Question

1. Value maximisation and agency relationship. Now consider an important corporate event called takeover. According to Investopedia, takeover occurs when one company makes a bid to assume control of or acquire another, often by purchasing a majority stake in the target firm. In the takeover process, the company making the bid is the acquirer while the company it wishes to take control of is called the target. Empirically it is estimated that on average shareholders from target company enjoy an average gain when acquired while the shareholders of the bidder are quite likely going to loose as their average gains from merger are negative. Why it is so? Try to provide several reasons and try to connect it also to the agency relationship.

Answer 1

Hi there,

1. In the process of Takeover, the shareholder's of bidder firm lose because due to takeover bidder firm issues shares or the target firm shareholder's and there is dilution in rights of bidder firm shareholders.

2. Target firm shareholder enjoy benefit of shares of new firm because after takeover the Share Price of bidder firm rose and they have Capital Gain.

3. Because the bidder company pays for stocks at a premium price, shareholders of Target company usually see an immediate benefit when their company is the target of an acquisition.

Hope this will help !

Thanks & Regards!!!