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Sep 8, 201510:46 AMOpen Mic

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The good war

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“War! Huh, yeah. What is it good for? Absolutely nothing!”

Well, now that I have you humming that popular 1960s Edwin Starr song that points out the horrible destruction of real wars, I would like to flip that notion on its head and discuss wars that create value. If Mr. Starr were writing about M&A, the lyrics might have been something like, “Bidding wars! What are they good for? Increasing value! Say it again.”

OK, that’s a little corny, but you’re still reading so maybe your interest is piqued. So, what is a bidding war when selling a company? True bidding wars occur regularly when the acquisition target is a publicly traded company. When the first buyer makes an offer to acquire the target company it is immediately disclosed to the public. The public disclosure signals other likely buyers to quickly evaluate the acquisition opportunity to determine if they are interested in acquiring the target. Knowing the target company is in play and could end up in the hands of their competitor will usually motivate the second buyer to make a better offer. Maybe a third and fourth potential buyer enter the fray and submit bids for the company. The first buyer has certainly left some room in their initial offer to negotiate, so they submit another offer that is higher. This process continues until one of the potential buyers submits an offer the others are unwilling to meet. The acquisition gets completed at the price offered by the victorious bidder. That is a bidding war, and it always benefits the selling shareholders.

A recent example of a bidding war occurred when Uphill Investment Co. announced an agreement to acquire publicly traded semiconductor company Integrated Silicon Solution Inc. for $19.25 per share. Cypress Semiconductor then made an unsolicited offer of $19.75 per share, starting the bidding war. After multiple rounds of competing offers by Uphill and Cypress, Uphill was victorious, agreeing to pay $23.00 per share. The bidding war increased the acquisition price by 19.5% and enriched the selling shareholders by an additional $119 million.

(Continued)

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