Aidan Jobe Sea


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Despite Disclosure Requirements

The mandatory disclosure requirement in the Williams Act states that any investor acquiring over %5 of any publicly traded company must disclose their holdings within ten days. This allows every investor, noise trader, and front-runner to see that a bid for control is potentially in progress.

If a bidder attempts a takeover by purchasing shares on the open market without selling any except in the total abandonment of their bid, the Williams Act ensures that the bidder will eventually surrender the full anticipated value of their control premium (the amount the bidder is willing to pay for control of the firm). Private equity funds use buyout offers in part to avoid the risk of shareholders engaging in this rent-seeking behavior during the bidding process.

But what if a bidder were willing to selling shares during their bid? By keeping close watch on movements into the shares of targets, as well as unexplained price increases, a bidder could react by selling shares until prices returns to the bidder's last price. This would not only realize an immediate profit, but it also show that the bidder is committed to punishing those who would exploit them. If prices don't subsequently fall, the bidder can realize a further profit by selling the remainder and abandoning their bid. If the rent-seekers back down and share prices fall, the bidder can resume efficient accumulation on the open market.

The key is that by being willing to partially or fully sell during an open market bid, it becomes far riskier for rent-seekers to manipulate share prices, and thereby easier for a bidder to find efficient prices on the open market in spite of the Williams Act.

index of thoughts

Let Social Media do the work

Principles for Private Equity

Despite Disclosure Requirements

Private Equity and the Option

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