What is a Takeover Bid?
Takeover bid basically refers to the price being offered by the acquiring company to the target company to purchase the company, the offer can in form of cash, equity or a combination of both; bids are generally placed by bigger companies to acquire the smaller ones in the market.
The most basic form of a takeover bid is a friendly one, where both the companies mutually agree to the bid, and the company is sold by the acquiree to acquire. In this way, the acquirer kills the competition or increases its strength in the market, and the acquiree gets the company worth in terms of cash or equity with a broader market to capture.
Such takeovers may bring operational advantages or performance improvement for the company, which in the long run, is beneficial for both the company and the shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares.. It can be categorized under corporate action, where an activity of the bid will affect most of the stakeholders like shareholders, directors, bondholders, and so on.
From the acquiring company’s viewpoint, there may be synergy involved with additional tax benefitsTax BenefitsTax benefits refer to the credit that a business receives on its tax liability for complying with a norm proposed by the government. The advantage is either credited back to the company after paying its regular taxation amount or deducted when paying the tax liability in the first place., and diversification may also be a reason for making the bid. So, it depends on the takeover bid. Generally, once the bid is placed, it is taken to the board of directors for approval and then to the shareholders.
How Does Takeover Bid Work?
- The first step is by the acquiring company, where it spots the target company and makes a bid to purchase that company. The reason to bid may vary from company to company. Some common reasons are tax benefits, synergy, diversification, an increase in market shareMarket ShareMarket share determines the company's contribution in percentage to the total revenue generated within an industry or market in a certain period. It depicts the company's market position when compared to that of its competitors., and so on.
- A bid is placed in the form of cash, equity, or a blend of both. The offer is passed on to the board of directors of the target company to approve or disapprove the deal.
- If all goes well, the deal is approved, and it goes for voting to the shareholders of the company for further proceedings and approval.
- The last and final clearance of the deal comes from the legal perspective, where the department of justice checks if there no antitrust laws to be breached.
- That’s it, the deal is done, and the promised price and benefits are transferred to the shareholders of the target company.
Types of Takeover Bid
There are four broad types of the bid which we shall discuss below:
#1 – Friendly
A friendly takeoverFriendly TakeoverA friendly takeover occurs when the target company peacefully accepts the acquisition offer. The takeover is subject to the approval of the target company's shareholders as well as regulatory approval to ensure that the acquisition complies with antitrust laws. is where the acquirer and the target company mutually agree to the price and takeoverTakeoverA takeover is a transaction where the bidder company acquires the target company with or without the management's mutual agreement. Typically, a larger company expresses an interest to acquire a smaller company. Takeovers are frequent events in the current competitive business world disguised as friendly mergers.. They sit on a table to negotiate the price, and the target company reviews the terms of the buyoutThe BuyoutA buyout is a process of acquiring a controlling interest in a company, either via out-and-out purchase or through the purchase of controlling equity interest. The underlying principle is that the acquirer believes that the target company’s assets are undervalued. post, which is passed onto the shareholders to approve or reject the deal.
#2 – Hostile
A hostile takeover occurs when the target company has no intention of merging or selling off the company. However, the acquirer company seeks to buy out the company. The acquiring company even makes a bid to buy the company, which may be unacceptable by the target company and its shareholders. Here in most scenarios, target companies reject the deal considering that the deal and price undermine the objectives of the company. The two very common ways through which the acquiring company tries to take over the target company are:
- Tender Offer: The company offers to buy the shares at a premium price, which is higher than the market price, and tries to acquire a huge stake in the company.
- Proxy Vote: Try to convince the existing shareholders to vote out from the management and sell their portion of shares to the acquiring company.
#3 – Reverse
In this type of bid, a private company makes a bid to buy the public listed company. The main reason for this type of takeover is that the private company saves itself from going through the entire process of IPOIPOInitial Public Offering (IPO) is when the shares of the private companies are listed for the first time in the stock exchange for public trading and investment. This allows a private company to raise the capital for different purposes. and gets a listed status from the acquired public company. Since the IPO process is too tedious and effortful, the acquiring company chooses to take over the listed company instead of having its IPO. In the end, it will result in the desired outcome. The private company gets listed status through the target company.
#4 – Backflip
As the name suggests, this is a Backflip bid where the acquiring company becomes the subsidiary of the target company. The main reason being that the target company might have a very strong brand name in the market, and the acquiring company might well off by being a subsidiary of the target company.
Examples of a Takeover Bid
- The classic example of a takeover bid, which eventually resulted in a Backflip takeover between Southwestern Bell, popularly known as SBC, and AT&T (American telecom operator). In 2005, SBC made a bid to take over AT&T for $16 Billion. However, AT&T was a well-established brand as compared to SBC, so eventually, SBC ended by merging and operating under the brand name of AT&T.
Takeover bid can be placed by any company is whichever way it seeks to acquire the target company, however as per the historical trend, it has been seen that most of the time, it is shareholders of the target company who benefits the most from the deal.
This article has been a guide to what is Takeover Bid and its definition. Here we discuss how does takeover bids work along with its types and examples. You may learn more about financing from the following articles –