Privatization

[David]

The player can propose privatization when the player owns over 75% of the stock. The player has to add a premium to the current stock price and offer it to existing shareholders for their considerations of the privatization proposal.

Interface may look like the following:

Privatization

To privatize a company, the parent company must own at least 75% of the shares of the company.

Parent company: <company name>
Owned shares: 88%

How much will you offer to existing shareholders for buying their shares?

Current stock price: $100
Offering stock price: $200

Required cash: $100,000,000
Parent company’s cash: $200,000,000

Probability of shareholders accepting your offer: 60%.

When a privatization attempt has failed, the company is not allowed to make another attempt until one year later.

[MagnusA]

Looks good to me! Maybe the offering stock price should be selectable (by the usual +/- buttons)? The probability of acceptance should of course be affected by the price.

EDIT: isn't this more naturally belonging to the Subsidiary DLC?

[David]

Looks good to me! Maybe the offering stock price should be selectable (by the usual +/- buttons)? The probability of acceptance should of course be affected by the price.

EDIT: isn't this more naturally belonging to the Subsidiary DLC?

I have added a poll option for implementing it to the Subsidiary DLC.

[beamthegreat]

YES! This feature should definitely be added to either the subsidiary or new DLC. I suggest the ability to raise the price even further to increase the probability that the tender offer will become successful.

[de1irium]

I believe this feature is a must. And what about making it be possible at all times (not only when a corporation has ownership), thus replacing the odd method of buying groups of 5% until one takes control. I think that the probability of shareholders accepting the offer should be hidden to the user in order to make it more challenging and seem more hazardous than calculated. You should also take in consideration the number of shares detained by the CEO, which may refuse to sell.

[David]

I think that the probability of shareholders accepting the offer should be hidden to the user in order to make it more challenging and seem more hazardous than calculated.

I would recommend that you set up a poll and see what other users think about this.

The current plan is to display the probability percentage. But if there is a sufficient number of users who prefer hiding it, we may change it accordingly.

[buells]

Couple of thoughts:

- Likelihood of success should depend on premium to enterprise value (debt + market cap - cash) instead of equity value. The reason for this is that companies with a lot of excess cash should demand a lower premium to equity value (you shouldn't have to pay a premium on cash). Likewise, you should have to pay a premium on assets financed with debt instead of equity. The interface can let you set a premium to equity value, but the calculation mechanism should use enterprise value for the reasons I mentioned.

- Likelihood of success could depend on % owned to start with. In the U.S., you don't need to pay a premium at all on a squeeze-out privatization if you own >90% of the shares. The probability of success could also depend on having blocks of larger shareholders vs. lower ownership concentration. I am not sure how best to model this dynamic in the game, but in real life, when you put the company in play, you often attract other bidders. Large shareholders often stand in the way of a privatization because they believe the long-run intrinsic value is greater than the stock price. That's why they are holders in the first place.

- Owning 75% seems way too high a threshold. Why not make it 50% and just have a low probability of success without a high premium? It could be made even lower with the ability for a majority owner to block?

- What about pro forma debt? Privatizations usually hinge on being able to raise new debt to buy out equity holders (cf recent failed Nordstrom privatization or, heck, Tesla for that matter). At a minimum maybe we just keep basic game mechanic and let the buyer rollover the existing debt?

[David]

- Likelihood of success should depend on premium to enterprise value (debt + market cap - cash) instead of equity value. The reason for this is that companies with a lot of excess cash should demand a lower premium to equity value (you shouldn't have to pay a premium on cash). Likewise, you should have to pay a premium on assets financed with debt instead of equity. The interface can let you set a premium to equity value, but the calculation mechanism should use enterprise value for the reasons I mentioned.

I believe that the debt is the amount of the money that the buyer has to pay in addition to the acquisition cost of the shares.

If the acquisition cost of the shares has to increase by the amount of the debt, and the buyer has to pay the debt after acquiring the company shares, doesn't it mean that the debt amount is calculated twice?

