company takeover share prices


Eli Lilly & Co. just announced that they are going to buy Sigilon Therapeutics for $14.92 per share. Why are they buying it for a much higher share price than through the stock exchange where the closed quote was $3.93 per share?

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You need to pay a premium to the publicly traded price to take control. The board makes these decisions on behalf of the shareholders.

You can imagine if they tried to buy these shares directly on the market, shareholders would demand more as it was clear the demand was increasing. So this is the price that the board believes the vast majority of shareholders would be happy.

It’s also quite common in these pharmaceutical deals that the company lacks the cash to get their products to the market. So the share price gets really depressed. Then, a company with deep pockets can take a chance on it. And have infrastructure to make it happen efficiently.


The price on the stock exchange isn’t the price to buy every share of the company. It’s the price of the most recently sold share (which will probably be pretty close in one direction or the other to the price of the next share that will be sold).

But every sale is an agreement between a specific buyer and a specific seller, and everyone who owns shares of the company isn’t going to be willing to sell at the current price. Anyone who is willing to sell at the current share price on the market will be selling until they run out of buyers willing to buy at that price.

If sellers at that price run out before buyers, then the price goes up as buyers have to deal with share owners who will only sell at a higher price. If buyers run out before sellers then the price goes down as sellers have to deal with buyers who will only buy at a lower price.

If you want to buy the whole company outright, you need the majority of current shareholders to agree to the sale. If you try to buy all of the shares individually on the open market it, you will quickly run out of sellers at the current price and have to make your way up the ladder of different price points that people are willing to sell at, which can get expensive, though it is possible to do. (This is a hostile takeover, because you’re buying out the company without coming to an agreement with that company first).

The alternative is negotiating a price with the current board of directors that they believe will entice a majority of current shareholders to vote in favor of selling. This will come at a premium over the current market price since you’re trying to buy from people who aren’t selling at the current price, but is usually cheaper than trying to buy it piecemeal on the open market where you’d still need to buy from all of those people anyway, and doing it through a single offer is both simpler in some ways and less risky since either they take the deal as is or you can walk away clean. If you attempt to buy the company out on the market and get to say, 40% ownership and discover that the price being demanded by the remainder of owners is much more expensive than you thought, you could be stuck in a position where you fail to take control of the company without significantly overpaying but now are also stuck with a large stake in a company you don’t control, some of which you almost certainly paid a premium for anyway.

For many companies, a large part of their stock are owned by large “institutions” – could be insurance, pension or investment funds etc. These shares are not often traded on the market. What is traded on the market day to day represents a fraction of the shares of the company.

If someone were to come up and purchase all the shares on the open market, it would rapidly drive up the share price. And worse, after doing that the buyer is nowhere close to buying up the “entire company”.

Then there are rules for the market that the regulator sets. In the US, this would be the SEC. If someone intends to purchase a public company in whole, there are ownership thresholds at which they must declare that intention.

Practically speaking, it would be impossible to purchase the company from just open market trades and a serious buyer must ultimately bring a proposal to the board of directors of the target company. This is where all the major shareholders have to be notified and negotiations held on the offer price. Once this price is accepted (only after a shareholder vote is taken, typically), then the rules usually allow for a “forced sale”. All shareholders will be paid the agreed upon price and their shares essentially taken regardless of whether that shareholder agrees to or not. (The rules of this are spelt out in the corporate documents – so everyone who owns shares should make themselves familiar with them. They cannot claim ignorance – buying shares without knowing the rules is no excuse. Buyer beware)

This is a vast simplification of the actual process, of course. But suffice to say, what you suggest won’t really work. When you have to deal with other major (and sophisticated) shareholders being somewhat up front and negotiating openly tends to be a better strategy.