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Does a special dividend really raise LSE offer?

Does the plan by TMX Group Inc. and London Stock Exchange Group PLC to add a $4 special dividend for TMX investors if their merger plan is successful really represent a higher bid.

One way to look at it, and the way most are currently doing so, is that the $4 comes on top of the roughly $45 in LSE stock that TMX shareholders will get, so that takes the value to $49.

But another way is to say that when a company pays a dividend, its stock usually falls by the same amount to reflect the fact that the cash has come off the balance sheet.

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In that case, one could argue the bid is now just recast as $41 in stock and $4 in cash.

However, there is some academic research that also shows that market reaction to a special dividend is usually to bump up the stock of the payer, and most investors have seen it happen: a company announces a special, and up goes the stock, even though logic says that it's just your own money coming back to you.

Perhaps the truth is somewhere in between -- while the bid is not necessarily higher, it is sweeter, as most investors prefer some measure of cash.

Indeed, there's proof that Maple Group, at least, believes that the perception among shareholders is that the LSE bid is improved. How else to explain Maple's reaction -- a quick bump to its own hostile takeover offer for TMX to take it to a value Maple puts at $50. Maple also added more cash.

The bottom line is that the value of each bid is in the eye of the beholder, given how many assumptions one has to make to understand each.

In the case of the LSE, one has to estimate how much of the current LSE share price is supported by fundamentals and how much rests on the expectation that if LSE doesn't get TMX, it will be a takeover target itself. LSE shares rose after Maple arrived on scene on precisely that belief.

In the case of Maple, one has to ascribe a value to the new shares in Maple that investors will get should the deal succeed. Maple argues that the baseline valuation there is easy -- just use the current value of TMX shares as a starting point. But after that, how much multiple expansion Maple will get from building its business, how much new profit from folding in other businesses, and what those other businesses will cost and how they are paid for all factor into the mix.

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