What is a Takeover Bid?

Explanation

The most basic form of a takeover bid is a friendly one, where both the companies mutually agree to the bid, and the acquireeAcquireeIn a merger and acquisition transaction, the acquiree, also known as the target company, is the company that is acquired by the acquirer.read moresells the company to acquire. In this way, the acquirer kills the competition or increases its strength in the market, and the acquirer gets the company’s 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.read more. Therefore, it can be categorized under corporate action, where an activity of the bid will affect most 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.read more, 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 the acquiring company, where it spots the target company and bids 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.read more, and so on.A bid is placed in cash, equity, or a blend of both. The offer is passed on to the board of directorsBoard Of DirectorsBoard of Directors (BOD) refers to a corporate body comprising a group of elected people who represent the interest of a company’s stockholders. The board forms the top layer of the hierarchy and focuses on ensuring that the company efficiently achieves its goals.
  • read more 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 company’s shareholders 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 are 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:

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#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.read more  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.read more. Then, they sit at 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.read more post, which is passed onto the shareholders to approve or reject the deal.

#2 – Hostile

A hostile takeoverHostile TakeoverA hostile takeover is a process where a company acquires another company against the will of its management.read more 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 bids 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 company’s objectives. 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 IPOIPOAn 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 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 is that the target company might have a very strong brand name in the market, and the acquiring company might be well off by being a subsidiary of the target company.

Examples of a Takeover Bid

  • The classic example of a takeover bid eventually resulted in a Backflip takeover between Southwestern Bell, popularly known as SBC, and AT&T (American telecom operator). In 2005, SBC bid to take over AT&T for $16 Billion. However, AT&T was a well-established brand compared to SBC, so eventually, SBC ended by merging and operating under the brand name of AT&T.

Conclusion

Takeover bid can be placed by any company in 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 a takeover bid and its definition. Here we discuss how takeover bids work along with their types and examples. You may learn more about financing from the following articles –

  • Reverse TakeoverAcquisition Premium (Takeover)Change of ControlAsset Stripping