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.

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