
  • 3
    Anti trust laws only paply if there is a trust situation - which is rare. Yes, it is as simple like that. Look at the 80s and the large raider barons doing exactly that (which, bts, forced the raise of shareholder value as concept). Borrow money (junk bonds), take over undervalued company. Political approval is not needed because of (attention) LAWS. it only gets into anti trust laws, but if a smaller company takes over another smaller one, not raising market share over a certain level, antitrust does not apply. – TomTom Dec 11 '20 at 8:33
  • 3
    @TomTom: "Antitrust laws only apply if there is a trust situation - which is rare." And they only apply if the antitrust regulators bother to enforce them, even rarer in the present day (1970s onward), at least in the U.S. It takes truly egregious monopolistic actions to trigger a serious investigation, and break-ups are all but unheard of (the '74-'82 antitrust action that led to the AT&T breakup was the last big one, and even then much of the breakup was undone by mergers over time). Microsoft got a slap on the wrist in '98; took until 2020 for Google & Facebook to get examined at all. – ShadowRanger Dec 11 '20 at 14:34
  • 3
    Facebook in particular seems to be one of the cases where it's big and regularly engages in acquisitions for anti-competitive purposes, but it was only finally sued to force acquisitions like Instagram (2012) and WhatApp (2014) to be unwound this past Wednesday (no one made a serious effort to stop the acquisitions when they happened). Facebook's even been pulling from the AT&T playbook from the '70s (heavy vertical integration, e.g. Oculus VR only functioning with an active Facebook account). – ShadowRanger Dec 11 '20 at 14:40
  • 3
    "Once you have a certain percentage, you can force board seats". You're not forcing board seats; you're exercising your rights as as a part owner with enough percentage to have some clout. – RonJohn Dec 11 '20 at 18:52
  • 4
    @jpaugh I'm dubious that OP understands that nuance. The tone of the question makes me wonder if Zabias might actually think that some sort of dubiously-legal coercion is involved. – RonJohn Dec 11 '20 at 20:45
16

Can one just forcefully acquire a company that is stock market listed?

No - all they can do is buy up all of the shares that are put up for sale. And that public buying would put significant upward pressure on the stock price, causing it to rise as shares were bought.

That said, they could buy up enough to get a majority voting share and basically run the company however they wanted. Even without a majority, there are activist investors that will buy up enough shares to have significant influence on policy (by having enough ownership to appoint their people to the Board of Directors). But a complete takeover would have to be done through the Board of Directors, who would authorize the sale (probably at much higher then market value) with the approval of the existing shareholders.

And if so, what happens to the stocks others are having? Are they just unilateral being sold for its current market value? Or are they going to be voided?

Depending on the terms of the acquisition (cash, stock, or a mix), your stock would be converted into cash, stock of the acquiring company (or a new company in a merger), or some combination. Most likely the total would be higher than the market value in order to get board approval.

Or did I just totally misunderstand the point this executive was making, and in fact there is no way to unilaterally take over a company?

It's hard to know without the exact words and complete context - did you misunderstand him or did he just oversimplify it? Perhaps he meant that the value of the company (it's assets, etc.) would be the same regardless of who owns it. Certainly, though, a takeover could be a significant shakeup to employees.

8
  • Okay, I might have not been clear enough. Still not sure how to improve my OP. But the executives point was: If one of our competitors had intends to buy the company, they could already have pulled that off. If they really wanted, it wouldn't really matter if that would cost them 300 billion or 350 billion. – Zaibis Dec 10 '20 at 15:30
  • 2
    @Zaibis FYI deals in the size of 300-350 billion doesn’t “just happen”. – ssn Dec 10 '20 at 17:47
  • 3
    @Zaibis The difference between $300B and $350B is $50B. There is not a single person, company, entity, or even country where $50B is a meaningless difference. – Grade 'Eh' Bacon Dec 11 '20 at 17:29
  • 2
    @Grade'Eh'Bacon $50B seems pretty meaningless in the play money world of the tech industry... :D – RonJohn Dec 11 '20 at 18:54
  • 1
    That wasnt the point either. His point (what it seemed to me), was: If any competitor intended to acquire the company (like 350billion much wanting it), they had the resources to do so and wouldnt have waited for the unlikely event of an 50billion discount. And since no one wants it thaaaaaat much, its also unlikely, someone wanting it 300 billion much. Thats how I understood it.BUUUUT that is irrelevant to my OP anyways I assume. – Zaibis Dec 11 '20 at 20:05
10

The 'current price' listed on a public stock market for company stock is simply the last price where someone was able to sell their stock to someone else. This is generally a very good representation of current company value, but there are some caveats to using that as 'the value of the company':

(1) For a company where minimal stock is traded (it is 'illiquid'), there are often price lags / jumps up or down, instead of smooth movement. So maybe stock traded 3 days ago for a junior venture at $3 / share, and in 2 days it might jump to $3.50 a share or drop to $2 a share. The more frequently traded a stock is, the greater certainty we have that the recent price is more like market consensus than a one-off need to buy or sell 'at any price available'.

