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Lufkin Industries Inc. Message Board

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  • nazbear88 nazbear88 May 5, 2006 10:20 AM Flag

    Shareholder Rights Plan to expire

    poision pill plans are usually in place 2 prevent takeovers

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    • Poison pill clauses became widely used during the corporate raider era of the 1980's. In short, they were put in place to prevent hostile takeovers. (The argument was that hostile takeovers are bad for long-term shareholder value, though that topic is still debated.) The theory goes that if a hostile firm tried to acquire over X% of the companies stock, the firm could increase the number of shares outstanding to a point that the raider lost control. This could be done a number of ways, but I won't get into that. One of the secondary outcomes of a poison pill clause is that it tends to force a stock to trade at a discount, because it signals that the management is not willing to allow a takeover, thus reducing the options shareholders have to gain value (at least in the short term.) (It also can be a signal of hubris, perhaps one of my favorite finance words, which can lead to managerial mistakes. Again, I won't Furthermore, it acts as a signal that management might be more worried about their bank account than the bank accounts of shareholders.
      What we are seeing here, imo at least, is a signal from the management that they are willing to allow a takeover possibility. In lieu of the long-term growth I am forecasting, I think this is a very logical step. The story goes that as oil services grows over the next few years, there will be potential consolidation and/or acquisitions.

      With a poison pill clause in place, Lufkin is not an attractive target. By allowing it to lapse, the company is signaling that it is willing to consider dancing with somebody. This willingness to be acquired, even if it isn't acquired, should increase share price over the long term. I don't know that this necessarily means that there was a friendly acquirer waiting in the wings. In fact, I would say this shows that LUFK management doesn't see an interested buyer that they like in the immediate future. (If there was a friendly buyer, the poison pill wouldn't be exercised, and if there was a hostile buyer, they wouldn't let it lapse.)

      They are simply setting the stage for someone who might consider buying the firm to take a deeper look. One potential group that could become interested as a result would be private equity firms. If this causes LUFK to hit their radar and they think the stock is undervalued, they would be more willing to make the first purchase, because it allows for follow-on investments MUCH easier.

      If you are curious about poison pills and have too much time on your hands, research the Conrail merger of the mid-1990s. Working around the poison pill clause was a big component of the takeover. If you are a finance nerd, it reads like a Tom Clancy novel.

      In the interest of full disclosure, I am long on LUFK.