So you’ve seen the news that PotashCorp has been bid for and it’s all looking very exciting. If you own shares then the value of the shares has just shot up. If you don’t then you may be tempted to jump in. On the other hand you may simply want to appear to be knowledgeable if this comes up in the office or down the pub.
This is looking like its going to be a very technical takeover, so we’d thought that we’d supply some background, to what’s happening, before you get the popcorn out for what could be a very entertaining fight.
BHP Billiton
By some measures the world’s largest company, it is listed on the London Stock Exchange but its roots are in Australia. It has a buccaneering style which has seen it grow by acquisition.
Hostile and Friendly Bids
BHP went hostile. This means that instead of reaching a gentlemanly agreement with the board, which is far more likely to succeed, they are going over the heads of the board and trying to buy the shares directly on the stock exchange.
If they increase the bid (which they probably will) then it could go friendly very quickly.
Poison Pill
This looks like its going to be the really controversial aspect of the bid, at least at first. A poison pill defence is essentially the right of a company that is facing a takeover to sell a large number of shares to the existing shareholders at a large discount. This will flood the market with shares and make it harder for the company to be bought.
It can sometimes be a bargaining chip to get a higher price.
White Knight
This is when the company that is attacked teams up with another company to either get the price up or to keep its independence. Essentially the white knight will have a lot of money that it will be able to lend to the company or buy the shares. The white knight will tend to be more amenable to the management, and will often be a rival to the original bidder.
Rio Tinto Zinc (known as RTZ) a deadly London based rival of BHP and a former takeover target of BHP is talked of as a “white knight”. They’ve denied it. So far.
All Cash Offer
If you want to get taken over, an all cash offer is probably the way to do it. This is what BHP are offering. The alternatives are shares in the parent company or tradable debt, or a mix of shares, debt and cash. The all cash nature will make this a very tempting offer.
Cash offers are very hard to arrange as they need the money up front, and so they either need a cash pile or, in the case of BHP, they need to arrange a loan. Matching this will be a bit of a stretch for any white knight.
Full Value
The PotashCorp board have turned down BHP’s initial offer as they don’t think it offers full value. It is like selling a house or accepting a job, you never take the first offer.
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