How to evaluate takeovers

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The market doesn't usually make mistakes when it comes to assigning probabilities to the outcomes of a takeover battle. Merger or 'risk' arbitrage funds attempt to capture the spread that often exists in a merger situation by shorting the shares of the bidding company and buying stock in the target.

This is a high-risk game, so the probabilities of each eventuality - an OFT referral, a successful defence, EU intervention, a counter bid - are calculated in a highly sophisticated way.

The takeover code can also make a difference. This document contains the rules that all investment banks and brokerage firms abide by. An agreed offer can be all over in 21 days from the date an offer document is posted.

More complex deals can take up to 60 days, with no new information allowed after day 45. If a counterbidder comes in on day 59, the clock is reset to zero and a further 60 days can elapse.

Contests are effectively over when a bidder controls more than 50% of the shares.

Occasionally even the sophisticated fall foul of the rules.

For example, if a would-be bidder states that he has 'no present intention of bidding', that's usually sufficient to stop them bidding for at least six months.

If a would-be bidder builds up a stake in a target company, then the terms of any subsequent bid has to include a cash bid at the highest price paid during the stake-building exercise.