The Headache of Taking a Company Private - Hostile Takeovers to Poison Pills Explained

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As we've all seen recently, taking a company private is a bit more dramatic than most would expect - today I explain the process and how it can get messy.
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DISCLAIMER:
This channel is for education purposes only and does not constitute financial advice - Richard is not responsible for investment actions taken by viewers. Please seek out a registered advisor if you require assistance (while Richard is a registered portfolio manager at WDS Investment Management, he does not provide advice through The Plain Bagel, which is not affiliated with his employer).

[@gasmice]

The leveraged buyout (LBO) came to public view in the 1980’s and continues to be a strategy - acquire a public company in a tender offer that is initially financed by short-term loans, but is ultimately paid by issuing new debt after taking the company private.

[@fitfirst4468]

I thought LBO meant Large Ball sack Orange sperm ?

[@moho472]

I just wanted to say, thank you for posting informative videos. What I love the most about your channel is that while you're informative, you don't give any financial advice for ethical reasons. I've been watching for just about 3 years, and your video really helped me understand how the business world works. While my investments are more low-risk, watching my savings grow is a sight that I never would have seen before. Thank you Richard for being an awesome KZbinr, best wishes, and congrats on 500k subscribers!

[@soosv7345]

This is helping me understand the TV show succession better lmao thanks

[@12nites]

It thought you'd mention Dell. They said they were taking it private to detach themselves from the whims of the market and focus on the long term and, apparently, it worked.

[@anivicuno9473]

*Laughs in Alienware vs LTT and Gamersnexus secret shopper*

[@MrSupernova111]

Exactly! Our friend has managed to build a youtube channel by reading a college textbook and adding infographics to the videos with little to no substance.

[@thatguyshaq7053]

@@MrSupernova111 🤨 do you want him to say something that a text book wouldn't already state? You're basically trying to hate on someone for being knowledgeable.

[@drogerflav6350]

@@thatguyshaq7053 plus textbooks cost money youtube free ish

[@MrSupernova111]

@@thatguyshaq7053 . Do you understand the difference between theory and applied knowledge? There is nothing useful in this channel for people who actively manage a portfolio. You don't need to watch hundreds of youtube videos that all lead to the same conclusion (for dummies) - diversify. If the plain bagel could run a multi billion dollar fund profitably he would do it. Instead, he reads a script on a youtube channel. This channel is nothing more than financial entertainment like the rest of them.

[@briannavarro5328]

Succession sent me here, and I’m HOOKED!

[@kingenma8731]

This type of content is exactly why I subbed. Great breakdown and good timing too.

[@therapturedmichelle]

Thank you for the explanation!!

[@nickdisibio5445]

great video as always. thanks tpb!!!

[@tomrulz444]

You are THE best ethical financial KZbinr bro! Love your vids

[@phath2007]

Enjoyed this! A new topic for me. Thank you!

[@ThePlainBagel]

Happy Friday everyone! Visit morningbrewdaily.com/theplainbagel to sign up for the awesome Morning Brew daily newsletter.

[@burnoutparidise1]

Really great video that highlights many important aspects of corporate finance. On a sidenote, markets were pricing in a 0% chance of the deal not happening which is absolutely absurd. If anything, it's a coinflip if this deal happens and the price should reflect this.

[@jamvan1000]

I never thought I would see Twitch Plays Pokemon referenced in a finance video

[@rohitkmr232]

Another great video by Mr. Bagel!

[@paddaydaddy]

Great video!

[@yesno5286]

good graphics - i especially liked the share holders kicking at the door

[@MrSupernova111]

Investor can sell their shares after a tender offer to take a public company private. Usually, the company will continue to trade at the offered price until its taken private. Investors don't have to wait for the company to actually go private to sell their existing shares. Existing investors might lose out on perceived intrinsic value but that just part of the game.

[@tomlxyz]

Doesn't it trade below the offer price due to the risk of it still possibly getting canceled, and approaching the price with increasing certainty?

[@MrJimmyboy262]

0:44 flawless transition. Nice.

