Re: Am I alone on this one?
Probity98 asked the following question:
Consider the following scenario (hypothetically speaking): a company looking to acquire another company made a deal in cash & stock, and agreed to a set $, # amount, respectively. Then the value of the stock unexpectedly increased and the company to be acquired would not agree to a lesser amount of stock shares. Could the CEO of the company making the acquisition reduce the value of his company's stock to accommodate this deal? Your insight is greatly appreciated.
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I replied:
Probity98, your question does not make sense. First you say "a deal in cash & stock, and agreed to a set $, # amount". Then you say "then the value of the stock unexpectedly increased and the company to be acquired would not agree to a lesser amount of stock shares". Either they have a deal or they don't, it's as simple as that. If they don't have a deal and conditions change, of course one side might want to renegotiate.
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Probity replied:
Jeff, I think you're splitting hairs. If I knew the answer to my question, I wouldn't be asking you. Let's just say it was initially agreed to in principle. Because the stock price increases, wouldn't that mean that the acquisition price has increased also? This would mean that the purchaser has paid more than the original "agreement".
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KJC replied to Probity:
Take a course in basic contract law at your local community college. Either an agreement was signed or it wasn't signed. If it was signed, then the company issuing the stock cannot renegotiate the deal. If an agreement wasn't signed, then they were still in negotiations. No deal, and the company issuing the stock can reopen negotiations. Verbal agreements mean squat at these dollar amounts. It's the signed contract that counts.
As an example, take a look at the BT and MCI deal that went south after they had reached an agreement in principle.
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I try again with:
OK, let me try to see if I understand what you are trying to say.
Company A agrees in principle to buy Company Z for $2M, which they divide as $1M in cash and $1M in stock, or, say, 200,000 shares at the current price of $5. Then, the stock price goes up to $6, making the value in stock $1.2M. So according to your scenario, Company A feels they are now overpaying by $200K and decides to intentionally do things to get the share price down to $5 again so as not to overpay. Right?
Ummm....
First of all, Company A is not buying the stock at market so they aren't losing a penny if the price goes down, right? Moreover, if the price goes down they lose buying power as their shares are worth less. So, I see absolutely no incentive in this instance to manipulate the share price down. Conversely, if they agreed to a set dollar amount in stock, they'd most likely want to manipulate the price UP!
Am I missing something here?
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Probity supposedly ends with:
Jeff, As Kerry pointed out I should have said negotiating, thanks for your reply. Not totally what I was after but it will have to suffice. Thank-you and good night.
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Now Probity is back with:
Last evening I posed a question to him and was not quite satisfied with his answer (beginning with Post #129-135 approx.). I may not have articulated to his liking, but I did feel that I got my point across. I think I sensed a bit of hostility in his responses. He's too intelligent not to know what I was really inquiring, but he has a knack of leaving his answers open-ended.
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My new response:
First of all, I wasn't the one who told you to take a course in basic contract law at your local community college, so I don't quite understand where you sense the "hostility" as regards what I wrote.
Second, even if I knew the person and stock to which you were probably referring it wouldn't make a bit of difference to how I answered your question; you still haven't given me any reason why it is to a CEO's advantage when making an acquisition with stock to manipulate his company's stock down and thus lose buying power.
Lastly, if you think I somehow sidestepped your question, please feel free to take as much time as you'd like to reformulate it and post it here for many others beside myself to answer.
- Jeff
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