What it means
In a normal takeover, shareholders accept a bid because the price is above what they could get on the market. A takeunder reverses this, offering less than the current price per share.
For shareholders to accept, there must be a reason why the market price is not a realistic guide to what the shares are worth. One reason is financial distress.
If a company is close to failure, its shares may be trading on hope, and a buyer who offers less may still be offering more than the shares would be worth if the company collapsed. Lenders or a rescue deal may leave shareholders with little choice.
Another reason is that the market price has been pushed up by speculation, for instance by rumours of a bid. When the rumour fades or the buyer decides the price is too high, the offer may sit below the temporarily inflated price while staying close to the price before the speculation.
Shareholders then have to weigh the offer against the earlier level. A third setting is a deal where the buyer already controls the target and can propose a purchase of the remaining shares.
Minority shareholders may object that the price is too low, and regulators and courts often examine such deals closely. The buyer has to show the price is fair, often with a report from an independent adviser.
For finance professionals, the term is a reminder that a premium is not guaranteed. The comparison is always between the offer and the value of the business, and the share price is only one input to that judgement.
It also shows why share prices and company values are not the same thing. A share price is set by the last trade between willing parties, while a takeover price has to be accepted by the owners of the whole company, and those two can sit apart for a time.
In practice
Real-world examples.
Example
A bank agrees a rescue purchase of a failing chain of gyms at 15% below its share price. The chain's shares had risen on hopes of a recovery that never arrived. Shareholders accept because the alternative is administration.
Example
A parent company that owns 80% of a listed subsidiary offers to buy the minority shares at a price below the recent trading level. A minority shareholder group objects and asks the regulator to review the price. The parent has to publish an independent valuation to support the offer.
Example
A technology group sees the shares of a target jump 30% on takeover rumours. When it finally bids, it offers a price 5% below the inflated level but 20% above the price before the rumours began. The target's board argues that the earlier price is the fair comparison.
Formula
Calculation
Premium or discount = (offer price - current share price) / current share price x 100
A struggling retailer's shares trade at $12.00, and a buyer offers $10.80 a share. The calculation is (10.80 - 12.00) / 12.00 = -1.20 / 12.00 = -0.10, or -10%. With 3,000,000 shares in issue, the market value is 12.00 x 3,000,000 = $36,000,000, while the offer values the equity at 10.80 x 3,000,000 = $32,400,000, which is $3,600,000 lower.Case study
Seen in the real world.
Dunmore Print Group is an illustrative, fictional company whose shares jumped from $5.00 to $7.00 on rumours of an offer. A buyer then made a formal proposal of $6.30 a share, which was 10% below the new price.
The buyer pointed out that the offer was 26% higher than the undisturbed price of $5.00 and that the business had lost money for three years. With 4,000,000 shares, the offer was worth $25,200,000, against a pre-rumour market value of $20,000,000.
The illustrative result was a negotiated price of $6.60, still a takeunder compared with the peak but a clear gain on the original price. Shareholders accepted because the alternative was to wait for a recovery that the company's results did not support.
Watch out
Common mistakes.
- Assuming every takeover pays a premium, when a bid can sit below a market price that has been inflated by speculation.
- Judging an offer only against the latest share price, rather than against the price before rumours and the value of the business.
- Overlooking the position of minority shareholders, who may have legal protection if a controlling owner proposes a low price.
Questions
People also ask.
Why would shareholders accept an offer below the market price?
They may judge that the current price is unrealistic, that the company is in difficulty, or that they have no better alternative.
Is a takeunder common?
No, it is unusual, and it mostly arises in distressed situations or after a price spike.
How is a takeunder different from a hostile bid?
A hostile bid is opposed by the board, while a takeunder describes the price relative to the market and can be friendly or hostile.
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