[@ThyasFGC]

Thank you for the informative video. I’m reading a book about the myth of shareholder primacy and this helped me understand some concepts. One thing I want to add is that “petty” strategies to prevent hostile takeovers may not be such a bad thing if the buyer doesn’t really care about the company and just wants short-term gains. Maybe it isn’t such a bad thing for a BoD to defend against a buyout that would not benefit the corporation’s customers, its employees, or the community/environment at large?

[@AGeeksTouch]

Dude! Your video quality has taken huge leaps. Great work to you and your team!

[@anncroxford2814]

Absolutely right now

[@danielhale1]

Your channel deserves more subscribers. There's so much bad advice out there on the markets and instead you're just explaining honestly. I hope you continue to thrive!

[@sdmugabe]

Gratitude's 🙌🏾

[@vikingdazed7366]

The first company i bought stocks in went private this winter. I have decreased my shopping with the company since i like to shop at places were i am part owner.

[@BlueSky-kh8ue]

I still don't understand why if I bought a share of a company how they can force me to sell it against my will.

[@sergecanepa1971]

that's a nice background...

[@daple1997]

Hi Richard! I have a question about about the Canadian economy for you. I am a little worried for the Canadian real estate market. The recent rate hikes can put pressure on the mortgage holders since the variable rate holders' payments will go up. Also, the general increase mortgage payments can price into the real estate value and crash the prices. Therefore, the people who bought in late and took out as much as they could while the rate were down would not be able to sell and cover the whole mortgage price in the future. I am most concerned for the Vancouver and Toronto markets. Could this cause a wave of defaults and hurt the banking sector similar to the US in 2008?

[@aw4610]

The sexy background music really does it for me.

[@andrewwhitcomb4857]

4:10 "all the bay-gij"

[@midimusicforever]

Banger as always!

[@GT-tj1qg]

I've just realized that How Money Works is very much modelled on The Plain Bagel. I think the Plain Bagel does it better

[@someonesilence3731]

Crown Jewel strategy reminds me of ABN Amro selling Lasalle.

[@zvxcvxcz]

Patrick has a good video on merger arbitrage, which would include private acquirement.

[@samsonsoturian6013]

Caveat on literal poison pills: They're rare. When a spy asked for one, all their coworkers would try and talk them out of it and they needed approval from hotshot director in order to get one and they'd often not permit them at all.

[@JosephDickson]

I'm glad I stick to broad market index funds. 🤣

[@marqkamamerg9019]

You taught me a lot about sensible investing. Thank you!

[@trevinbeattie4888]

My biggest concern about these decisions, and a lot of decisions in general that are put up for a shareholder vote, is that it’s not just one vote per shareholder - their voting power is proportional to the number of shares held. And in most cases (as far as I’ve seen) the board of directors and senior management collectively own the majority of shares in any company, so the general public who owns relatively few shares of stock has practically no influence on these decisions even though they are more populous. Then again in several ways this might be a good thing, since the general populace doesn’t have enough experience to know the impact of these decisions.

[@hoodygod110]

Does he have a video about golden handcuffs

[@CaribouDataScience]

His about a "poison bot" defence?

[@gilgamesh310]

A staggered board system can also prevent a takeover. I think Twitter has that.

[@esattahaIbis]

Hi Richard, If a company that you have shares of it goes private, after the closing date do you have to pay capital gains tax on that pay out? Or this counts as a special case since you are forced to sell your position?

[@ProfAzimov]

You pay capital gains taxes. If you got a gain, the gov doesn't care.

[@AinNutnButAPnut]

What happens if you have a lot of stocks in a wide range of ETF's and one of the companies is a major portion of the ETF? does the ETF go in value, does the investor get a chunk of money or does that go to the ETF provider?

[@joshuawoodford7525]

Great question, you do recieve cash in lieu of shares. it's important to note the ETF may temporarily stagnate until it rebalances, depends on the weight of the now private company and diversity of stocks in the ETF. It's also important to understand the overall philosophy on market ETF investing. A lot of money is poured in these regardless and chances are you wouldn't notice a abnormal dip larger that normal market fluctuations. Awesome question.

