What is a public tender and how does it affect stock prices?
Investing money in shares of a company can be quite a fickle process, but often it can yield quite lucrative returns.
These days, one of the hot names in the stock market is First Fire and Marine Insurance Company. This is because the company’s share price doubled in a week. This occurred when news broke that the company’s rival, Meritz Fire and Marine Insurance Company, had targeted First Fire for a takeover bid.
Meritz announced that it intends to buy a 20.7 percent stake in First Fire from its top shareholder, Kim Young-heay, and will offer a public tender should Kim refuse to accept the bid. Under a public tender, also called a “call for bids,” a company tries to generate competing offers from different bidders for a stake in the company.
Upon Meritz’s announcement of its intent to issue a public tender, First Fire’s stock price shot up. Why does a “public tender” have this effect?
In a public tender, buyers openly purchase stock instead of procuring shares in private. But the actual purchases do not take place in the stock market. Buyers purchase shares outside the stock market under a designated price and deadline. When a public takeover takes place, shares trade at higher prices than when they sell inside the market.
There are a variety of reasons a company might use an open tender. In some cases, a top shareholder buys shares to solidify his management rights. Managerial control over the firm goes to the person who possesses 51 percent of the entire stake. The rule is similar to decision-making by a majority. A shareholder who possesses a majority of the shares in a company is highly influential in the business’s management.
Some companies purchase shares in their subsidiaries to become a holding company. More than anything else, however, buyers utilize a public tender to initiate a hostile takeover of a company.
This means, for example, that when the top shareholder of Company A refuses to sell his majority stake, Company B, which is trying to take over Company A, buys up stocks from other shareholders. By securing a larger portion of Company A’s shares than the existing top shareholder, Company B can gain control of Company A. This situation applied to the public tender that Meritz Fire mentioned.
But in the above situation, why wouldn’t Company B buy stock in Company A through the regular stock market?
The process isn’t as simple as it seems. More than anything else, when a buyer tries to purchase a massive amount of stock at once in an open market, the stock price shoots up. For this reason, there is a high chance that the buyer will fail to purchase the stocks within the budget he’s originally set aside. Although it may take some additional money, buyers think a public tender at fixed cost is a better plan of action.
For this reason, the top shareholder of a company, which has become the target of a public tender, must strive to increase his share in the company. In this situation, the main shareholder in Company A will most frequently buy up shares of Company A both in and out of the market. He may also try mobilizing his friends. When another shareholder with a large stake supports the top shareholder, the main majority shareholder doesn’t need to solely own a 51 percent stake in order to protect his management rights. This type of friendly force is called a “white knight.” First Fire had its own white knight, Hanwha Group. The younger brother of First Fire’s top shareholder is Hanwha’s Chairman Kim Seung-youn.
But just as there are white knights in the stock market, there are black knights as well. This term refers to someone who helps the group intending to launch a takeover, which would be someone enlisted to help Company B in our example.
Meanwhile, Meritz Fire has acquired an 11.5 percent stake in First Fire after collaborating with its black knights, Hanjin Heavy Industries and its affiliates. The insurer’s top shareholder, Cho Jung-ho, is the younger brother of Cho Nam-ho, chairman of Hanjin Heavy. Thus, some say that the public tender of First Fire is a duel between Hanjin Group and Hanwha Group.
When a public tender offer is scheduled or underway, investors need to be prudent because market conditions fluctuate rapidly. For example, the force that has been proceeding with its acquisition can abruptly give up its plan, or the top shareholder can suddenly buy up a large amount of shares and thus succeed in acquiring the minimum stake for securing management rights. In that scenario, the battle for the larger stake will abruptly end and share prices will plummet.
On rumors that Meritz gave up its takeover plans for First Fire on April 28, the stock price of the latter company fell as low as 14,150 won ($13.60)per share. But when Meritz announced it would push ahead with the acquisition plan, the stock price shot up to 19,050 the same day. This example shows how unpredictable the stock prices can become when there’s a public tender in the works.
After a successful public tender or once the bid ends in failure, the stock price of the company in question — Company A in our example — also nosedives. This also means that a company can sustain great financial damage when other buyers recklessly purchase stocks after seeing prices sharply rise on news of a public tender.
That was the case for Sempio Foods Company, a major sauce maker in Korea, in a recent case. Mars Fund, a private equity fund set up by Woori Investment and Securities, sought to improve Sempio’s corporate management by publicly taking over stakes at 30,000 won per share. But as prices for Sempio shares rose, they passed the limit of the budget Mars Fund had set aside for the takeover. Thus, the private equity fund failed to meet the 50 percent stake it wanted.
By Lee Sang-ryeol JoongAng Ilbo[spring@joongang.co.kr]
with the Korea JoongAng Daily
To write comments, please log in to one of the accounts.
Standards Board Policy (0/250자)