Murdoch makes an offer you can't refuse
Here's the story:
55% jump in the share price upon publication of the offer? If I was a shareholder, I'd sue too.DOW Jones could face a flood of shareholder lawsuits if it rejects a buyout bid from News Corporation and its shares tumble, legal and governance experts said overnight.
Dow Jones, publisher of the Wall Street Journal, has said it is evaluating the $US5 billion ($6 billion) takeover bid from Murdoch's News Corp (nws.ASX:Quote,News), a proposal that triggered a nearly 55 percent jump in its stock price on Tuesday.
But a representative of the publisher's controlling shareholders, the Bancroft family, said they would oppose it.
If the board ultimately rejects the offer, and no comparable bids emerge, lawsuits almost surely will be filed accusing the directors for failing to look after investors' interests, said Thomas Dewey, a partner at law firm Dewey Pegno & Kramarsky.
Who said that the rise of litigation culture is a bad thing?
In terms of the risk of litigation, there might be a selection issue.
Shareholders can lock in the 55% rise by selling on the current rumours rather than holding out for any further takeover premium. Arguably a more skillful investor is more likely to do this and they may also have been the type of investor most likely to sue.
A good point. However, you are ignoring the fact that the 55% rise reflects the money DJ shareholders stand to gain weighed by the probability the takeover will take place. Any merger may fail, let alone a hostile takeover, so shall Murdoch have his way shareholders should be looking at capital gains way in excess of %55. That's a good reason for a sophisticated investor not to sell now, and a way in which the controlling family is hurting shareholders' interests. Being sophisticated myself, I would hold on to the shares and either look forward to a spectacural capital gain or a bumper payout in court.
Just to say my financial sophistication mentioned in the previous comment is self-perceived. My immodesty is the more publicly observed characteristic.
I have to agree with Anonymous's point of view. When a merger is announced skillful investors would be better off if they sell off the stock rather than wait for higher capital gains regardless if the merger goes through or not. The latter is more so if one considers the evidence that the stock price is higher at the day of announcement and afterwards drops significantly, an argument which is more consistent with share price smoothing or the market efficiency hypothesis. All of this makes the possibility of high capital gains in the first 3-4 years following the merger highly unlikely.
"Being sophisticated myself, I would hold on to the shares and either look forward to a spectacural capital gain or a bumper payout in court."
The expected return of continuing to hold is: (prob of takeover) x (full takeover premium) + (1 - prob of takeover) x (-55% - cost of suing + (prob of winning litigation) * (litigation pay-off). A sophisticated investor would make an assessment of the expected return of holding and compare that to an immediate 55% gain.
The cost of suing is high (including psychic costs), the probability of success is low because it is currently unprecedented and the likely pay-off would probably only be at best to receive the full takeover premium plus legal costs (although this would current be at an unpayable level), so the likelihood is that the expected pay-off from continuing to hold is less than 55%. Build in risk aversion and the case is even more compelling.
There is also a co-ordination problem in that litigation would have to be on behalf of potentially a large number of small agents. This further reduces the probability of successfully suing.
Ah, how I like some heated debate. (not quite heated, I know, but temperature has risen a couple of degrees for sure) Since my sophistication and perhaps my tactlessness are both challenged here, I will respond.
I agree with all the comments you make, but I disagree with your implied conclusion that a sophisticated investor should sell. Your formula is misleading in that it takes the 55% as exogenous, while it actually reflects the current probability the merger will go ahead, the probability of successfully suing if it doesn't, the litigation pay-off etc. The expected return on the left-hand side is also (roughly) known: overall market return + risk premium + liquidity premium etc for holding DJ stock.
Taking as my starting point that the market is roughly efficient (something you implicitly assume too for your formula to be meaningful) and thus all the factors you put in the formula (including the degree of risk aversion) have been taken into account by the marginal investor, an investor should sell if he expects one of the price determinants to change for the worse (or if he more risk-averse than the marginal investor, or is likely to face higher litigation costs etc), and should hold on if he expects them to stay the same or change for the better.
So, personally, I would hold. I would not necessarily disagree with someone who believes the right thing to do is sell - but as I did above, I strongly disagree with the claim that all sophisticated investors should sell since that's how expected gains are maximised.
Thanks for your comments - please keep them coming (perhaps on different topics too, because I'm getting a bit bored of discussing this merger)