For a brief period in the late ’50s, until the mid-’60s, when modern hostile takeover techniques were perfected, we had a pretty much unregulated market for corporate control. Shareholders received on average 40% over the pre-bid price for their shares. But… 1968 … Williams Act … made it vastly more expensive for outsiders to mount successful tender offers. The highly profitable element of surprise was removed entirely.
Hello! This is my fist time commenting and I love the blog! A question that may be obviously answered but popped into my head from reading. In the "government buying a bunch of land" scenario would it not also be smart for the government to go to all the land owners (let's say 10 of them) in the proposed area and have a contract with each of them saying they will buy the land only if everyone agrees to sell? Similar to GoFundMe where your credit card only gets charged if they reach the goal? This obviously does not work if the land is urgently needed and cannot be done without.
A stock is an "asset", even if that asset is a fraction of ownership of the larger corporation. And your eminent domain example involves pieces of real estate being part of a larger whole.
"That means those trying to takeover in essence faced a 40% tax; no point in taking over a firm if you can’t make it worth at least this much more."
Forty percent is an average, not a minimum threshold. Suppose that, in each acquisition, the acquirer captured half of the value added and the other half went to pre-takeover shareholders. Then, the 40% figure would just mean that the average takeover added 80% of value. But, there would be no threshold below which a takeover wouldn't be worth it. Even if the acquirer could add only 10% in value, then the acquirer would receive 5% and the pre-takeover shareholders would receive 5%.
There is a surplus between the post-acquisition and pre-acquisition valuations of the firm. Aren't all possible divisions of that surplus between the acquirer and pre-takeover shareholders equally economically efficient? Isn't this like consumer vs. producer surplus in goods markets?
I think of eminent domain as addressing a problem where one or a few property owners truly don't want to sell, but all properties need to be sold for the project to go forward. With a takeover, the acquirer may not need to acquire all shares. Even if the acquirer does need all shares, as in a merger, then usually there are drag-along rights where, if a certain percentage of shareholders agree to the merger, then all shares must be sold to the acquirer.
Stocks have declared prices for a small fraction of the total asset, but not for the whole thing. When real estate has prices, it is for the whole thing.
I guess I didn't express my scenario clearly. I'm considering a situation where someone who finds out info that implies the company is worth more than current market price will now be able to buy 51% of the company at massive discount even though (1) they don't have any plans or ability to manage company differently and (2) the *value of the information* they found and are now revealing is low (even though the information implies the company has higher value than previously believed).
In other words, if a random person is walking past and discovers gold is buried under company land, does it really make sense that they should be able to buy a controlling stake of the company at a massive discount relative to its new fair value? Under the current system, if someone tries to buy such a large stake based on secret info, the sellers can infer (after seeing many rapid purchases) that there is something they don't know and raise their prices.
As I said in the post, I'd let people declare their value relative to the market price, in which case they are never at risk of their offer being taken by the regular market.
So, I think some market makers already receive an incentive from exchanges for keeping a standing order book of bid/ask offers at a certain depth. One way to think about your proposal is to force all shareholders to also maintain such a book (at least for asks), and taxing them based on how large their bid-ask or mid-market-ask spread is.
Market makers have to be very careful of not getting run over by people with new information, constantly monitoring trades and making sure the current market price is fair. Seems like small stock holders will have a hard time doing this, even if the tax is low enough that their ask can be pretty high (10% over market price). If someone discovers a fact that actually raises the value of the company by 20% (say, a gold deposit is found on company land), then armed with this information they can now profit a lot more than they could in the past because they can basically buy as much of the stock as they want all at once at a discount relative to the fair value in light of the new info. This differs from the current state-of-affairs where people who discover new info necessarily leak that info as they try to profit from it.
No idea how large these effects are, or even their sign.
Yes, that is a common approach, but as you note not very reliable.
Hello! This is my fist time commenting and I love the blog! A question that may be obviously answered but popped into my head from reading. In the "government buying a bunch of land" scenario would it not also be smart for the government to go to all the land owners (let's say 10 of them) in the proposed area and have a contract with each of them saying they will buy the land only if everyone agrees to sell? Similar to GoFundMe where your credit card only gets charged if they reach the goal? This obviously does not work if the land is urgently needed and cannot be done without.
A stock is an "asset", even if that asset is a fraction of ownership of the larger corporation. And your eminent domain example involves pieces of real estate being part of a larger whole.
If it takes work to find good targets and design effective changes, then efficiency require the takeover party to get most of the gains.
"That means those trying to takeover in essence faced a 40% tax; no point in taking over a firm if you can’t make it worth at least this much more."
Forty percent is an average, not a minimum threshold. Suppose that, in each acquisition, the acquirer captured half of the value added and the other half went to pre-takeover shareholders. Then, the 40% figure would just mean that the average takeover added 80% of value. But, there would be no threshold below which a takeover wouldn't be worth it. Even if the acquirer could add only 10% in value, then the acquirer would receive 5% and the pre-takeover shareholders would receive 5%.
There is a surplus between the post-acquisition and pre-acquisition valuations of the firm. Aren't all possible divisions of that surplus between the acquirer and pre-takeover shareholders equally economically efficient? Isn't this like consumer vs. producer surplus in goods markets?
I think of eminent domain as addressing a problem where one or a few property owners truly don't want to sell, but all properties need to be sold for the project to go forward. With a takeover, the acquirer may not need to acquire all shares. Even if the acquirer does need all shares, as in a merger, then usually there are drag-along rights where, if a certain percentage of shareholders agree to the merger, then all shares must be sold to the acquirer.
Stocks have declared prices for a small fraction of the total asset, but not for the whole thing. When real estate has prices, it is for the whole thing.
Speculative markets already have publicly declared prices, which seems rather different from an illiquid/non-fungible market like real estate.
Who ever learns something that changes firm value by over 10%, and has the capital to buy an entire firm? Seems pretty rare problem to me.
I guess I didn't express my scenario clearly. I'm considering a situation where someone who finds out info that implies the company is worth more than current market price will now be able to buy 51% of the company at massive discount even though (1) they don't have any plans or ability to manage company differently and (2) the *value of the information* they found and are now revealing is low (even though the information implies the company has higher value than previously believed).
In other words, if a random person is walking past and discovers gold is buried under company land, does it really make sense that they should be able to buy a controlling stake of the company at a massive discount relative to its new fair value? Under the current system, if someone tries to buy such a large stake based on secret info, the sellers can infer (after seeing many rapid purchases) that there is something they don't know and raise their prices.
As I said in the post, I'd let people declare their value relative to the market price, in which case they are never at risk of their offer being taken by the regular market.
So, I think some market makers already receive an incentive from exchanges for keeping a standing order book of bid/ask offers at a certain depth. One way to think about your proposal is to force all shareholders to also maintain such a book (at least for asks), and taxing them based on how large their bid-ask or mid-market-ask spread is.
Market makers have to be very careful of not getting run over by people with new information, constantly monitoring trades and making sure the current market price is fair. Seems like small stock holders will have a hard time doing this, even if the tax is low enough that their ask can be pretty high (10% over market price). If someone discovers a fact that actually raises the value of the company by 20% (say, a gold deposit is found on company land), then armed with this information they can now profit a lot more than they could in the past because they can basically buy as much of the stock as they want all at once at a discount relative to the fair value in light of the new info. This differs from the current state-of-affairs where people who discover new info necessarily leak that info as they try to profit from it.
No idea how large these effects are, or even their sign.