Money Matters

Investors Column – Company Takeover

At some point, most investors experience owning stock in a company that is taken over by another company. How does a company takeover affect you as an investor?

Simply put, a company takeover is when one company purchases all the shares of stock of another company.

The reality tends to be more complex. The company being taken over may initiate the process, by quietly looking for “suitors” – companies with which they believe a merger would be mutually beneficial, for both stockholders and for employees.

Alternatively, a company may look for smaller companies which make products that can be combined with their own line of products to increase sales. Such a takeover can be “friendly”, with the acquiescence of the Board of Directors of the company being purchased, or the takeover can be “hostile”, when opposed by the purchased company’s Board of Directors. Hostile takeovers will often result in a greater number of the purchased company’s employees being let go.

Usually, the company doing the takeover will buy enough shares of the stock in the targeted company to have a “controlling interest”, and then call for a vote by shareholders to agree to the takeover.

Typically the purchasing company will offer a premium price for the stock, well above its current selling price. That will make a nice gain for you. But if you believe the stock would grow in value very nicely over the next year or two, then you may feel like you are losing a better opportunity for your investment.

Once the vote is taken, however, the road ahead is unavoidable.

What happens to your shares?

You will get paid for your shares of stock. You are, after all, legally an owner of the company. The payment may be cash, or in shares of stock of the purchasing company, or, most commonly, in some combination of money and shares.

If your research of the purchasing company shows it to be a worthwhile investment, you can keep the stock. If not, you are free to sell it.

A Shining Example

In late March, Canadian Pacific Railway (“CP”), the fifth-largest “Class I” railroad, offered to buy Kansas City Southern Railroad (“KSU”), the sixth-largest Class I railroad, for $25 billion. It was a great combination: CP has a coast-to-coast rail network in Canada and the northern U.S.; KSU has a rail network that runs from Chicago into Mexico. KSU is the primary rail route for shipping between Mexico and the U.S.

By acquiring KSU, CP would have the huge strategic advantage of being able to ship south to Mexico as well as from coast to coast. Even though the two railroads combined would still be smaller than the five biggest Class 1 railroads (Union Pacific, BNSF, Norfolk Southern, CSX, and Canadian National), the combined advantages would offer huge growth potential.

KSU stock prices shot way up on the news of the merger, from about $230 per share to about $275 per share.

Barely a month later, however, Canadian National made a bid for KSU of almost $34 billion, essentially offering about $325 per share. KSU stock shot up even further.

Smaller CP did not have the resources to make a counter-offer. It now appears that regulators are likely to approve the CN-KSU merger.

That, of course, will mean a lot of money and CN stock for each KSU shareholder.

Regulatory approval – whether for CN or for CP – will probably come sometime in July. Which will it be? Watch the KSU stock price fluctuate: the market will tell you how the “smart money” is betting.

Does anyone really know? Not really. That would be “insider trading”, which is highly illegal, easily detected, and the Securities Exchange Commission (SEC) sets very high fines for anyone caught doing so.

Next Month: More on Investing Strategies

Scott Crosby

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