3 questions to smart minds

Should shareholders earn premiums on mergers?

For this 3 questions to Deborah Sturman

Photo: D. Stur­man | SturmanLLC
2. Septem­ber 2014

In prin­ci­ple, mergers involve compa­nies whose value ratio is roughly the same merging by mutual agree­ment. — In contrast to a genuine take­over, no premium is ther­e­fore usually paid to the share­hol­ders. In this way, tran­sac­tions that would usually be impos­si­ble to finance as “hostile” take­overs can be laun­ched. If certain condi­ti­ons are met, it is also possi­ble to ensure that no addi­tio­nal enter­prise value (good­will) is crea­ted as a result of the merger and thus avoid depre­cia­tion and amortization.
— In prac­tice, share­hol­ders some­ti­mes feel tricked because mergers that were cele­bra­ted as “mergers of equals” on the day they were announ­ced later turned out to be the opposite.

For this 3 ques­ti­ons to Mana­ging Direc­tor of STURMAN LLC

1. Why should share­hol­ders realize signi­fi­cant premi­ums in mergers?

The Execu­tive Board and Super­vi­sory Board of a company have a fidu­ciary duty to the share­hol­ders to achieve the highest possi­ble price enforceable on the market in a sale process of the company. The price should ther­e­fore, as a rule, exceed the current price in effect when the sale or partial sale is announ­ced, because the acqui­rer, the future owner, expects to realize bene­fits from the invest­ment. The inves­tor expects syner­gies from the purchase or lever­a­ges other stra­te­gic poten­tial. This crea­tes added value, at least some of which should also flow to the former owners.

A merger inevi­ta­bly ends the exis­ting share­hol­ders’ long-term econo­mic inte­rest in the company and thus also their entit­le­ment to future divi­dends or the right to sell shares at a time of their own choo­sing. All these aspects justify a “premium”.

2. What inher­ent risks do share­hol­ders bear in going-private transactions?

A going-private tran­sac­tion usually invol­ves a squeeze-out for all shares in a company acqui­red by the new majo­rity share­hol­der in the course of the tran­sac­tion. By reali­zing the intrin­sic value of the company, the acqui­rer is later able to sell either the company, parts of the company or products of the company at a profit, thus reaping the rewards of the invest­ments of the former share­hol­ders. These values should be legally reviewed in parti­cu­lar when insi­ders delist a company because they may have had access to confi­den­tial infor­ma­tion about the company’s future prospects.

3. How can share­hol­ders’ proceeds be increased by apply­ing the law?

The sale of a company requi­res the appr­oval of the share­hol­ders. Often, howe­ver, the company’s manage­ment promo­tes the tran­sac­tion. Frequently, mate­rial infor­ma­tion is with­held from share­hol­ders or other poten­tial suppli­ers that is rele­vant for a fair valua­tion of the tran­sac­tion by the shareholders.

Share­hol­ders may oppose the merger process on behalf of the company, a proce­dure that often results in addi­tio­nal disclo­sures and infor­ma­tion. This enables share­hol­ders to make a better-infor­med choice. In addi­tion, these lawsuits may lead to signi­fi­cant impro­ve­ments in the terms of the merger. A review of docu­ments of the selling company can make a variety of infor­ma­tion available to share­hol­ders such as. the future valua­tion of the company or growth pros­pects. Used properly, this infor­ma­tion can signi­fi­cantly improve the terms of the transaction.

Subscribe newsletter

Here you can read about the latest transactions, IPOs, private equity deals and venture capital investments, who has raised a new fund, how Buy & Build activities are going.

Get in touch

Contact us!
fyb [at]