[@whatsup3519]

What if there is no buyer in share market in a hypothetical situation. What will happen to the PRICE of share? Could you please answer my question,or make a video about it?

[@luisandrade2254]

It would go to 0

[@MrSupernova111]

The stock price is just a battle between sellers and buyers. For the price to move one side has to inflict more pressure than the other. If there are more sellers than buyers the price will go down until there is an equilibrium between buyers and sellers. Otherwise, if sellers continue to win the battle they can drive the price down to $0. Usually, the stock price will be halted after a certain point and potentially dropped from the stock exchange before it goes to $0. Either way, this isn't good unless you have put options on the stock.

[@ProfAzimov]

@@MrSupernova111 If buyers are winning, not sellers

[@economicon9257]

10:05 Noob question incoming. I thought that once certain company goes public, it can't divide itself in the future, i.e. create more shares, since the whole company is already 'divided'. What piece of knowledge am I missing to understand this?

[@ThePlainBagel]

Once a company goes public, it can actually issue more shares (called a secondary issuance). So if the company plans on expanding and needs money to acquire some assets, it can sell more shares to raise the money. It can, however, cause what's called share dilution. Here's a video with more on it :) kzbin.info/www/bejne/nHmkfmOMiNCkh8k

[@economicon9257]

@@ThePlainBagel Thanks :) Keep up the good work on educating! P.S. You could do a video on some book recommendation for people completely illiterate in economics, like myself.

[@MrSupernova111]

Companies buy (retire) and issue shares all the time. Ever heard of buybacks? How about stock splits? Also, note that the shares you buy and sell over your app are from a secondary market. As our friend the plain bagel mentioned the firm can raise money by issuing more shares (equity) but they can also raise money through debt (bonds or loans). Most people who trade stocks have no clue how all this works but are out there buying and selling stocks clueless of the mechanisms that affect their stock price. There is also something called the float which is a portion of the total outstanding shares available for trade. You should look up all this stuff if you're interesting in trading company stocks.

[@MrSupernova111]

I recommend a book called Financial Shenanigans if you want to learn more about accounting gimmicks.

[@zvxcvxcz]

... just wait for it, who says we can't go from Twitch plays Pokemon to Twitch runs a public company :P

[@tkdevlop]

How capital gain or loss work in this case? as it wasn't me who sell those shares

[@ThePlainBagel]

It would be the same as if you sold; the government will tax you on any gain

[@nittikorn]

Nice little crash course on corporate restructuring and governance!

[@graymars1097]

Now tell me, did you just become my favorite investor-gamer KZbinr?!

[@jonathanduran2921]

Not sure it was intentional, but that Elon imitation was spot on.

[@tomsawyer8102]

content +1 , Virtue signaling -1

[@BET-BOY]

Just a question that flared up in my head regarding the comment at 4:33 : why are investors as a crowd often thought of as impatient and overtly focused on short-term prospects? I'm not too familiar with the investing business, but a similar dynamic seems to show up in political contexts, where voters are thought to favor concrete and immediate gains, while autocratic individuals would better be able to disregard irrelevant short-term turbulence to realize their grand vision of great historical importance. Shouldn't the crowd of investors or voters take the long-term interests of a company or community into account, if the argument for forsaking short-term gains for long-term benefits would be compelling?

[@WrathOfMega]

Some are willing to wait 20 years for money. More are willing to wait 10. Most are willing to wait 5. But *everyone* would like to have more money _now_. If your goal is to please the largest percentage of people possible, your time horizon inherently shortens.

[@Justauri-asdfghjkl]

A lot of investors evaluate company growth quarter to quarter because it is easier to justify taking on more money if there is fast growth - while this is not always best for the business long-term, funding can make or break a start-up so a lot of founder adhere to these unspoken requirements

[@MrSupernova111]

Because the general public is clueless and expect the world to evolve around their lifestyle. Nothing is certain in the world but investors expect a smooth trend with each quarterly report. Also, investors are emotional.

