| A.
| Listen, if shareholders decide on a company’s policy by voting, then whoever owns the majority of shares in a company can take decisions.
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| B.
| Let me see … . Of course, a threat that the company can be taken over keeps the managements on their toes. By the way, takeover battles are often fought through the pages of the press.
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| A.
| You mean “take-over” bids, don’t you?
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| B.
| Yes, an attempt to get control of a public limited company may be carried out by purchasing, or offering to purchase, the whole or part of the ordinary shares. And the price is usually well in excess of their quoted price.
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| A.
| Is takeover the only possible situation?
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| B.
| No, of course not. I’m sure you have heard the term M&As.
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| A.
| Mergers and acquisitions?
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| B.
| Yes. We're not going to get into the nitty-gritty[4] of describing the details, but for now just keep in mind this may be a merger (two companies join together to form a new one), a takeover or acquisition (one company buys another one). The latter happens when a company offers to buy all the shareholders’ shares at a certain price (higher than the market price) during a limited period of time. This is called a takeover bid.
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| A.
| And if a company tries to buy as many shares as possible on the stock market, hoping to gain a majority?
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| B.
| This is called a raid.
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| A.
| Oh, I know that this practice has been under attack in the press, and some bids have been nothing more than attempts to make a great deal of money at the expense of the shareholders.
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| B.
| But, usually, this is only possible when the company’s assets have been undervalued by the directors who have allowed them to be shown in the balance sheet at a figure that is far below their true value.
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| A.
| Does gaining control of a company always have a negative meaning? If, for example, a company’s Board of Directors agrees to a takeover, and the shareholders agree to sell?
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| B.
| Then it becomes a friendly takeover. On the contrary, attempts to acquire companies in the face of opposition from existing management are called hostile takeovers. The number of hostile takeovers relative to friendly takeovers is small: however, drama surrounds them, and they usually capture the interest of the press and the public.
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| A.
| Aren’t hostile takeovers a mixed blessing?
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| B.
| It’s a complicated question. Opponents of hostile takeovers, including the management of the target company, claim these takeovers are not in the long-run interests of the stakeholders. The opponents claim that the “raiders” will sell off assets to pay for the acquisition and severely cut back on research and development expenditures to conserve cash and to generate immediate increases in reported earnings.
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| A.
| I believe companies have various ways of defending themselves against a hostile bid. For instance, they can try to find another company that they prefer to be bought by.
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| B.
| May be, may be… . Sometimes the companies choose issuing new shares at a big discount, which reduces the holding of the company attempting the takeover, and makes the takeover much more costly.
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| A.
| Is it legal?
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| B.
| It is. They have the right to do so. You will agree that it is worse when a proxy fight[5] occurs.
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| A.
| Wait …. . Proxy isthe authority to represent someone else, especially in voting. If you do something by proxy, you arrange for someone else to do it for you.
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| B.
| Right in every detail. This is the situation when a group of outsiders try to gain control of a company by persuading existing shareholders to vote into office a new team of directors.
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| A.
| I guess proxy fights are expensive. I know that illegal insider trading is also part and parcel of the process.
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| B.
| Not all trading on information is illegal insider trading. For example, while dining at a restaurant, you hear the CEO[6] of Firm A at the next table telling the CFO[7] that the company's profits will be higher than expected, and then you buy the stock, you are not guilty of insider trading unless there was some closer connection between you, the company, or the company officers.
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| A.
| But I guess illegal insider trading would occur if the CEO of Company A learned (prior to a public announcement) that his company will be taken over, and bought its shares knowing that the share price would likely rise. But that will be the subject of another discussion.
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