The long term begins with the short term: anyone who wants to achieve a certain result within a number of years must now be able to show that he’s on the right track to get there
COLUMN - Long live the short term!
By Jan Maarten Slagter
In the current discussion on hostile takeovers of Dutch funds, two views are often contradictory: the crazy short term - mostly represented by investors - and the well-considered long term, represented by directors, commissioners and politicians. Anyone who chooses to bid – usually higher than the stock market price – in the event of an unwanted takeover attempt, is driven by the short term. One who wishes to keep the daring challenger outside, however, whether or not supported by protective measures, focuses on the long run in which the company is ultimately worth more than the rejected takeover bid. It’s clear who’s morally right. Taste the terms ‘long-term investors’ and ‘short-term investors’ and you’ll find that the first is a title of honour, and the second a curse.
There is quite a bit of misunderstanding in this way of thinking. A few general comments first. The long term offers ample opportunity to hide underperformance (‘we follow the hockey-stick model: results are visible in two years’). The short term is, however, mercilessly transparent. And further: the long term begins with the short term. Anyone who wants to achieve a certain result within a number of years, must now be able to show that he’s on the right track to get there.
In the case of a takeover bid, the long term and the short term come together. The stock price at that time reflects the average of all long-term investment expectations: the price of a share is, in fact, equal to the sum of all expected future dividends, adjusted for loss of interest. The aspirant buyer thinks, for example, that he can achieve synergies with his own business, that he can derive more value from the target company than possible as an independent unit. He offers part of that additional benefit as a takeover premium to the current shareholders.
Investors must have very good arguments to reject an offer that exceeds the market price, as they can get more than they had collectively expected. And with absolute certainty, something that’s not the case with future profits. A potentially competitive bidder can be such an argument – a takeover can take the price levels above the strictly rational. Whether that also applies to the statement of the target’s management that the bid underestimates the company is by definition dubious: at least the market did not assume this for the bid. What has changed in the meantime to attain more trust in the current management? Those who answer that question with ‘nothing’ are not driven by short-term profit – they just don’t believe in the pot of gold at the end of the long-term rainbow.
Jan Maarten Slagter is CEO of the International Bureau of Fiscal Documentation (IBFD). The IBFD is the world’s foremost authority on cross-border taxation. Tax practitioners from all over the world rely on its high-quality, independent tax research.