From https://www.investopedia.com/terms/e/en ... evalue.asp
"The value of a firm's debt, for example, would need to be paid off by the buyer when taking over a company. "

- Likelihood of success could depend on % owned to start with. In the U.S., you don't need to pay a premium at all on a squeeze-out privatization if you own >90% of the shares. The probability of success could also depend on having blocks of larger shareholders vs. lower ownership concentration. I am not sure how best to model this dynamic in the game, but in real life, when you put the company in play, you often attract other bidders. Large shareholders often stand in the way of a privatization because they believe the long-run intrinsic value is greater than the stock price. That's why they are holders in the first place.

Latest update from the devs:

A better way to indicate the likelihood of success rather than showing a percentage will be to display that in words including "low", "moderate", "high", "very high".

Let's say that we calculate a premium price that has an absolute chance of acceptance by the shareholders. If the offer price >= that price, the privatization will definitely go through. But if it is owner than that, then it is based on the percentage of shares held by other shareholders.

e.g. if the percentage of shares held by other shareholders is 10%, then X= 25%-10% (=15%), and the offer price is Y= 5% less than the ideal premium price, then the chance of success is 100% - Y/X = 100% - 5%/15% = 66%

if the percentage of shares held by other shareholders is 10%, then X=25%-10% (=15%), and the offer price is 2% less than the ideal premium price, then the chance of success is 100% - 2%/15% = 86%

if the percentage of shares held by other shareholders is 10%, then X=25%-10% (=15%), and the offer price is 15% less than the ideal premium price, then the chance of success is 100% - 15%/15% = 0%

if the percentage of shares held by other shareholders is 20%, then X=25%-20% (=5%), and the offer price is 3% less than the ideal premium price, then the chance of success is 100% - 3%/5% = 100% - 60% = 40%.

if the percentage of shares held by other shareholders is 20%, then X=25%-20% (=5%), and the offer price is 7% less than the ideal premium price, then the chance of success is 100% - 7%/5% = a negative value.

[jckceric]

Valuing a takeover cost based off enterprise value is a useful metric to determine if the acquisition is feasible for the acquiring company.

However, this doesn’t mean the price of the acquisition should be determined by the enterprise value. Valuing companies based off of a multiple of earnings is a more realistic way of handling market values of companies, as it is currently.

I think the MOST realistic way of valuing a firm without getting too complicated is a combination of both a multiple on earnings and a multiple on revenue. This would make companies in their growth stages more valuable and therefore harder to acquire, which would make sense because of their higher future earnings prospects.

Another suggestion that correlates with the above information is to base IPO values on a multiple of earnings/revenue rather than the book value, since the price generally gravitates to that value anyways after the IPO.

[buells]

Let me see if I can make my point more clearly. My point is that if the game mechanic makes the AI willing to accept an offer based on a premium, that premium should be relative to total enterprise value. I actually think this matters in the game because even though AI uses little debt, it can accumulate a lot of cash.

Conceptually, total enterprise value ("TEV") represents the value of the business itself including both debt and equity claims and excluding non-operating assets like cash. Net operating assets is an equivalent term for enterprise value but is generally used in reference to book value of those same assets.

Suppose the AI has a business with market cap of $1000, debt of $100, and cash of $800. The enterprise value is $300 ($1000+$100-$800). If I offer a premium of 10% of TEV, I would pay $1030 to acquire the equity. If I pay a 10% premium on market cap, I am paying $1100. Since the business has net cash of $90, I am paying a premium on that net cash. If the business had net debt, I would be paying too low a premium.

If you base the premium the AI requires to transact on market cap, a business with net cash would be overvalued for M&A purposes and a business with net debt would be undervalued. The required premium should be paid only on operating assets for this reason. It is fine, however, to express the premium as a premium to the stock price for interface and decisionmaking purposes.

The question becomes more contemplated when you consider stock holdings. Because stock holdings in this game tend to have strategic value, I think they should be considered as part of TEV. In other words, they need not be factored into the equation for TEV.

That equation is simply: Total Enterprise Value = Market Capitalization + Total Debt - Cash

The required premium would be calculated as $ Premium = Total Enterprise Value x (1 + Premium %)

The proceeds paid to the sellers would be calculated as Proceeds = Market Cap + $ Premium.

The buyer would pay Proceeds to purchase 100% of the equity interests in the company. The buyer would receive 100% of its cash and assume 100% of its debt. This is similar to the existing game mechanic. The $ premium would be pro-rated across all holders, so the premium % is only really paid on the part of the equity not already held by the buyer.

Does that make sense?