Takeover
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In business, a takeover is the purchase of one
Management of the target company may or may not agree with a proposed takeover, and this has resulted in the following takeover classifications: friendly, hostile, reverse or back-flip. Financing a takeover often involves loans or bond issues which may include
Types
Friendly
A friendly takeover is an acquisition which is approved by the management of the target company. Before a bidder makes an offer for another company, it usually first informs the company's board of directors. Ideally, if the board feels that accepting the offer serves the shareholders better than rejecting it, it recommends the offer be accepted by the shareholders.
In a private company, because the shareholders and the board are usually the same people or closely connected with one another, private acquisitions are usually friendly. If the shareholders agree to sell the company, then the board is usually of the same mind or sufficiently under the orders of the equity shareholders to cooperate with the bidder. This point is not relevant to the UK concept of takeovers, which always involve the acquisition of a public company.
Hostile
A hostile takeover allows a bidder to take over a target company whose
A hostile takeover can be conducted in several ways. A
In the United States, a common defense tactic against hostile takeovers is to use section 16 of the
The main consequence of a bid being considered hostile is practical rather than legal. If the board of the target cooperates, the bidder can conduct extensive due diligence into the affairs of the target company, providing the bidder with a comprehensive analysis of the target company's finances. In contrast, a hostile bidder will only have more limited, publicly available information about the target company available, rendering the bidder vulnerable to hidden risks regarding the target company's finances. Since takeovers often require loans provided by banks in order to service the offer, banks are often less willing to back a hostile bidder because of the relative lack of target information which is available to them. Under Delaware law, boards must engage in defensive actions that are proportional to the hostile bidder's threat to the target company.[7]
A well-known example of an extremely hostile takeover was Oracle's bid to acquire PeopleSoft.[8]
As of 2018, about 1,788 hostile takeovers with a total value of US$28.86 billion had been announced.[9]
Reverse
A reverse takeover is a type of takeover where a public company acquires a private company. This is usually done at the instigation of the private company, the purpose being for the private company to effectively
- exceed 100% in any of the class tests; or
- result in a fundamental change in its business, board or voting control; or
- in the case of an investing company, depart substantially from the investing strategy stated in its admission document or, where no admission document was produced on admission, depart substantially from the investing strategy stated in its pre-admission announcement or, depart substantially from the investing strategy.
An individual or organization, sometimes known as a
A well-known example of a reverse takeover in the United Kingdom was
Backflip
A backflip takeover is any sort of takeover in which the acquiring company turns itself into a subsidiary of the purchased company. This type of takeover can occur when a larger but less well-known company purchases a struggling company with a very well-known brand. Examples include:
- The Texas Air Corporation takeover of Continental Airlines but taking the Continental name as it was better known.
- The SBC takeover of the ailing AT&T and subsequent rename to AT&T.[10]
- Westinghouse's 1995 purchase of CBS and 1997 renaming to CBS Corporation, with Westinghouse becoming a brand name owned by the company.
- NationsBank's takeover of the Bank of America, but adopting Bank of America's name.
- Norwest purchased Wells Fargo but kept the latter due to its name recognition and historical legacy in the American West.
- Interceptor Entertainment's acquisition of 3D Realms, but kept the name 3D Realms.
- Nordic Games buying THQ assets and trademark and renaming itself to THQ Nordic.
- Infogrames Entertainment, SA becoming Atari SA.
- The Avago Technologies takeover of Broadcom Inc.
- Overkill Software's takeover of Starbreeze
Financing
Funding
Often a company acquiring another pays a specified amount for it. This money can be raised in a number of ways. Although the company may have sufficient funds available in its account, remitting payment entirely from the acquiring company's cash on hand is unusual. More often, it will be borrowed from a bank, or raised by an issue of bonds. Acquisitions financed through debt are known as leveraged buyouts, and the debt will often be moved down onto the balance sheet of the acquired company. The acquired company then has to pay back the debt. This is a technique often used by private equity companies. The debt ratio of financing can go as high as 80% in some cases. In such a case, the acquiring company would only need to raise 20% of the purchase price.
Loan note alternatives
Cash offers for
A takeover, particularly a reverse takeover, may be financed by an all-share deal. The bidder does not pay money, but instead issues new shares in itself to the shareholders of the company being acquired. In a reverse takeover the shareholders of the company being acquired end up with a majority of the shares in, and so control of, the company making the bid. The company has managerial rights.
All-cash deals
If a takeover of a company consists of simply an offer of an amount of money per share (as opposed to all or part of the payment being in shares or loan notes), then this is an all-cash deal.[11] This does not define how the purchasing company sources the cash- that can be from existing cash resources; loans; or a separate issue of shares.
Mechanics
In the United Kingdom
Takeovers in the UK (meaning acquisitions of public companies only) are governed by the
The Code requires that all shareholders in a company should be treated equally. It regulates when and what information companies must and cannot release publicly in relation to the bid, sets timetables for certain aspects of the bid, and sets minimum bid levels following a previous purchase of shares.
In particular:
- a shareholder must make an offer when its shareholding, including that of parties acting in concert (a "concert party"), reaches 30% of the target;
- information relating to the bid must not be released except by announcements regulated by the Code;
- the bidder must make an announcement if rumour or speculation have affected a company's share price;
- the level of the offer must not be less than any price paid by the bidder in the twelve months before the announcement of a firm intention to make an offer;
- if shares are bought during the offer period at a price higher than the offer price, the offer must be increased to that price;
The Rules Governing the Substantial Acquisition of Shares, which used to accompany the Code and which regulated the announcement of certain levels of shareholdings, have now been abolished, though similar provisions still exist in the Companies Act 1985.
