http://www.wsj.com/articles/microsoft-to-acquire-linkedin-in-deal-valued-at-26-2-billion-1465821523
Microsoft give 50% premium.
Why?
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Microsoft is making it difficult for holdouts to vote against the merger in a special shareholders meeting– user662852Commented Jun 14, 2016 at 10:50
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They are getting control of the company and synergies from the merger. A simple example of synergies, imagine Microsoft paid 250mil annually to advertise and recruit from LinkedIn's network. They can save that money, continue to hire the best employees and grow LinkedIn's revenues.– emicanCommented Jun 14, 2016 at 17:07
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I know. But why can't microsoft just pay the normal market price? Why it has to pay 50% premium? There are plenty of stockholders willing to sell at market price.– user4951Commented Jun 15, 2016 at 9:42
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@JimThio The approach you mentioned was done in the US and elsewhere during the 1980s "corporate raider" period. Laws and accounting rules changed to make "creeping takeovers," as they were called, more difficult to maneuver and expensive, e.g. corporate "poison pills" and other "shark repellents," as they were called. What you're thinking can be, and sometimes is, done in US markets. It's rare, extremely cumbersome and expensive. Besides, LinkedIn without its executives and employees is not much more than a website and database. Buy too cheap and Microsoft may lose the main assets it wants.– CatalyxCommented Jun 15, 2016 at 16:36
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3 Answers
Without any highly credible anticipation of a company being a target of a pending takeover, its common stock will normally trade at what can be considered non-control or "passive market" prices, i.e. prices that passive securities investors pay or receive for each share of stock.
When there is talk or suggestion of a publicly traded company's being an acquisition target, it begins to trade at "control market" prices, i.e. prices that an investor or group of them is expected to pay in order to control the company. In most cases control requires a would-be control shareholder to own half a company's total votes (not necessarily stock) plus one additional vote and to pay a greater price than passive market prices to non-control investors (and sometimes to other control investors).
The difference between these two market prices is termed a "control premium." The appropriateness and value of this premium has been upheld in case law, with some conflicting opinions, in Delaware Chancery Court (see the reference below; LinkedIn Corp. is incorporated in the state), most other US states' courts and those of many countries with active stock markets.
The amount of premium is largely determined by investment bankers who, in addition to applying other valuation approaches, review most recently available similar transactions for premiums paid and advise (formally in an "opinion letter") their clients what range of prices to pay or accept.
In addition to increasing the likelihood of being outbid by a third-party, failure to pay an adequate premium is often grounds for class action lawsuits that may take years to resolve with great uncertainty for most parties involved.
For a recent example and more details see this media opinion and overview about Dell Inc. being taken private in 2013, the lawsuits that transaction prompted and the court's ruling in 2016 in favor of passive shareholder plaintiffs. Though it has more to do with determining fair valuation than specifically premiums, the case illustrates instruments and means used by some courts to protect non-control, passive shareholders.
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REFERENCE
As a reference, in a 2005 note written by a major US-based international corporate law firm, it noted with respect to Delaware courts, which adjudicate most major shareholder conflicts as the state has a disproportionate share of large companies in its domicile, that control premiums may not necessarily be paid to minority shareholders if the acquirer gains control of a company that continues to have minority shareholders, i.e. not a full acquisition:
Delaware case law is clear that the value of a dissenting [target company's] stockholder’s shares is not to be reduced to impose a minority discount reflecting the lack of the stockholders’ control over the corporation. Indeed, this appears to be the rationale for valuing the target corporation as a whole and allocating a proportionate share of that value to the shares of [a] dissenting stockholder [exercising his appraisal rights in seeking to challenge the value the target company's board of directors placed on his shares]. At the same time, Delaware courts have suggested, without explanation, that the value of the corporation as a whole, and as a going concern, should not include a control premium of the type that might be realized in a sale of the corporation.
There are kind of two answers here: the practical reason an acquirer has to pay more for shares than their current trading price and the economic justification for the increase in price.
Why must the acquirer must pay a premium as a practical matter? Everyone has a different valuation of a company. The current trading price is the lowest price that any holder of the stock is willing to sell a little bit of stock for and the highest that anyone is willing to buy a little bit for. However, Microsoft needs to buy a controlling share. To do this on the open market they would need to buy all the shares from people who's personal valuation is low, and then a bunch from people whose valuation is higher and so on. The act of buying that much stock would push the price up by buying all the shares from people who are really willing to sell. Moreover, as they buy more and more, the remaining people increase their personal valuation so the price would really shoot up. Acquirers avoid this situation by offering to buy a ton of stock at a substantially higher, single price.
Why is Linkedin suddenly worth more than it was yesterday? Microsoft is expecting to be able to use its own infrastructure and tools to make more money with Linkedin than Linkedin would have before. In other words, they believe that the Linkedin division of Microsoft after the merger will be worth more than Linkedin alone was before the merger. This synergistic idea is the theoretical foundation for mergers in general and the main reason people use to argue for a higher price.
You could also argue that by expressing an interest in Linkedin, Microsoft may be telling us something it knows about Linkedin's value that maybe we didn't realize before because we aren't as smart and informed as the people on Microsoft's board. But since it's Microsoft that's doing the buying in this case, I'm going to go out on a limb and say this is not the main effect. Given Microsoft's history, the idea that they buy expensive things because they have money to burn is more compelling than the idea that they have an insight into a company's value that we don't.
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Why microsoft don't create a company called macrohard, by more and more linkedin shares. Than macrohard will simply sell 40% of the share to microsoft?– user4951Commented Jun 15, 2016 at 9:44
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They don't need to create a separate company if their objective is to hide their trades--plenty of ways to do that. The real problem is that ultimately they have to buy a LOT of shares, and there's no way to keep that much volume from affecting market prices, regardless of how and where the transactions happen.– farnsyCommented Jun 15, 2016 at 21:36
Microsoft wants to buy a majority in the stock. To accomplish that, they have to offer a good price, so the current share owners are willing to sell.
Just because the CEO of LinkedIN agreed to the deal doesn't really mean much, only that he is willing to sell his shares at that price. If he does not own 50%, he basically cannot complete the deal; other willing sellers are needed.
If Microsoft could buy 50+% of the shares for the current market price, they would have just done that, without any negotiations. That is called a hostile take-over.
