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In: Economics
because buying a controlling portion shares isnt a reliable or easy way to take over a company. in many cases a controlling amount of share isnt even available on the market; and there are poison pills and bylaws about what stock majority holders can and cant do.
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Not a large enough % of the company is up for sale in the open market.
And, once that news gets out that a company is actively trying to buy up shares, it automatically causes the price of those shares to jump as sellers jack up their prices knowing that there is this demand out there
There might not be enough supply at the current market price, so a premium is needed to entice shareholders.
Attempting to buy a large number of shares on the open market can drive up the share price even higher. It can also cause the company to take defensive measures (e.g. poison pill and the crown jewel defense).
A premium can convince shareholders to approve a mutual deal which would mean the acquirer can purchase all of the shares at an agreed price.
If a company makes a tender offer to buy out a target company and the target company responds positively, it can lead to the target company opening its books to the potential buyer in the process of working out a deal, so they can see what they are actually buying. That option does not exist if they just try to buy the company off the open market (a hostile takeover).
Imagine a large building with 1000 flats in it, and high turnover in tenants.
If you want to buy one flat, there a good chance that several are available, so you can easily buy one.
If you want to buy ten, you can buy then ones that are being sold, and then wait a couple months to progressively buy new ones being sold.
If you want to buy half the building, it doesn’t work. Maybe more than half the building are families that don’t intend to move out and sell any time soon. Your only chance is to tell people that you’re buying at +30% compared to the market, on the condition that you get offers to 500 flats at that price.
Works the same with shares of a company.
Legal requirement.
If they acquired more than 5% then they have to declare it, at which point everyone will demand higher prices.
It would be more expensive to buy the stock on the open market. As supply drops the price will increase. There is also the issue that the sec could see it as a pump and dump or some other illegal trading. And you run the risk of the company dumping large amounts of stock to deflate the price and screw you over.
Because you need the control a majority of the shares to buyout a company, and there aren’t that many shares on the open market available to purchase.
Most companies have a buyout clause where a buyout offer can be approved by the board and/or the shareholders, forcing all shareholders to sell even if their shares weren’t on the market originally.
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