On Bank Mergers and the Hostile Takeover

Once in a while I think back to those days when corporate raiders were chewing up and spitting out large corporations. Like natural selection in the animal kingdom, these raiders sought out those companies that were sick or injured, from which they made a nice profit.

The reality though is that despite changes in our economy, corporate raiders are still alive and well today. They are a little better disguised in most cases, often hiding behind charitable activities or buried within the board of a larger company, but they live on.

On Bank Mergers and Corporate Raiders

Companies are bought and sold quite frequently. Often you don’t hear about such cases because things happen behind the scenes, quietly — say when two companies take part in a merger. A merger is simply the situation wherein two friendly companies come together and form one entity. Often, two small, lesser known companies that are having trouble growing, recognize that by merging, much of the overhead is eliminated and, in turn, saves money. Because most companies that merge aren’t exactly the same size, money often changes hands to make the deal equitable.

Sometimes, high profile mergers take place. AOL and Time Warner merged. Morgan Stanley and Smith Barney have as well. And taking a look at the auto industry of the 90’s will reveal many more.

How A Hostile Takeover Works

A hostile takeover is quite different. Because the target company doesn’t want to be acquired, the modern day corporate raider buys a large interest in the company in the form of stock. As you can imagine, if you own millions of shares in a company, you can amass quite a lot of pull in the price of the stock especially if the company is small or medium sized.

Holding just 5% of the company’s stock can often get you a seat on the board of directors and because you’re a big player and often getting bigger, you can go to other board members and sway their vote for company officers. It works like this:

You buy a huge amount of stock, you then campaign to get either yourself or your company officials on to the board of the target company. You talk to the other board members to try to win their vote. If you are successful and you have a majority of board members who vote in your executive officers, they will vote to accept your takeover offer. The company is now yours.

If you are a small time investor watching all of this play out in the news, you might be kind of happy because often, any kind of takeover will result in the price of the stock going up. The corporate raider goes after a company only when they believe that the stock price is undervalued, so by bumping the price of the shares higher with their takeover bid, the investor and the stockholders end up making money. Be warned though: This is only a short term rise in stock price. When the smoke clears, the common stock holder loses money almost every time.

In corporate America, most takeovers are friendly but some turn hostile, and hostile they are. As a part time investor, it’s often best to steer clear of such battles for one big reason: while there are chances of making some major money, there is also an equally big chance of losing it. If you were a short term investor in Yahoo while Microsoft was fighting for them, you would have noticed just how unstable the share prices were.

 
Contributing Writer: Tim Parker from Elementary Finance