Takeover (Corporate) - Explained
What is a Corporate Takeover?
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Table of ContentsWhat is a Corporate Takeover?Reasons for Corporate TakeoversHow a Corporate Takeover Works (Example)Voluntary versus Unwelcomed TakeoverTypes of Corporate TakeoverFriendly takeoverHostile TakeoverReverse TakeoverBack-flip TakeoverAdvantages of a Corporate TakeoverDrawbacks Associated with a TakeoverAcademic Research on Corporate Takeovers
What is a Corporate Takeover?
A takeover is a term used in business when a given company is purchased by another (the acquirer). In other words, takeover happens when one company through bidding, assumes control of another company. The process of takeover happens when the company assuming control purchases the majority of the target company's shares.
The company purchasing is usually known as the bidder or the acquirer while the company being bought is known as the target. Note that takeover happens commonly in the world of business. However, it is completely different from a merger. A merger happens when the bidding company and the target company stops to exists and instead, come together to establish one new joint company.
In the United Kingdom, the term takeover is used to refer to a situation where there is an acquisition of a public company through a stock exchange market where its shares are usually listed. Note that it is big companies who mostly initiate takeover for small companies. This means that small companies are mostly the target while the big companies happen to be the bidders in the takeover process.
Companies in the following situations make appealing takeover targets:
- Small companies that are struggling financially but their products and services are viable.
- Those small companies with a product or service in a unique niche.
- Companies that produce similar products or services (in the same niche) whose geographical proximity happens to be close. They may combine forces in order to boost their efficiency.
- A small viable company that is struggling to pay a debt of which it can be refinanced by a bigger company at a reduced cost.
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Reasons for Corporate Takeovers
There are many reasons as to why takeover may be initiated by companies. Some of the reasons include the following:
- When a bidding company decides to use the prevailing opportunity to purchase the company (opportunistic takeover). A good example is where a company believes that the target company has a long-term value if purchased at its current pricing. It, therefore, purchases the target company because of its foreseen long-term value.
- Secondly, a takeover may happen when the purchasing company wants to eliminate competition. It can do this by going for a strategic takeover.
- Takeover happens when acquiring company wants to enter the market without necessarily having to take on additional risk, time, or money.
- A takeover may also happen when a bidding company wants to achieve economies of scale by reducing its costs and maximizing its returns.
- The takeover also happens when the acquiring company wants to increase its market shares.
- Another instance is when a company wants to acquire assets that are intangible such as brands, trademarks, patents, etc.
- When acquiring company wants to spread its investment risks through diversification.
Generally, if the takeover happens to be successful, then the acquiring company assumes all of the target company's responsibilities such as the company's holdings, debts as well as its operations.
How a Corporate Takeover Works (Example)
Let's assume that Company A has an intention of acquiring Company B. To achieve this, Company A can begin to purchase Bs shares through the open market. However, the moment Company A acquires 5% of the Bs shares, it then must formally and publicly declare the number of shares it owns to the Securities and Exchange Commission. Also, Company A must state whether it has intentions of creating Company B takeover or it just wants to invest in it through the shares they hold. If Company A wants to create a takeover, it will make a tender offer to Company Bs top management (board of directors) where an announcement to the press is made. The tender offer usually indicates things such as:
- How much Company A is willing to pay in order to acquire Company B.
- How long Company Bs shareholders have to receive the offer being given.
After making the tender offer, Company B can then accept the offer, negotiate a different price offer or make use of other defense to change the pact or find another interested party to sell the company to. It must be a party with better terms than that being offered by Company A. This means it is willing to pay a price which is higher than being offered by Company A and sell to him or her. However, if the terms being offered are accepted by Company B, then the regulatory bodies will do a review of the business deal to ensure that the procedure does not bring about monopoly. The deal is closed after the regulatory bodies approve the transaction and the two companies exchange funds.
Generally, a takeover is usually conducted with cash. However, they can also use debt as well as their stock.
Voluntary versus Unwelcomed Takeover
It is important to note that a takeover can be voluntary and at the same time unwelcome. It all depends on the circumstances surrounding the takeover process. Voluntary takeover here means that there is a mutual agreement between the two companies. On the other hand, unwelcome takeover refers to cases where the takeover process is not a shared idea, meaning that the acquiring company acts without the consent or knowledge of the target company. This, therefore, means that the target company's management may or may not be in an agreement with the takeover. This situation may then lead to the creation of different takeover classifications (types) as discussed below.
Types of Corporate Takeover
Takeover exists in the following categories:
A friendly takeover which is also known as a welcome takeover refers to a takeover where both of the company's board of directors is in mutual agreement about the takeover. This means that the management of the target company is informed by the acquiring company about their intention to purchase the company, and the management approves the set purchasing terms. The management then informs the shareholders who are the owners of the target company about the takeover plan. The shareholders will then either vote for or against the takeover process. In a friendly takeover, it is the shareholders votes that will decide whether the takeover process will happen or not.
A hostile takeover is quite different from a friendly takeover. In this type, there is some degree of aggressiveness because one party which is mostly the target company is not a willing participant. This means that the management of the target company is not supporting the takeover idea. In this case, the acquiring company may go to the extent of using tactics to ensure that the target company loses control of its company shares and assets. It does this by purchasing the majority of the target company's shares, once they are in the market.
Purchasing the majority of the shares means that it automatically assumes control of the target company. Another way is that the acquiring company may decide to make an offer directly without giving the management time to make a decision, on whether they support the idea or not. The bidder goes ahead to pursue the acquisition without first engaging the board of directors (management). This kind of acquisition is what is called a hostile takeover.
A reverse takeover refers to a situation where a private company assumes control of a public company. A reverse takeover simply happens to enable a public company to go public without necessarily taking a risk of going through an initial public offering, a process that is costly and tedious. This means that the private company (the acquirer) changes to a public company by assuming control over an already listed company.
Back-flip takeover happens when the company acquiring becomes the target company's subsidiary. The reason behind the back-flip takeover is so that the acquiring company can benefit from the already existing targets robust brand recognition. Let's assume that your XYZ Company's existence is less known globally by people despite it having big money figures.
On the other hand, there is the ABC Company which is struggling financially despite its products being well-known globally, because of its strong brand. In this case, you may acquire company ABC but then, you will be forced to drop your XYZ brand name and instead, continue with the ABCs brand name because of its popularity.
Advantages of a Corporate Takeover
The following are some of the advantages of takeover:
- First, it creates a more cost-efficient as well as competitive entities.
- Secondly, takeover helps those companies not capable of growing their own brand to own a competitive venture by simply purchasing another company's brand.
- Lastly, a well-executed takeover can take a CEOs career to a higher level.
Drawbacks Associated with a Takeover
The takeover has the following drawbacks:
- It involves high costs because the price of a takeover is usually very high.
- It leaves the clients/consumers annoyed because the process always comes with disruptions.
- The process of takeover always has a questionable motive.
- Since takeover involves new management assuming control over a target company, there is some element of incompatibility in terms of management styles, structure, and culture.
- It may bring about an integration problem. As usual, most people detest changes as it interferes with their normal way of life. Some people such as employees may struggle to adjust to the changes.
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