In a contested takeover bid the successful bidder usually pays significantly more than intended. Do any circumstances justify a price in excess of the estimated worth of the target enterprise?

Question

What will be an ideal response?

Answer 1

When a proposed takeover becomes in effect an auction there is always a significant risk of
overpayment in the heat of the contest. The key question is what one means by worth and to whom
and thus how it is calculated. It is necessary to distinguish strategic acquisitions that are critical to
the future prospects of the acquirer as opposed to acquisitions that would be worthwhile avenues for
growth or diversification, provided that the acquisition price does not exceed the net present value of
projected additional future profits. In the former instance the acquired enterprise has been judged to
confer valuable resources or capabilities on the acquirer that the latter considers, realistically, to be
otherwise unobtainable. In that case the acquisition premium must be compared with a calculation of
worth that takes account of both the expected income stream thereby obtained and the reduction of
income stream that is predicted from the status quo, should the acquisition not occur. These are
highly subjective calculations involving tangible and intangible factors. Further, when the opposing
bidder is a direct competitor, its willingness to bid up the price may simply be a spoiling tactic to
debilitate its opponent’s finances, or a recognition that it too has a strategic interest in making the
acquisition. A difficult judgement must be made about competitive motives. As in all competitive
bidding, the bidders should be clear what is the maximum price they are prepared to pay.