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Merger Arbitrage, 2nd Edition by Thomas Kirchner

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Chapter 13Four Ways to Fight Abuse of Shareholders in Mergers

The last few chapters have painted a gloomy picture of frequent shareholder abuse in mergers. Fortunately, investors have ways to fight back when they think that a firm is sold on inadequate terms. This chapter discusses the methods shareholders can employ to defend their interests.

“Just Sell” Is for Losers

Some commentators argue that shareholders unhappy with a company's management can just sell their shares. A similar line of argument maintains that investors can always vote with their feet and thereby punish management. Some investors even go so far to invest only in firms that are liquid enough to allow them to exit easily if they are dissatisfied or disagree with management.

Unfortunately, this simplistic argument actually plays into the hands of unscrupulous management. Many examples in this book deal with conflicts of interest where a buyer tries to acquire a target company at a low valuation. When that buyer of a firm is its management team, it is in a position to make the firm unattractive to investors in order to stage a carefully crafted low-priced buyout. Investors who sell because they are unhappy with management will, in fact, play into the hands of such managers. Chapter 11 describes a plot by majority shareholder Lukoil to squeeze out the minority shareholders of Chapparal Resources. Lukoil caused Chapparal's management to make a number of negative announcements about the company's prospects, thereby ...

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