Blog 1: Alpha take over Messey

I am going to write about how the wealth of shareholders was affected by company decision. The case study of Alpha set to take over Massey for $7.1 billion would be referred.

The wealth of shareholders would be affected by company long-term and short-term objective. John Kay point out that the firm may concentrate on making the best procedure rather than just focus on shareholder value. Thus, it will bring best return to shareholder.

Alpha is the biggest producer of metallurgical coal in Abingdon, Va., The aims of Alpha take over Massey is to create a global leadership in metallurgical coal reserves and production. Combination between Massey and Alpha may bring high growth and profit to both companies. Alpha poised to become the world’s third-biggest producer of metallurgical coal used by steelmakers.

Several of Massey’s directors and executives think that it would create more shareholder value if keeping independent of Massey. However, due to the accident at Massey’s Upper Big Branch mine which killed 29 miners in April, Massey’s board was under pressure because prestige of Massey severely decreased by the accident.

Even Massey might improve its stock price over next few year by itself, operational and reputational risk are important determinants which decision are made (Coleman et al, 2010) And Alpha offer 1.025 share for each share of Massey, plus $10 a share in cash. That represents 21% premium over Massey’s closing share price from $57.23 to $69.33. Due to those factors, combine with Alpha might be the best method for Massey to recover their reputation and make profit in the shortest time.

Combination between Alpha and Massey perhaps very compelling, it may stimulates the stock price for the company in short time.

However, think about after combine Alpha and Massey, is it good for both companies? Have a look on AOL merge with Time Warner to emerge the world’s largest internet and media company in 2000. It is similar to Alpha and Massey that AOL and Time Warner have similar strengths in their respective business, but it finally destroyed billions of the wealth of shareholders due to changes of accounting rule. People would think about why choose AOL Time Warner rather than BBC or CNN?
The same situation may occur, people may invest to BHP Billiton Metallurgical Coal which the largest global supplier of seaborne traded hard coking coal rather than Alpha and Massey.

Strictly thinking for the decision may affect long term objective of the firm. Therefore, the deal should involve the approval by shareholders and regulators.