Another takeover?

Glen_Clark

General Question on takeovers really, prompted by the proposed takeover of BG by Shell.
I can see how the 2 companies might benefit from joining together, (and how the directors who are recommending it might benefit even more from being promoted to running a larger company without having to show the aptitude to grow it.;) )
But why do one set of shareholders have to pay a dowry/premium to the other?

SailorSam

I wont go to a Shell garage to fill-up.
After seeing a documentary about them drilling in Africa and leaving the environment in a mess with lakes of leaking dirty oil around, and despite promises to the local people they did nothing.

kidmugsy

Glen_Clark wrote: »

But why do one set of shareholders have to pay a dowry/premium to the other?

They don't "have to" but if they don't they will probably find their offer turned down. Why do you "have to" pay Tesco's prices if you shop at Tesco?

Glen_Clark

kidmugsy wrote: »

They don't "have to" but if they don't they will probably find their offer turned down.

Well if the offer is going to benefit both companies as claimed, why would they turn it down?
For example shares in the whole company calculated on the market price of the separate companies, without a premium for one over the other.
Suppose each has a house valued at £100k, and the 2 houses together are worth £250k. Why would they turn down a half share in £250k, in return for their £100k?

greenglide

After seeing a documentary about them drilling in Africa and leaving the environment in a mess with lakes of leaking dirty oil around, and despite promises to the local people they did nothing.

And there is an oil company that hasnt done that?

It is a dirty business, in more ways than one, that has enormous sums of money coming in.

Aretnap

Glen_Clark wrote: »

Well if the offer is going to benefit both companies as claimed, why would they turn it down?
For example shares in the whole company calculated on the market price of the separate companies, without a premium for one over the other.
Suppose each has a house valued at £100k, and the 2 houses together are worth £250k. Why would they turn down a half share in £250k, in return for their £100k?

Depends how confident they were that the new house really would be worth £250K I suppose...

To execute the deal Shell have to buy all of BG's shares (or at least the vast majority - enough to give them a large enough majority to unilaterally change the structure of BG). That means they have to make an offer which is large enough to persuade all, or virtually all, of BG's shareholders to sell. And that's likely to be significantly more than last night's closing price - a lot of BG investors were quite happy to sit and hold at that price.

Glen_Clark

Aretnap wrote: »

Depends how confident they were that the new house really would be worth £250K I suppose...

Exactly.
If the combined company really is worth more than the sum of its parts, they would both have an incentive without one paying a premium.
Say Shares in Shell are £20, and BG £10. BG Shareholders would have an incentive to accept Shell Shares on a ratio of 1:2 because Shell would increase in value when it was joined with BG.
It just seems to me that Shareholders in the company doing the takeover invariably get the worst of the deal, thats why their Share price crashes as soon as its announced.

AndyT678

Glen_Clark wrote: »

Exactly.
If the combined company really is worth more than the sum of its parts, they would both have an incentive without one paying a premium.
Say Shares in Shell are £20, and BG £10. BG Shareholders would have an incentive to accept Shell Shares on a ratio of 1:2 because Shell would increase in value when it was joined with BG.
It just seems to me that Shareholders in the company doing the takeover invariably get the worst of the deal, thats why their Share price crashes as soon as its announced.

Lots of synergies and cost savings to be had of course but what you're ignoring is investor sentiment about future earnings potential. If company A shares are valued on a higher P/E ratio than company B then it suggests that investors have more confidence in the management of company A to profitably grow their business in the future.

Why shouldn't the P/E ratio of company B shares also increase towards the company A P/E ratio when the company A management takes over running the business?

SailorSam

greenglide wrote: »

And there is an oil company that hasnt done that?

It is a dirty business, in more ways than one, that has enormous sums of money coming in.

If they were drilling in the middle of the British countryside or somewhere in America, Shell would be made to clean up after them. And compensation and jobs would have gone to the local people. Aas you say there are enormous sums of money involved, some of that should be paid to people who for generations have lived on that land.

kidmugsy

Glen_Clark wrote: »

If the combined company really is worth more than the sum of its parts, they would both have an incentive without one paying a premium.

Come off it. If I owned shares in BG and someone came along and said that he'd pay me the current market price but (honest, guv) they'll be worth far more in ten years' time, I'd say "Thanks but I'll have some of that extra now". Then I wouldn't have to take the risk of his failing to deliver on his promise.

Another way to look at it is that the current market price tells you what a few marginal shares are worth (or were worth a few minutes ago). But the bidder isn't buying a marginal share, he's buying control of the company. Naturally that costs more.

Anyway, you seem to be skirting close to the medieval idea of the "just price", an endless source of delusion and folly. The selling shareholders will charge what the market will bear. That's all. I dare say that's how you charge for your labour too.

Glen_Clark

kidmugsy wrote: »

Come off it. If I owned shares in BG and someone came along and said that he'd pay me the current market price but (honest, guv) they'll be worth far more in ten years' time, I'd say "Thanks but I'll have some of that extra now". Then I wouldn't have to take the risk of his failing to deliver on his promise.

Well that suggests the combined company won't really be more profitable than the sum of the 2 separate ones - as is claimed by those directors and dealmakers who stand to gain most from the takeover..
What I am suggesting is that if both sets of shareholders start at the same level they will benefit equally from any increases in profitability