Takeover

Takeover Definition

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

  1. 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.read more: Here, the acquirer purchases a controlling interestControlling InterestA controlling interest is the shareholder's power to speak in the corporate actions or decisions derived from possessing a considerable chunk of the company's voting stock. However, such a stakeholder may or may not hold a significant portion of the company's common stocks.read more 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 shareholdersMajority ShareholdersA majority shareholder or controlling shareholder is an individual or a corporation that owns the majority of the company's stock (more than 50%) and therefore enjoys more voting power than other shareholders. These shareholders are in a position to influence the company's decisions.read more.
  2. Hostile TakeoverHostile TakeoverA hostile takeover is a type of acquisition of a target company by an acquiring company in which the target company's management is not in favour of the acquisition but the bidder still uses other channels to acquire the company, such as acquiring the company through tender offer by directly making an offer to the public to buy the shares of the target company at a pre-specified price that is higher than the prevailing market prices.read more: 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.
  3. 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 institutionFinancial InstitutionFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. read more.
  4. Reverse TakeoverReverse TakeoverA reverse takeover, also known as a reverse IPO, is a strategy for a private firm to list on a stock market by acquiring an existing listed public company. This avoids the costly and time-consuming process of obtaining a stock exchange listing through an initial public offering (IPO).read more: 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 offeringInitial Public OfferingAn initial public offering (IPO) occurs when a private company makes its shares available to the general public for the first time. IPO is a means of raising capital for companies by allowing them to trade their shares on the stock exchange.read more (IPO).
  5. Backflip Takeover: This acquirer turns itself into a subsidiarySubsidiaryA subsidiary company is controlled by another company, better known as a parent or holding company. The control is exerted through ownership of more than 50% of the voting stock of the subsidiary. Subsidiaries are either set up or acquired by the controlling company.read more 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 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.read more.
Takeover

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Examples of Takeover

Example #1

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 mergerSynergies From The MergerSynergy in M&A is the approach of business units that if they combine their businesses by forming one single unit and then working together to achieve a common goal, the total earnings of the business can be greater than the sum of the earnings of both businesses earned separately, and the cost of the merger can be reduced.read more. The merger resulted in the amalgamation of CVS Health’s pharmacies with Aetna’s insurance business, which in turn resulted in lower operating expensesOperating ExpensesOperating expense (OPEX) is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery. Therefore, they are readily available in the income statement and help to determine the net profit.read more.

Example #2

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 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.read more 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.

How to Takeover a Company?

How to Takeover a Company

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  1. Evaluate Market Opportunities: The interested acquirer evaluates the market to figure out various growth opportunities and rank them based on business feasibility.
  2. 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.
  3. Evaluate the Financial Position of Target Company: In this stage, the financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more of the target company are analyzed comprehensively, and its future business viability is assessed.
  4. 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.
  5. 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.
  6. 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.
  7. Implement the Takeover: Finally, the definitive agreement is prepared, and then the deal is closed.

Reasons

  • 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).

Advantages

  • 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.

Disadvantages

  • 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.

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