1) Why is the company targeting a specific M/A?
2) How wil the M/A maximise the wealth of a company's shareholders?
Recently, there was extensive media coverage of William Hill’s speculated takeover bid
for 888 Holdings plc. News of
negotiations broke in the news on 10th February 2015, yet the deal
was ultimately quashed just six days later.
Of course, in theory,
there are numerous significant benefits M & As can provide to the buying
company, and consequently the respective shareholders. It is well discussed throughout academia that
M & As can generate cost efficiency through economies of scale,
enhance revenue and expansion due to greater market share, and ultimately
improve value generation. On paper these possibilities appear all well and
good, but in reality, many shareholders and experts reserve their scepticisms
of M & As.
As the UK’s largest listed betting operator, William Hill
spotted the need to add new customers and boost its growth as the betting
industry has been hit by new taxes and regulations from the UK government. A
horizontal merge arguably was the best strategy for William Hill as it would
allow synergy of the companies to take place more rapidly and ultimately
improve the operations of the firm. 888 Holdings are well regarded within the
betting industry for their leading technological platform; this may have
drastically improved William Hill’s reach within the market, and could have
provided the company with great potential for expansion.
But then again, these points are a lovely collection of
“if’s, but’s, and maybe’s” which now we will never know, unless William Hill
decide to really flaunt their chequebook. There are many difficult obstacles to
overcome in order to achieve the positives of a M/A, and given the bawdy,
aggressive and strongly-opinionated characters within the betting industry,
perhaps these are two working cultures that may not integrate together
smoothly.
In the process of these negotiations, there is a set of
stakeholders for each company who should be strongly considered during any
decision, and that is the shareholder. Shareholders of the acquiring company
can suffer from a torrid time during an M & A, and in many cases, they do
not want a deal to be completed.
Warren Buffet argues that company leaders and directors can
be sucked into unnecessary M & As due their overly-sized ego, whilst John
Kay supports this notion and suggests that managers purely love “the chase” of
an acquisition. Neither of these statements provides a common shareholder with
full faith in the CEO of their respective stake, and empirical studies
reinforce that perhaps shareholders of the buying company (in this case
William Hill) should be afraid.
Figure 1: 888 Holdings share price 2nd Feb - 16th March 2015
.jpg)
Hargreaves Lansdown,
2015
Jensen & Ruback’s (1983) seminal study found that the
set of shareholders who really benefit from an M & A are the ‘target’
company’s; these shareholders, on average, can see an average return of 20-30%
on their share value. The media tells us that William Hill offered 200p a share
for 888 which – on the 9th February – looked to be around 37%
greater than the actual share price (146p; see Figure 1). However, upon the leak of the news (10th
February), 888 shares seen a monumental spike, which perhaps was caused by
traders attempting to exploit greater future growth in the share value. This movement also suggests the market efficiency was semi-strong as tarders were not aware of this information until it was publicised by media leak, and then reacted appropriately to how they felt the company could be valued post-acquisition (Fama, 1970).
Regardless of the definite cause of the market’s reaction to
each company’s share value, Jensen & Ruback’s finding, for the larger part,
are supported by this market reaction to the information of a takeover (see Figure 2). It is clear that there is a
significant increase in 888’s share value, whereas William Hill’s share price
takes a slight decrease, possibly highlighting the fears created by Buffet and
Kay. It can then be seen (Figure 2 & Figure 3) that upon the announcement of
the deals collapse on February 16th, that William Hill’s share price
begins to rise again and ultimately reach a level greater than that before the
takeover proposal.
Figure 2: William Hill share price vs 888 share price
.jpg)
Hargreaves Lansdown,
2015
Perhaps the hubris amongst William Hill’s leadership team
was not great enough to be sucked into this chase, or maybe 888’s hubris was
too much for a deal to take place; the company’s founding investors were
rumoured to be holding out for 300p a share – creating a valuation gap of
around £350m between William Hill and 888 Holdings.
Figure 3: William Hill share price
.jpg)
Hargreaves Lansdown,
2015
In this case, it could be suggested that the egos of the target company have outweighed that of the acquisitioning company. Roll (1986) infers that if a target company's share price falls after they have rejected an acquirer's offer, then it suggests that hubris has inflicted the decision-making process as the market does not agree with the decision made (see Figure 2). Conclusively, it could be argued that 888’s founding investors may have damaged value creation of their shareholders (and indeed themselves).
