Question

Suppose you own stock in a company. The current price per share is $25. Another company has just announced that it wants to buy your company and will pay $35 per share to acquire all the outstanding stock. Your company’s management immediately begins fighting off this hostile bid. Is management acting in the shareholders’ best interests? Why or why not?

Answer 1

Agency problem refers o the conflict that occurs in a relationship between agent and principal,where the agent is supposed to be acting in the principals best interest.Here the agent (is the management) and the principal is the shareholders),when the management receives and offer for acquisition at rate higher than it's present share price,the management might refuse to go with the acquisition proposal.This is in the best interests of the shareholders in two cases.First , if the management has received a better offer from another interested party.In this case the management is right to fight off the acquisition proposal,as an acquisition at a higher price would benefit the shareholders.Secondly the management believes the firm is able to increase it's profits significantly that the share price would be higher than the present proposal on the table.But if these two are not the reasons for the management's opposition to the proposal,then its fair to suspect whether there is an agency problem.In case of most acquisitions, a change in management is quite common.So the management's opposition to the acquisition proposal maybe due to this reason. In such a case there is an agency problem as the agent is not acting in the best interest of the shareholders(principal) but rather their own.Because shareholder wealth maximization is the most important goal that the management must pursue and by fighting off the bid to protect their personal interests the management is not acting in the best interest of the shareholders.