The discount retail giant Dollar General announced to day that in light of its rival Family Dollar’s board of directors rejecting it’s proposed acquisition offer, it is bypassing the FDO board and making a hostile bid for the company directly to the shareholders, offering $80 per share for the company.
How does this work exactly? FDO is trading between $78 and $79 dollars (having gone up quite a bit since DG and Dollar Tree began bidding to acquire it). I’m assuming I can’t just go buy as many $78 dollar shares as I can afford and then turn around and sell them to Dollar General for $80. Does the deal require holders of a majority of the stock to all agree to sell before DG will buy any? How is the number of stockholders willing to sell to DG tracked until that majority is reached? Or does it mean something different?
You can go out and buy as many $78 shares as you can afford and then sell them to Dollar General for $80. However you run the risk that things might still fall through and nobody will give you $80 for the shares you bought.
Maybe one or two members of the board liked the idea and was outvoted, so they could sell shares and make a profit and now possibly be directors at the new company. Hostile like.
The hostile taker-overers will make a tender offer to the shareholders. The shareholders need an incentive to sell, so tender offers are almost always made at a premium above the current share price. (Though a 1-2 dollar premium is kinda cheap.)
In the US, the bidder is required to file certain forms with the SEC announcing their bid, make announcements in the appropriate forums, and specify a deadline for the vote (the SEC regulates the allowed time frame.) If more than 50% of the shareholders vote for it, then the deal is done irrespective of what the board wants.
The premium to be considered is to where the stock was trading prior to any form of an announcement that Family Dollar was being considered as an acquisition target. The stock has traded up to $78 since Dollar Store and Dollar General have announced their offers to acquire Family Dollar.
Most of the investors that are currently buying the stock are Merger Arb Hedge Funds. The believe that a sale will occur and even the $2 gain on a $78 purchase, if the sale occurs within 60 days, is a 15% return, more if they have levered the fund. 60 days is a probably a bit optimistic as the anti-trust regulatory approval for either of those acquirers will likely take a bit longer.
Not unusual at all for the stock to sell at a price different from what is being offerred by an acquirer. The people selling now at $78 will definitely get $78 per share now. Dollar General is offerring to pay $80 at some point in the future, and that is contingent upon a number of factors, not least of which is that they don’t decide to withdraw the tender offer.
Conversely, if people felt that the Dollar General offer was too low and that other acquirers were waiting in the wings, the current market might be at a price higher than $80, on the assumption that someone else was going to come in with a higher bid.
Worse, since you just bought the shares, the shares might not be part of the formal offer !
Also the buying of many shares may send up the stock market quote price and perhaps block the takeover by inspiring the belief the take over offer should be for a higher price again… Especially as it was a tiny ($2 ? thats only 3% ?? ) premium offered. When the take over doesn’t go ahead, you then have a lot of expensive shares to sell with no buyer.
I think this is an explicit stock exchange requirement, but even if it isn’t it is dictated by self-interest. The success of the offer requires that the holders of 50% + 1 of the total shares in issue should accept it. Given that, arbitrarily selecting the holders of any shares and saying that your offer is not open to them is shooting yourself in the foot. It makes it more difficult to reach the 50% + 1 threshhold. Plus, if you do reach that threshold, you then have to pay $80 per share for every share in issue, so the excluded shareholders will get the $80 anyway.
