Suppose you own a stock in a company. The current price per share is $25. Another company has just announced that it wants to buy your company and will pay $35 per share to acquire all the outstanding stocks. Your company’s management immediately begins fighting off this hostile bid. Is management acting in the shareholder’s best interest? Why? and Why not?
Determining whether the management is acting in the shareholders' best interest in this situation requires considering several factors. These factors involve analyzing the potential benefits and drawbacks of the hostile bid and evaluating how the management's response aligns with the shareholders' interests.
To evaluate the management's actions, you can follow these steps:
1. Assess the premium: Calculate the premium being offered by the acquiring company. In this case, the current market price of $25 per share is significantly lower than the proposed offer price of $35 per share. A higher premium generally indicates a greater value being assigned to the company by the acquiring company.
2. Evaluate the likelihood of a better offer: Consider whether there is a possibility of a higher bid from another party. If there is a reasonable expectation that an alternative offer may emerge, the management's efforts to resist the hostile bid might be justified in order to potentially obtain a better offer for shareholders.
3. Review the management's rationale: Examine the reasons provided by the company's management for opposing the bid. Management may believe that the offer undervalues the company's future prospects or that it represents a strategic mismatch with the acquiring company's objectives. Assess whether these arguments hold merit and align with the long-term interests of the shareholders.
4. Consider shareholder input and engagement: Evaluate whether the management is actively seeking and considering the opinion of the shareholders. If the management is engaging with shareholders, taking their opinions into account, and providing clear justifications for their actions, it suggests that they are acting in the shareholders' best interest.
5. Evaluate the potential risks: Assess the potential risks associated with the hostile bid. This could include considering any negative consequences for employees, potential loss of company culture, or any adverse impacts on existing shareholders, such as a diminished ability to participate in future growth prospects.
Based on the analysis of these factors, you can form an opinion on whether the management is acting in the shareholders' best interest. Ultimately, it will depend on the specific circumstances, shareholder expectations, and the validity of the management's arguments against the hostile bid.