Time Warner Cable's Reasons for Holding Out

Matthew C. Klein writes for Bloomberg View about the economy and financial markets. He previously wrote for the Economist magazine and its economics blog, Free Exchange.
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Charter Communications says that it wants to buy Time Warner Cable, but it's going about it in a very odd way. Normally, prospective acquirers offer to pay a premium of about 20 percent to 30 percent of the current market price. Charter offered shareholders of TWC a premium roughly equal to zero. No wonder TWC's boss called the bid a "low-ball offer." He would be nuts not to insist on more.

In theory, mergers of complementary businesses can create a new company more valuable than the sum of its parts. That doesn't happen as often as executives might like but the mere possibility of creating synergies -- often code for firing people and cutting costs -- from acquisitions can justify the large premiums paid by acquirers.

It's also worth paying extra to gain total control. In practice, the difference between owning 49 percent and 51 percent of a company is actually worth more than 2 percent of the company's market value.

Finally, and most importantly, acquirers should have to pay a premium to lock in the cost of actually executing their purchase. Remember that a stock's price is just the price at which the last transaction occurred. People are constantly buying and selling shares of TWC, so you probably won't move the market price if you only want to buy a single one. If you want to buy all 282 million shares of TWC, however, you should expect to pay a lot more than the current market price. Everyone who isn't currently interested in selling their shares will require more persuasion -- i.e., money -- than the people who were planning on selling their shares anyway.

Sometimes, when a company is on the verge of collapse, it can be acquired for less than the last price at which it traded. For all other cases, and TWC definitely falls into the category of healthy profitable companies, shareholders should demand a significant premium before selling to an acquirer.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.