Question

The current stock price of Cruz Inc. is $50 per share. The company’s management believes that the current price is fair and there is nothing else they can do to increase shareholder value. Another company just announced that it wants to buy Cruz Inc. and will pay $65 per share to acquire all the outstanding shares of Cruz. Cruz management immediately begins fighting off this hostile bid. There are no other potential buyers. Do you agree with the action taken by Cruz’s management? Provide your answer and state your reasoning.

Answer 1

Yes, I would agree with the management's action taken because the management's objective is to create wealth for the shareholders in the long-term by operating the company efficiently. And selling the outstanding shares to another company might bring some short-term capital gain but it won't create wealth for the shareholders in the long-term.

If a company is ready to purchase the shares at a higher price that means the company has a good future prospect which is intangible but will benefit the shareholders in the future by creating values for them. So by protecting this company they are meeting their objective.

There are many different ways to restrain a hostile takeover although there are no other potential buyers so those can be applied like poison pill defense, staggered board defense, greenmail defense, etc. So if the management has decided to fight against this hostile bid without any potential buyer then they can succeed.