Take Over Bid

Take Over Bid

Take-over Bid The take-over bid has been aptly described by two British economists as 'a short circuit in an electrical system where the load was unevenly distributed' (George Bull and Anthony Vice). It has been widely criticized as an effort by outsiders with no interest in the activities of a company to snatch a quick profit, dislocate its trade, disturb its staff and denude it of its profitable assets to the detriment of its earning capacity in the long run. Two replies have been made. First, it the assets are undervalued, removing the surplus will not impair their earning power. (A common method, selling freehold properties and taking out leaseholds, yields capital sums, and the new rents can be written off against profits.) Secondly, a firm that joins a large group may gain rather than lose from the resulting diversification.

Take-over bids have been outnumbered by other forms of association that form part of the normal process of development and expansion. In a flexible free economy change is inevitable and desirable, particularly to keep pace with a changing world economy, and directors and employees risk losing their jobs and shareholders their money it market conditions alter. But such upheaval or distress has been exceptional in the post-war take-over bids. In most, although inefficient people have been dismissed or retired, the business has been expanded and additional people employed. The danger that take-over bids could lead to over-concentration of power by monopoly is common to all forms of industrial association.

The case for take-over bids is that they result in fuller use being made of economic resources. Whether this is so or not depends on the attitude to the life of a company's assets taken by the sitting board and by the bidder. The bidder's views are usually shorter than the board's: he will probably make the assets more profitable in the short run. If his view is too short, the general interest will suffer because the assets may be worn out too quickly, and he will not replace or augment them. If the board's view is too long, and the assets M, not pay for themselves in the period envisaged perhaps because market change makes them out of date, again the public interest will suffer. The bidder's short-term views have probably caused boards of directors to review their generally long-term attitude and work their assets more intensively. In a rapidly changing world economists generally would argue that this is probably on the whole in the public interest.

The rights of shareholders as a class can be prejudiced (even though they make a capital gain or receive higher dividends) if the bidden use voteless shares to gain control, or if they make a bid for part of the shares so that those holding the remainder lose authority over the board, or if the board raises the dividend in the effort to keep the bidders out and thus weaken the company's resources.

Economic - Columbia Economics


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