Investments / Corporate Takeovers is an optional feature in the MikesBikes Advanced simulation which may be enabled by your instructor.
The Investment decision enables you to bid on one or more of the companies in your industry:
If successful you will own this company, control its finance decisions and its share price feeds into your own. This enables you to not only purchase an asset but give you the option to cooperate with another company to improve their performance which if successful, will have a positive impact on your company’s share price.
The firm you have taken over still has control of all non-finance decisions, so your acquisition can be seen as a merger, or a hostile takeover depending on how your deal with your new subsidiary.
To make this a successful investment you will need to ensure that you will receive an appropriate return on your investment either in the form of dividends or increasing value of shares.
Purchasing a Company
The minimum realistic takeover bid is shown on the Takeover Screen below right. You can access this screen by pressing the Takeover Button on the Investment Decision Screen.
You must pay at least a 40% premium over current market capitalization to achieve a successful takeover. This means that a takeover bid will usually require a significant amount of cash.
Remember that there may also be competing bids from other firms, so you may wish to go higher than the realistic minimum. All other things being equal, the highest bidder wins!
Antitrust provisions exist in the Multi-Player which exclude takeover bids that would cause your total Market Share to exceed 50% (see the All Firm Ownership Decision Results for last year’s market share percentages).
For more see: Takeover Rules and Regulations under Reports.
Benefits of Investment
With any investment you should only proceed if you believe you can obtain a reasonable return. Investing in another company can enable the following avenues of returns:
- As the Parent company you will benefit from the your Subsidiary’s underlying Share Price.
- As its shareholder of another company you are able to pay yourself a Dividend as a return on your investment.
We recommend you treat this as a merger (as opposed to a hostile takeover) and work with your subsidiary as any improvement to their performance will improve your return (could be simply strategic, but may also stretch to investing further through a loan).
Impact on Share Price
Subsidiary Contribution to Parent Share Price = Subsidiary Market Capitalization / Parent Number of Shares Issued
Example: If Firm A owns Firm B
– Firm A has 100 shares with an underlying Share Price of $50
– Firm B has 50 shares with an underlying Share Price of $40
So Firm B’s contribution to Firm A’s Share Price is: 50 * $40 / 100 = $20
Meaning Firm A will have $20 added to their own Share Price.
Owner Decisions / Capital Transfer Decisions
Once you own a company you become responsible for its finance decisions. Select the company you own, then click on the Transfer button to see the following options:
Increase or decrease your equity holding in the owned firm by purchasing shares from a share issue or selling shares back as a share buy-back. Enter the value of the shares you wish to purchase or sell back.
You may sell your entire shareholding back to the share market at large:
- The sale price is based on the Share Price of the subsidiary at the end of the period in which you choose to sell.
- This process takes a year. Financial Decisions you make for your subsidiary during the sale period will be void.
- Any loans outstanding when you sell your subsidiary will be written off as a Bad Debt. Debt to Bank is unaffected.
Debt to Owner / Debt to Bank
Your subsidiaries may need additional cash for a variety of reasons. This can be done through a loan from the parent company or by raising a loan with the bank.
The Debt Equity Ratio determines how much banks are willing to lend to your subsidiaries.
If you are unable or unwilling to continue to lend to a struggling subsidiary then you should cut your losses and sell your shareholding.
Set an annual amount to be paid to shareholders as a cash payment.
Investor PR (also known as Investor Relations) is directed at increasing shareholder value by ensuring that the investment community is kept aware of developments in the firm’s business.
What if it’s my company that’s been purchased?
You remain the managers of your MikesBikes company and retain control of all decisions except those under the Finance menu.
It is up to you whether you treat their purchase of your company shares as a merger or a hostile takeover. The company who has purchased your shares often has been more successful thus far. If you treat this as a merger this can be a great opportunity for you to work together to improve your company’s performance as your improved performance feeds into their Share Price. So we recommend discussing a partnership in where they can assist you with strategy and possibly invest further capital into your company (through a loan) to help your strategic position.