Takeover

Takeover Meaning

A Takeover is the buying of a target firm with or without the agreement of the target鈥檚 management. The acquirer wins the bid and buys a major stake in the target firm. Typically, larger companies try to acquire smaller companies.

Takeovers are common practice鈥攄isguised to look like friendly mergers. It could be a mutual agreement or a hostile battle. In a hostile takeover, the acquirer secretly buys the shares of non-controlling shareholders from the open market. Gradually the acquirer takes hold of more than 50% of the target's stocks, gaining control. The target firm management and board are unaware of such developments.

• A takeover is a strategic move of a business entity to purchase a large stake (usually more than 50%) of the target company and get control over the latter.
• The company that buys another firm is called the acquirer, while the newly acquired business is referred to as the target.
• Takeovers can be friendly if the target accepts the bid willingly. With conflicting interests, takeout battles turn hostile. Acquirers mischievously procure target firms without the latter's knowledge or consent.

Takeover Explained

Takeover deals can be paid in cash, stocks, or both depending on the mutual agreement of parties. Mergers, acquisitions, and subsidiaries are the most common strategies followed. What motivates buyouts? At times, the acquirer may see an immense scope of growth and long-term value in a target firm. Sometimes, the acquirer intends to enter a new market immediately and with little investment. Capturing a huge market share, acquiring valuable resources and assets, attaining economies of scale, and profit maximization are among other motives.

Moreover, a larger company may be willing to eliminate competition by buying a smaller company. In an activist buyout, the acquirer intends to gain a controlling stake and initiate changes. Sometimes the reason behind an acquisition can be as crazy as a great deal, where a target company is available for a steal.

Types of Takeovers

Following are the different types of takeovers:

1. Friendly Takeover: When the target firm's management and most stakeholders voluntarily agree to sell off the company's significant share to the acquirer, the move is welcomed.
2. Hostile Takeover: Sometimes, acquirers secretly buy the shares of non-controlling stakeholders from the open market. Over time they slowly grab a majority stake in the target company. The management and board of the target firm are unaware of such developments.
3. Reverse Takeover: It is a strategy that private firms adopt to get listed. Instead of spending much, they procure a listed public company. It helps companies sell shares without going through the complex IPO procedure.
4. Bailout Takeover: Struggling businesses get rescued under the rehabilitation schemes set forth by the financial institutions. The acquirer has to put forward a proposal to the financial institution for acquiring the target company.
5. Backflip Takeover: This acquirer turns itself into a subsidiary of the target company to retain the brand name of the smaller yet well-known company. This way, the larger acquirer can operate under a well-established brand and gain its market share.

How to Takeover a Company?

The systematic procedure for buyouts are as follows:

1. Set an Objective: The foremost step is to ascertain the reason for buying and the business goal.
2. Evaluate Market Opportunities: The interested acquirer surfs the market to determine various growth opportunities and ranks them based on business feasibility. The acquirer proactively searches for potential target firms.
3. Identify the Perfect Match: Next, acquirers need to select a target firm that best serve their purpose.
4. Evaluate the Financial Position of Target Company: In this stage, the acquiring company has to analyze the financial statements of the target company and its future business viability.
5. Take the Decision: Based on the expected benefits and limitations of the buyout, the acquirer has to assess the strategic value addition of the combined entity before making the final call.
6. Assess Value of Target Company: In this stage, the acquirer conducts a financial valuation of the target company at the price consideration. Additionally, the acquirer looks at alternatives that can finance the buyout transaction.
7. Make the offer: The acquiring company has to send a buyout proposal to the target firm.
8. Conduct Due Diligence: Once the offer has been accepted, the acquirer undertakes complete due diligence of the target company. This stage involves a thorough investigation and inspection of the target company's legal, financial, and operational position.
9. Implement the Takeover: Finally, the definitive agreement is prepared, and the deal is closed.

Takeover Examples

Following are some real-world examples of takeovers.

Example #1

In November 2018, CVS Health and Aetna entered into a $69 billion merger agreement. It is an example of a friendly acquisition. CVS Health first announced the merger back in December 2017; both entities expected significant synergies. In addition, the merger resulted in the amalgamation of CVS Health pharmacies with Aetna's insurance business, resulting in lower operating expenses.

Example #2

In November 2009, Kraft Foods offered $16.2 billion to Cadbury, and the offer was rejected straightaway. In response, Kraft Foods turned hostile. Kraft took the proposal directly to the shareholders to start a hostile buyout battle that lasted three months. However, in January 2010, Kraft Foods increased its offer up to $21.8 billion, and Cadbury agreed. Eventually, the acquisition was realized. This is an example of a transaction that was hostile at the beginning but ended in mutual agreement.

Advantages and Disadvantages

Who benefits from a buyout, and how? By purchasing another firm, the acquirer can gain a significant market share, maximize sales, generate additional profit, achieve economies of scale, reduce competition, acquire valuable resources, or expand the business.

A backflip helps lesser-known firms as they now get a brand name. Whereas, in a reverse buyout, companies can get listed without the IPO hustle. Target firms also benefit from buyouts. In a sinking company, the investors, board of directors, and shareholders can recover losses. Employees also escape getting laid out.

Buyouts come with their own risks. When a quick deal is set up, the acquirer might run out of time. A rigorous valuation of the target's assets and resources is not possible. Thus, the acquirer may end up paying higher than required. Buyouts directly affect work culture. If the ethos of new and old management differs significantly, there could be clashes in objectives and policies.

The acquirer can be caught unaware of undisclosed liabilities of the target business; also, the new entity may end up with two sets of employees that perform the same role. As a result, many end up losing jobs.

Difference Between Takeover and Acquisition

There is a slight difference between the two. Takeovers or buyouts may or may not be welcomed by target firms. In contrast, acquisitions are always friendly.

In a hostile takeover, the target firm's management may not cooperate with the acquirer. The old management does not guide the new owners in administration and internal affairs. In contrast, acquisitions are met with the complete support of the management and board.  

Frequently Asked Questions (FAQs)

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