Do shareholders get fair value in Buyouts?

Today's announcement that Hospital Operator HCA has agreed to be acquired by an investor group again raises the question if public shareholders really are well served by the procedures that are currently applied during these transactions.

When management (which often benefits from takeovers either due to accelerated option vesting, Golden Parachutes or cut-price stakes in the succeeding corporate entity) and the board engage in secret negotiations that lead to a take-out price that is close to the upper end of a decade-long trading range of the company's stock it sets alarm bells ringing.

In our opinion, the price offered to all shareholders should be determined by the highest price that the bidders have to pay to get the required percentage holding that would allow them to control the company.

A proper auction process and clear rules about which shares the bidder may vote in any company meeting are necessary to reduce the 'Bidder's Surplus' as much as possible and minimise the risk that public shareholders sell out at too low a price.

Should Bid targets pay break fees?

We do not think that bid targets should be allowed to enter into binding agreements to pay any indemnity to the bidder until the shareholders have been able to formally vote on the merger/sale proposal.

All too often, the amounts that are agreed are way above any reasonable costs that the bidder may have incurred.

One has to assume that this type of agreement more often than not is intended to discourage competing bids. As such, break-up fees are not in the interest of the company's shareholders.