Strategies
There are a variety of reasons why an acquiring company may wish to purchase another company. Some takeovers are opportunistic – the target company may simply be very reasonably priced for one reason or another and the acquiring company may decide that in the long run, it will end up making money by purchasing the target company. The large holding company Berkshire Hathaway has profited well over time by purchasing many companies opportunistically in this manner.
Other takeovers are strategic in that they are thought to have secondary effects beyond the simple effect of the profitability of the target company being added to the acquiring company's profitability. For example, an acquiring company may decide to purchase a company that is profitable and has good
Agency problems
Takeovers may also benefit from
A reduced share price makes a company an easier takeover target. When the company gets bought out (or taken private) – at a dramatically lower price – the takeover artist gains a windfall from the former top executive's actions to surreptitiously reduce the company's stock price. This can represent tens of billions of dollars (questionably) transferred from previous
Similar issues occur when a publicly held asset or non-profit organization undergoes privatization. Top executives often reap tremendous monetary benefits when a government owned or non-profit entity is sold to private hands. Just as in the example above, they can facilitate this process by making the entity appear to be in financial crisis. This perception can reduce the sale price (to the profit of the purchaser) and make non-profits and governments more likely to sell. It can also contribute to a public perception that private entities are more efficiently run, reinforcing the political will to sell off public assets.[citation needed]
Pros and cons
While pros and cons of a takeover differ from case to case, there are a few recurring ones worth mentioning.
Pros:
- Increase in sales/revenues
- Venture into new businesses and markets
- Profitability of target company
- Increase market share
- Decreased competition (from the perspective of the acquiring company)
- Reduction of overcapacity in the industry
- Enlarge brand portfolio
- Increase in economies of scale
- Increased efficiency as a result of corporate synergies/redundancies (jobs with overlapping responsibilities can be eliminated, decreasing operating costs)
- Expand strategic distribution network
Cons:
- Goodwill, often paid in excess for the acquisition
- Culture clashes within the two companies causes employees to be less-efficient or despondent
- Reduced competition and choice for consumers in oligopoly markets (bad for consumers, although this is good for the companies involved in the takeover)
- Likelihood of job cuts
- Cultural integration or conflict with new management
- Hidden liabilities of target entity
- The monetary cost to the company
- Lack of motivation for employees in the company being bought
- Domination of a subsidiary by the parent company, which may result in piercing the corporate veil
Takeovers also tend to substitute debt for equity. In a sense, any government tax policy of allowing for deduction of interest expenses but not of dividends, has essentially provided a substantial subsidy to takeovers. It can punish more-conservative or prudent management that does not allow their companies to leverage themselves into a high-risk position. High leverage will lead to high profits if circumstances go well but can lead to catastrophic failure if they do not. This can create substantial
Occurrence
Corporate takeovers occur frequently in the
Tactics against hostile takeover
There are quite a few tactics or techniques which can be used to deter a hostile takeover.
- Bankmail
- Crown jewel defense
- Golden parachute
- Greenmail
- Killer bees
- Leveraged recapitalization
- Lobster trap
- Lock-up provision
- Nancy Reagan defense
- Non-voting stock
- Pac-Man defense
- Poison pill (shareholder rights plan)
- Flip-in
- Flip-over
- Jonestown defense
- Pension parachute
- People pill
- Voting plans
- Safe harbor
- Scorched-earth defense
- Staggered board of directors
- Standstill agreement
- Targeted repurchase
- Top-ups
- Treasury stock
- Gray knight
- White knight
- Whitemail
See also
- Breakup fee
- Concentration of media ownership
- Control premium
- List of largest mergers and acquisitions
- Mergers and acquisitions
- Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.
- Scrip bid
- Squeeze out
- Successor company
- Transformational acquisition
References
- ^ "What Is a Takeover? Definition, How They're Funded, and Example". Investopedia. Retrieved 2024-04-12.
- OCLC 936331906.
- ISSN 0099-9660. Retrieved 2022-02-04.
- ^ a b c "What Is a Hostile Takeover?". The Balance. Retrieved 2022-02-04.
- ^ Picot 2002, p. 99.
- ^ Joseph Gregory Sidak (1982). "Antitrust Preliminary Injunctions in Hostile Tender Offers, 30 KAN. L. REV. 491, 492" (PDF). criterioneconomics.com. Archived (PDF) from the original on 2015-07-17.
- ^ Badawi, Adam B.; Webber, David H. (2015). "Does the Quality of the Plaintiffs' Law Firm Matter in Deal Litigation?". The Journal of Corporation Law. 41 (2): 107. Retrieved 19 November 2019.
- ^ Oracle's Hostile Takeover of People Soft (A) - Harvard Business Review
- ^ "M&A by Transaction Type - Institute for Mergers, Acquisitions and Alliances (IMAA)". Institute for Mergers, Acquisitions and Alliances (IMAA). Retrieved 2018-02-27.
- ^ "SBC completes purchase of AT&T". NBC News. Retrieved 2022-06-15.
- ^ "Japan's Tokio Marine to buy US insurer HCC for $7.5 billion in all-cash takeover". Canada.com. 10 June 2015. Retrieved 17 August 2015.
- ^ Directive 2004/25/EC of the European Parliament and of the Council of 21 april 2004 on takeover bids
Works cited
- Picot, Gerhard, ed. (2002). Handbook of International Mergers and Acquisitions: Preparation, Implementation, and Integration. OCLC 48588374.
External links
- Jarrell, Gregg A. (2002). "Takeovers and Leveraged Buyouts". In