Definition of a public offer
Public offerings are stock market transactions initiated by a company aimed at gaining control of a target company by obtaining majority control. The name public offer comes from the fact that the company making the offer is addressed to the public, that is, to the shareholders of the target company. They exist different types of public offerings: the takeover bid. For each of them, the conditions of the transaction are different but in all cases, this has a strong impact on the structure of the two companies and on their stock market price.
Generally speaking, a public offer has a positive effect on the market price of the target company and a negative effect on the company issuing the offer. Indeed, for the latter, the public offer will have an impact on its cash flow and will lead to significant changes within its organization. In the short term, the stock market price will therefore fall and in the long term, everything will depend on the company’s ability to integrate the new entity absorbed.
Conduct of a takeover bid
A takeover bid is a stock exchange transaction aimed at taking control of a target company by purchasing the shares of the target company. This type of operation is closely supervised by the market regulatory authorities in order to avoid any abuse. In France for example, any company wishing to make a public offer must inform the .
The also ensures that there is no so-called “creeping” public offering, that is to say that one company takes control of another company little by little, by buying each year of new actions of the target company, without notifying the market authorities. Thus, beyond a 30% stake, the is entitled to ask the company about its intentions. If the company declares that it does not wish to carry out a public offer, it cannot subsequently carry out one and will have to stop its purchases of shares in the target company. On a creeping public offer, the offer price will then be the highest price per share paid for a year for the acquisition of a share.
Now let’s come back to classic public offerings. The offeror must publish an information notice and have it validated by the in order to notify the shareholders of the company and those of the target company. A takeover bid can be friendly the target company will then use different means to make the operation fail.
In the event of a friendly public offer, the target company will jointly establish the offer document with the offeror, specifying that it is preferable for its shareholders to respond positively to the offer. On the other hand, in the event of a hostile public offer, the target company has 10 days to establish its response note, specifying to its shareholders the reasons for their refusal of the offer.
One day after the publication of the information note on the public offer, the operation is open for a period of 25 days in the event of a friendly public offer and 35 days in the event of a hostile offer. The period of reflection can be extended if overbids and counter offers are made.
In the event of a hostile takeover bid, the target company or another company may submit a counter offer which must be greater than the old offer by at least 2%. A higher bid or a counter-offer must be submitted at least 5 days before the closing of the first offer. The battle can last several months in some cases but in the long run, the cost of the operation will be too high for one of the two.
Takeover bid : The company issues an offer to the shareholders of the target company by offering them to buy their shares at a price often higher than the current stock market price. The shareholder then has two possibilities:
– Accept the offer : In this case, the gain is immediate for the shareholder. He then resells his securities to the company issuing the takeover bid at the price determined for the transaction. The offer is often 15% to 30% higher than the current market price.
– Reject the offer : The shareholder then keeps his shares. The reasons are multiple, it can be for emotional reasons, a disagreement on the purchase price or the fact that the shareholder thinks that an escalation will occur. If the majority of control is not obtained by the company carrying out the takeover due to too many refusals by the shareholders of the target company, the takeover bid will have failed and in most cases, a a new more advantageous offer is then made to the shareholders. On the other hand, if the takeover bid is successful, the shareholders who refused still have their shares listed at the stock price before the takeover bid.
Public exchange offer : The principle is the same as for a takeover bid except that the company initiating the public exchange offer offers the shareholders of the target company an exchange of shares. If the shareholders sell their shares, then they receive securities from the company that made the offer. The exchange parity is obviously advantageous for the shareholders, of the order of 15 to 30% as for a takeover bid. For example, the company will offer to exchange 1 securities of the target company which has a value of 10 euros against 2 of its own securities with a value of Rs.6. The profit for the shareholder of the target company is therefore Rs. 2. The stock market price of the target company will then be after the of Rs. 12 . This type of operation is used by companies which do not have sufficient cash to carry out a takeover bid.
Public repurchase offer : It is a stock market technique in order to remove the securities of the target company from the quotation. A takeover bid often comes after a takeover bid or takeover bid to force shareholders to resell their securities. The price offered to the remaining shareholders is often equal to the takeover or takeover bid that had been offered. In the event of further refusal by the shareholders, the company can launch an which will force the shareholders to sell their shares. To carry out this type of operation, the capital remaining on the stock market must be less than 5%. At least 95% of shareholders must approve this transaction.
Defense strategies against public offers
Here is a list of the different defense strategies that can be taken by the target company in order to counter a hostile public offer:
– Opting for the status of limited partnership : This type of status makes it possible to separate the voting rights from the capital. Thus, only the managers of the company intervene in decision-making. The shareholders are then only a simple source of financing.
– Alert thresholds : As we have seen above, the has established a threshold (30%) above which shareholders must declare their intentions. A company can create its own alert thresholds (5%, 10%, 15% …) above which all shareholders must specify these objectives for the coming year. Thus, this can make it possible to avoid so-called “creeping” public offers by allowing the company to protect itself in advance against this type of operation.
– Loyalty : The company then has several possibilities. It can choose to retain its shareholders by offering dividends which depend on seniority, or even offer shares to company employees. Air France employees, for example, own 16% of the capital.
– Alliances : The company may also seek to establish alliances with its partners. This is called the White Knight Strategy. In the event that the company is the target of a takeover bid, its partners act together to counter the transaction. There are also non-aggression pacts where two competing companies agree not to attempt a public offer to each other. Finally, it is possible to create cross alliances, company A is a shareholder of B which it owns shares of A.
– Sale of strategic assets : In order to protect the core of its activity from a competitor, a company can decide in the event of a hostile public offer to sell its strategic assets to a third party ally. This agreement is stipulated by a contract between the two parties beforehand.
– Poisonous pills : In the event of a hostile takeover bid, the target company will distribute share subscription warrants free of charge to its shareholders in order to carry out a capital increase. Thus, the capital will be diluted and it will be harder for the acquirer to take control of the business. Subscription warrants allow shares to be subscribed under preferential conditions. It’s extraordinary general meeting that the decision is taken.
The Public Share Buyback Offer
A buyback operation by the company of its own securities in order to remove them from the quotation. The purpose of this technique is to revalue upwards the net profit per share (the number of securities in circulation being less important) which has the effect of increasing the stock price (the return of the share being higher after the surgery). A public share buyback offer is made by companies that have significant liquidity. This type of operation can however be perceived negatively by the market. Indeed, if the company uses its cash to buy back its own shares, we can think that it has no investment projects, which will therefore be harmful for the future growth of the company.