The Role of Shareholders in Mergers & Acquisitions

Arbitrageurs go fishing for value and generate opportunities for shareholders.

The role of shareholders in an acquisition depends on whether the acquisition is a friendly transaction between the managements of the two firms (in which their role might be passive), or a hostile takeover.

Potential

Poor management performance often shows in a stock price lagging the prices of comparable companies. Potential acquirers might notice this lag, buy controlling shares, and make changes, in the expectation of boosting that stock price.

Effects

The market for such controlling shares provides considerable benefit to the stockholders of the underperforming target firm. "Such shareholders receive a substantial premium, generally around 50 percent of the price at which the target firm's shares had been trading before the bid," according to Yale Law School professor Jonathan R. Macey's book "Corporate Governance" (2008).

Hostile Takeovers

Some acquisitions are contested by the directors of the target company through various means, such as "poison pills"--obligations imposed on a buyer who passes a particular threshold in equity ownership.

The use of these defenses often leads to shareholder unhappiness, because many shareholders believe that the takeover defenses are depriving them of a premium that the market for control would otherwise bestow. This can generate a proxy fight.

References

• "Corporate Governance"; Jonathan R. Macey; 2008.
• Shark Repellent: Rethinking the Role of the Poison Pill?

Resources

• The Icahn Report: Absurdity of the Poison Pill