Acquisition Premium

  

Lumber company A has had a devil of a time negotiating with the Lumberjack Union, but it buys company B so that they can go from five million acres to eight million acres of forest to kill, digest, and turn into scratchpads.

With a highly unionized labor force, both lumberjack companies had only 10% margins, and few resources to invest in technology. Combined, however, with their enormous new scale, it makes financial sense to replace two-thirds of their lumberjacks with robots, a.k.a., the Tree Slayers.

The would-be acquired lumberjack company B knows the math, because they've taken a couple of awesome finance courses on Shmoop, and while as a stand-alone company they might be worth 14x earnings, as they key to unlock the Tree Slayer and a new era of high-margin tree cutting, lumberjack company B will be smart enough to demand a big acquisition premium.

That is, instead of their steady state 14x earnings valuation, they'll ask for and probably get something closer to 20x earnings or more, as the acquisition premium here is warranted in the creation of this new behemoth tree cutting company, which everyone is happy about.

Except the trees. And the squirrels who lived in them. And the birds. And the atmosphere...

Related or Semi-related Video

Finance: What is the Williams Act?5 Views

00:00

finance a la shmoop what is the Williams Act

00:05

well it's 28 Grand Slam singles titles 26 in doubles eight Olympic gold medals [William's sisters career stats appear]

00:11

a successful designer clothing company and an interior design firm yeah like

00:15

you really thought shmoop wouldn't go there for this one come on the Williams

00:19

Act the financial one is actually about making acquisitions or takeovers fair

00:24

and square you know like a tennis court before 1968 when the Williams Act 1.0 [People playing tennis]

00:29

was enacted mega glopped gargantuan strollers could launch a takeover bid

00:34

for micro Corp shakers Rattlers and Hum to make a vertically integrated

00:39

near-monopoly in baby hardware the bid could have come in on a Thursday giving [Bid appears on calendar]

00:44

shareholders 48 hours to respond with say a 20% premium over the current share

00:50

price take it by noon Monday or leave it in the deal's off the table shareholders

00:54

would then have to quickly scramble to figure out this was no is this a fair [Woman scrambling away]

00:59

deal a steal or something else done just to disrupt the market well a bunch of

01:04

companies were quote stolen unquote this way with boards having to scramble and [Robber running away from police]

01:08

often ending up with less than optimal or full value that they were supposed to

01:13

get for their shareholders who they represent so the Williams Act came along

01:17

and required there to be a whole range of filings and disclosures whenever a

01:21

public takeover was announced like the price the terms the mix of stock and

01:26

cash what the newly composed company would look like it's out its out cetera

01:30

and it also required that there be at least five days from when the initial [Five days on calendar highlighted]

01:34

takeover was announced to there being any kind of definitive agreement and

01:39

then quickly investors realized that five days wasn't long enough so less

01:43

than a decade later yeah things move slowly in a financial regulatory world [Cash falling]

01:47

the Williams Act pause button was extended to 20 days and that's where

01:52

things stand today so yeah the Williams Act ensures [Williams act stamped fairness]

01:54

fairness or at least it tries to and that fairness you know which cannot be

01:59

said for the taking no prisoners Williams sisters those two do not know

02:03

the meaning of mercy [Tennis ball hits girl on the head]

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