1. Comment on the following quote from the L.A. Times: The unusual $200-per-shar
ID: 2646727 • Letter: 1
Question
1. Comment on the following quote from the L.A. Times:
The unusual $200-per-share offer that Teledyne Inc. made Wednesday for at least 25% of the its common stock has astounded even veteran financial analysts, who predict that the vast majority of big institutions that own the shares will jump at the lucrative offer. Although Teledyne has made seven previous offers to repurchase its shares since the early 1970's, never before has the conglomerate offered such a substantial premium over its existing trading price or sought such a large purchase......The motivation behind the unprecedented offer is a belief by Teledyne Chairman Henry Singleton and the Teledyne board that the firm's stock is undervalued, according to Fayez S. Sarofim, one of Teledyne's largest shareholders......"In a slow-growth environment, it is a viable strategy," he said in a telephone interview. "When your shares are undervalued you are going to increase your earnings per share for the remaining shares. How can you argue with success? A lot of companies follow the tender route to best serve their stockholders." Sarofim said.
Explanation / Answer
The offer made by Teledyne Inc must have been made after a lot of considerations. There could be various reasons for that lucrative offer. Basically, in my perspective, it is a well conceived strategy serving two purposes namely :
The buy-back offer made the company offering $ 200 per share can be attributed to undervaluation of stock. The company might be sitting on a huge pile of cash and hence, might be interested to see a huge spike in its share price considering its position in the market. Now, when the company goes for such a step, it not only increases the promoters shareholding in the company but also increases their earning per share substantially. Now with increased promoters shareholding in the company, they can take strategic decisions with utmost ease and comport as well as can thwart any hostile bid too to take over their company from outside investors.
Now if the buy-back offer is pulled off successfully, it will bring in the following benefits :
No more hostile bid danger looming before the company.
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