Takeover rumors

Shortly before 2011 drew to a close, two mega-deals in Philippine business were reported to be in the offing.

First was the possible acquisition by the San Miguel conglomerate of a substantial stake in debt-ridden Philippine Airlines.

According to reports, business tycoon Lucio Tan has expressed willingness to sell some of his PAL shares to SMC to enable Asia’s first airline to meet the challenges of the highly competitive airline business.

Then GMA Network Inc., the operator of TV Channels 7 and 11, was reported to be in negotiations with a group of investors led by businessman Manuel Pangilinan, whose interests include the resurgent TV Channel 5, for a possible buyout.

SMC admitted it was in talks with PAL to help the latter raise capital to purchase additional aircraft. In spite of the admission, however, the share prices of the two companies hardly moved.

Their investors probably felt there was no reason to be worried or be optimistic about the transaction whichever way it goes.

Not so for GMA Network. There was heavy trading of its shares on the day the buyout rumor came out, with its share price rising by almost 5 percent.

The enthusiasm proved to be short-lived because GMA Network denied any plans or negotiations with the Pangilinan group for the sale of its lucrative TV franchise.

Objectives

The rule of the thumb in negotiations for merger or acquisition is secrecy or confidentiality. The premature disclosure of the discussions may invite adverse reaction (and counter-measures) from third parties who, for one reason or another, would not want the transaction to succeed.

What’s more, if public or listed companies are involved, there are strict rules on insider trading (or taking advantage of information that is not available to the public) that have to be observed by the people involved in the negotiations.

More than fines and penalties, violation of insider trading rules could seriously impair the image or reputation of the professionals involved in the transaction.

Thus, investors, especially small stockholders, should be wary when they hear or read about reports of alleged buyouts or sellouts coming from “anonymous sources” or “persons who refused to be identified because they are not authorized to speak on the matter.”

When a so-called news source refuses to go on record or be identified, his statements should be taken with a grain of salt—a questionable objective is behind the unauthorized disclosure of such information.

The objective varies depending on the identity of the party who stands to benefit from the reaction of the investing public to the deliberate leak. But in all cases, it is profit oriented.

Profit motive

The target company of a takeover move would want news of that action to discreetly spread through the grapevine to attract the attention of other companies or investors that may also be interested in its business.

The more suitors participate in the wooing process, the stronger the bargaining leverage of the target company. It can play the prospective buyers against each other to squeeze as many concessions as possible.

Whoever offers the highest price for the shares, including hidden extras for the directors and officers whose signature would be critical to the transaction, wins the bidding war.

Planting well-placed rumors about an impending merger or acquisition also works to the advantage of the major stockholders in the target company who want to unload their stocks with a premium.

If the would-be buyer has a huge treasure chest or is reputed to have the magic touch in turning around distressed companies, chances are the demand for the stocks of the target company would rise the moment word gets around about the interest in acquiring it.

With the rise in demand comes the increase in share price and the savvy stockholders would only be too happy to have their stocks included in the buying frenzy.

At this stage, they have to decide when to sell to get the maximum profit. If they sell too early, the price may later go up; but if they hold on to their shares in the expectation that the price would still go higher, it’s possible that the price may instead go down. In other words, they have to temper their greed.

Caution

The participation of unscrupulous stockbrokers in takeover rumors cannot be discounted.

When trading in the stock market is sluggish or the prices are down, there is the temptation to artificially perk up the market through cleverly planted text messages or word of mouth tips.

This manipulative practice, whose variations are described as “hype and dump,” “marking the close,” or “painting the type,” is aimed at inducing the purchase or sale of stocks in the stock market.

Either way it goes, buying or selling stocks, the stockbroker earns by way of commission based on the value of the transaction.

The standing rule when buyout or sellout talks are in the grapevine is for the parties concerned to immediately make a disclosure or statement about the truth or falsity of such talks.

But the problem is, often no statement is issued at all or, if there is, it is either late or couched in jargon that leave their readers more confused than enlightened.

So, next time you read about this kind of rumors involving companies whose shares you own, hold on to your stocks, wait for further developments and consult a knowledgeable friend on the proper course of action to take.

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