[@BET-BOY]

​@@WrathOfMega I think almost everyone would agree that an equivalent amount of money now is better than the same amount later, especially if things like safekeeping costs or the possibility of getting robbed are disregarded, even though those might be relevant in some contexts. But I don't immediately see how this translates into overt impatience at the crowd level. If you are looking to please a crowd, to me it would seem intuitive that you should aim to provide as much money as possible as fast as possible, and I don't really see why a crowd would necessarily err on the side of excessive impatience in how long they are willing to wait in exchange for a bigger return.

[@BET-BOY]

@@Justauri-asdfghjkl Why would "a lot" of investors do that though, especially if it is recognized that it can indeed be bad for the businesses in question? If I invest in a company, it would seem intuitive that I would want for the company to do well.

[@sideways5153]

Please review the hostile takeover of Kaibacorp from the YuGiOh tv series! The show very bizarrely included an origin story where one of the characters was revealed to have bought out the family business as a child in order to oust his father, the founder and former majority owner. It went into an interesting level of detail (especially for a cartoon made for middle schoolers) and to my knowledge illustrated the process fairly accurately.

[@Lazyguy22]

IT'S TIME TO D-D-D-D-D-DELIST EQUITY

[@Vanderpool0312]

Great explanation! Thanks! And I really hope the Twitter deal fails and Twitter stays a public company!

[@Creamy_Goodness]

Sorry if this is offensive but I'm always partial to a pale ginger (so pale almost translucent🤙). Subscribed.

[@therapturedmichelle]

why? that's discrimination

[@krombopulos_michael]

How does the person doing the takeover acquire all the shares on the open market? If I have 10 Twitter shares and dont even list them, does Elon have a way to force me to sell them? And if I'm not listing them on any exchange, how does he know how to find me to pay me for them?

[@Connor-vj7vf]

There are shareholder votes. If the motion to be acquired passes then your share ceases to exist and is bought at the agreed price regardless of your vote

[@MrSupernova111]

The buyer doesn't need all the shares - just the majority or more accurately the majority vote. The buyer can influence enough stock holders to force the company to sell. I've never been in such a situation as an investor but trades are usually done electronically like anything else. My guess is that when the company officially goes private your shares will be forcefully sold and you get your money back in your account.

[@skolarii]

can you make a video on Dark Pools

[@samsonsoturian6013]

Everything is 100x more complicated when there's a billion dollars involved.......

[@sojibrajii]

Hi bro, U need thumbnail designer?

[@thedave1771]

A shout out to Elon Musk, I bought a bunch of TWTR when it looked like Musk couldn’t get it up. I gambled he’d get sued into making it happen, and/or Twitter would be okay enough long term. Now some of his money is in my pocket. I would accept more of his money.

[@RyanRJ]

First?

[@sobtrdeszl7806]

no

[@ethanbrooks7648]

It would appear so.

[@OneNewHope]

I look forward to Elon being no more than a footnote in history soon...

[@SoiBoi_Kelda1059]

All this beta ressentiment, the man will take us back to the moon and got first at capitalising EV and privatise space trips, but is still seen as a billionaire like any other billionaire. Look forward to the day that the sad memory of betas is erased from history

[@OneNewHope]

@@SoiBoi_Kelda1059 lol is this a parody of a Tesla boys? If so, it's perfection.

[@MrSupernova111]

Agreed! Elon is the biggest welfare recipient on the planet!

[@adriatical9016]

wait, don’t tell me that Elon musk bought twitter 9 months ago already

[@Victor-dx2ew]

Who are you?

[@JMP1337]

It looks like the orange and blue background messes with the compression. You look very un sharp (pixel wise, not talking about your appearance :P) for a 1080p video. Might be worth looking into!

[@anthonymort5202]

I don't get the white knight one if the point is to not get acquired then why get acquired by somebody else

[@wolfgang972]

Learned that lesson with my investment in Nemaska Lithium NMX.TO, Thanks Pallinghurst and the government of Quebec.