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Takeover Bids and Trading

Recently, Canada’s government, led by Prime Minister Stephen Harper, has rejected a $5.23 billion bid by Malaysia’s state oil company, Petroliam Nasional Bhd., a.k.a. Petronas, for Progress Energy Resources Corporation, a.k.a. Progress. The bid was reviewed under Canada’s foreign takeover law, in which such kind of transactions should result in a “net benefit” to Canada. It was concluded that acquisition by Petronas was not in Canada’s interest. The Petronas rejection, as it is called, is the second time that Harper’s administration rejected a bid of such large scale.

Petronas and Progress will meet with Canadian officials to understand how the takeover bid must be changed to gain approval. Petronas has thirty days to propose a new offer until the government settles on a final decision. Companies and investors are questioning the Canadian government’s definition of “net benefit.” The Investment Canada Act allows the government authority over foreign takeovers, including employment, competition, and compatibility of the bid with national policies.

Comparing and simplifying this current situation to a market with intermediaries, Petronas is acting as the buyer, while Progress is acting as the seller. Canada’s government is the intermediary or the trader. The government will allow the takeover bid if it sees a profit from Petronas’s “ask price”; currently it does not. The government cannot set the prices itself, and therefore rejected the bid fully. No trade will take place, because the buyer Petronas wants to buy Progress for less than the trader’s value. If $5.23 billion is Petronas’s true value, depending on how much Petronas needs to take over Progress, Petronas may have to bid higher than its true value at the end of the thirty days that it has been given.

The difference with this model of trade is that the seller and buyer are not indifferent between acceptance or rejection of the bid. At $5.23 billion as the “ask price,” the seller and buyer will be satisfied with their potential payoffs; however, the trader is not. The causes of Petronas’s need for the takeover include Malaysia’s diminishing gas and energy supply. Petronas proposed to build a liquefied natural gas terminal after gaining Progress, which is currently a small company that cannot afford to extract resources by itself. Although both parties will have a symbiotic relationship and regard the current bid positively, the government, or the intermediary, does not see an advantage from it and rejected it, as of now.




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