Shuanghui deal for Smithfield Foods Question?
I understand that today Shuanghui agreed to buy Smithfield foods for $34.00 per share, increasing the share price to $33.35 at end of trading Wednesday. This represented a 28.4% increase in price.
I can understand paying a premium to acquire a company in a takeover. Can anyone explain to me the reason such a large premium is being paid. I'm not knowledgeable on takeover bids and what acquisition premium percentages usually are, but to my untrained eye this appears abnormally large, especially considering sums involved.
Does premium here represent diversification/access to US market or similar? Bringing home the bacon to China?
Cheers for any knowledge/reasoning.
It's definitely the Chinese buyer premium. As the great Don Corleone said, making an offer he can't refuse. (he in this case would be the shareholders). There's going to be a lot of redtape going on as the US-Chinese relation gets more strained by the day. So if they did overbid it'd be for this reason mainly.
However, you can't just look at premium over current trading price. Usually you need to spread some more analysis to know whether it's a high premium or not.
Just my $0.02
I actually was reminded I received and e-mail related to M&A during the week from McKinsey after posting this. Appears to be normal enough.
http://www.mckinsey.com/insights/corporate_finance/m_and_a_in_2012_pick…
I am interested to find out what this premium incorporates exactly.
Think of it this way - if I'm Shuanghui, I need to convince Smithfield shareholders to sell their shares to me as opposed to just selling them on the open market. If I just offered the market price, there's no reason to sell to me in particular, so I need to offer something greater than the current market price.
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