You can see if this is the case by looking at the standing buy/ask orders on the market; if people are lining up to buy at $2 and no one is currently willing to sell for less than $2.75, then it seems the 'market consensus' is just that the 'true value' of a share is somewhere between those two points.

(2) When you buy an increasingly large portion of that company (say, > 1%, 5%, 10%), you are buying more than just the right to future dividends - you are also buying your way to be able to elect at least 1 member of the board of directors entirely on your own, enabling you to have a voice that gets heard in how the company is run. This might enable you to steer the company in a direction you believe to be more profitable or even to interact with your other businesses.

For example, if aluminium became quite rare, Tesla might want to buy a minority interest in some aluminium smelting businesses, in order to be able to gain certainty over its own supply for its production.

buying a significant chunk of shares will quite likely cost more than 'the current market price', for a few reasons:

(a) 1 person recently traded at $3, but perhaps they only have another 10k shares listed at that price, and the next person believes their shares are worth $3.10, so they won't sell for less than that. Large orders can 'gobble up' the order book, and it is unlikely that, say, 30% of a company is currently listed on the order book anywhere close to the last traded price.

(b) If 10% of a company's shares are purchased over a short time frame (especially if it is obvious to be a single buyer), that could create a bit of a 'run on the market', where shareholders may believe rumours about some good news, or even just try to capitalize on someone's immediate need to buy shares, which would further drive up the price.

(c) The value in being able to impact a company's operations has value beyond the currently projected income stream (including for reasons above).

(3) When you buy a controlling interest [ie: 51%, but in cases where there are no other large 'voting blocs', often 30% ownership of a company could allow you to fully vote in the majority of board members, since many small shareholders never vote], you effectively control the company, for all reasonable intents and purposes. Like with the above, this will increase the price you pay to buy the shares, but will also give rise to the need to report your intent and follow regulatory guidelines, which can further drive speculation of the purchase, increasing the price even further.

So, it is not exactly true that someone could take control of, say, TSLA by buying 51% of its 1 billion shares for the current price of $604 each [costing the hypothetical buyer about $302 Billion]. It would likely cost far more than that, because you wouldn't be able to find 500M shares on the open market where the holders are willing to sell for $604, especially after they hear a rumour about someone wanting to buy out the company.

So your executive is being a little glib when he says 'whatever, our market value is still our market value'. The change in current price does reflect a change in market sentiment about the value of your company, and that impacts how much it would cost someone to buy you out, although it would cost more than just the listed share price.

8
  • generally a very good representation of current company value — isn't it how we generally define company monetary value, and therefore a circular reasoning? Monetary value is not the only value. If a 400 year old company that is a small nation's pride gets bought by a venture capitalist from a much larger country only to be liquidated, then many would feel a loss in value even if they pay triple the listed share price per share to all shareholders. – gerrit Dec 11 '20 at 8:01
  • 5
    @gerrit Canada weeps for the drop in quality of Tim Horton's coffee and donuts after changes made under new ownership by the publicly traded RBI, majority owned by a Brazilian venture capital firm. Not really the point of my answer here, but I feel you. – Grade 'Eh' Bacon Dec 11 '20 at 13:46
  • 2
    @Grade'Eh'Bacon: Although the term "market capitalization" has been applied to the product of a company's market stock price times the number of shares, it's only meaningful for purposes of determining whether the market is overvaluing or undervaluing a stock. If the market price of a stock doubles for a couple hours and goes back to trading regularly at the old price, that would in no way imply that the value of the company doubled and then dropped by half, but more likely simply that the stock was briefly massively overvalued by the market, but the market corrected itself. – supercat Dec 11 '20 at 17:27
  • @Grade'Eh'Bacon: Alternatively, one could say that if the market neither overvalues nor undervalues a stock, its market capitalization will reasonably match its monetary value, but actions which cause the market to overvalue or undervalue a stock will push its market capitalization up or down more than they affect the underlying value (if they affect the underlying value at all). – supercat Dec 11 '20 at 17:30
  • @supercat Yes I believe that's largely the point of my answer - in most cases the most recent share price provides a reasonable estimate of company value, but not always (particularly in extreme circumstances, as I've pointed for example, one situation where this is a poor estimate of 'company value', would be low-liquidity stock that can have more extreme price movements). – Grade 'Eh' Bacon Dec 11 '20 at 17:32

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.