A takeover is a type of transaction where the bidder company acquires the target company with or without the mutual agreement between the management of the two companies. Typically, a larger company expresses an interest to acquire a smaller company. Takeovers are frequent events in the current competitive business world and are usually disguised to make them look like friendly mergers.
Types of Takeover
- Friendly Takeover: Here, the acquirer purchases a controlling interest in the target only after rounds of negotiations and a final agreement with the latter. The bid is finalized based on the approval of the majority shareholders.
- Hostile Takeover: This acquirer gains control of the target company by buying the shares of its non-controlling shareholders from the open market. Typically, the shares are purchased over a period of time in a piecemeal manner so that the target remains unaware of the takeover attempt.
- Bailout Takeover: This is intended to bail out the sick companies and allow them to rehabilitate as per official schemes approved by the leading financial institution.
- Reverse Takeover: In this type of takeover, a private entity acquires an already public listed company to list the former on an exchange while effectively avoiding the expenses and lengthy processes involved in the initial public offering (IPO).
- 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. In this way, the larger acquirer can operate under a well-established brand and gain its market share.
Examples of Takeover
In November 2018, CVS Health and Aetna entered into a $69 billion merger agreement, which is an example of a friendly takeover. Almost a year back in December 2017, CVS Health announced the takeover of Aetna as both the entities expected significant synergies from the merger. The merger resulted in the amalgamation of CVS Health’s pharmacies with Aetna’s insurance business, which in turn resulted in lower operating expenses.
In November 2009, Kraft Foods offered $16.2 billion which Cadbury straightaway rejected stating it to be a derisory offer. Reacting to this, Kraft Foods turned hostile in its bid to acquire Cadbury and took the bid directly to the shareholders to start a takeover battle that lasted up to 3 months. However, in January 2010, Kraft Foods increased its offer up to $21.8 billion to which the management of Cadbury agreed, and eventually, the acquisition was realized. This is an example of a transaction that started as a hostile takeover and ended in a mutual agreement.
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How to Takeover a Company?
- Evaluate Market Opportunities: The interested acquirer evaluates the market to figure out various growth opportunities and rank them based on business feasibility.
- Identify the Perfect Candidate: The acquirer proactively searches for potential candidates that meet its strategic and financial growth objectives. The acquirer may restrict itself within the industry or look beyond if required.
- Evaluate the Financial Position of Target Company: In this stage, the financial statements of the target company are analyzed comprehensively, and its future business viability is assessed.
- Take the Decision: Based on the expected benefits and limitations of the takeover, the acquirer has to assess the strategic value addition of the combined entity and make the decision.
- Assess Value of Target Company: In this stage, the financial valuation of the target company is conducted to arrive at the price consideration along with the alternatives for financing the takeover transaction.
- Conduct Due Diligence: Once the offer has been accepted, the acquirer undertakes complete due diligence of the target company. This stage involves thorough investigation and inspection of the legal, financial, and operational position of the target company.
- Implement the Takeover: Finally, the definitive agreement is prepared, and then the deal is closed.
- The acquirer believes that there is a long-term value in the target company.
- The acquirer intends to enter a new market without investing any extra money or time.
- A larger company may be willing to eliminate competition via a strategic takeover of a smaller company.
- A shareholder may intend to gain a controlling stake to initiate some change (activist takeovers).
- Helps in gaining market share through increased sales or venture into new markets through the target company.
- Helps in reducing the competition in the market.
- Enhances operational efficiency owing to synergies created out of the acquisition.
- It may result in a decline in operational efficiency in case the cultures of the participating companies don’t match.
- In some cases, it results in a reduction of the workforce, i.e. job cuts.
- The acquirer may be exposed to the hidden liabilities of the target company after the takeover.
This has been a guide to What is Takeover and its definition. Here we discuss types of takeovers along with examples, reasons, advantages and disadvantages. You can learn more about from the following articles –