Takeover Meaning Types Examples How It Works

Takeover Meaning

Takeovers are common practice—disguised to look like friendly mergers. It could be a mutual agreement or a hostile battle. In a hostile takeover, the acquirer secretly buys the shares of non-controlling shareholders from the open market. Gradually the acquirer takes hold of more than 50% of the target’s stocks, gaining control. The target firm management and board are unaware of such developments.

Key Takeaways

A takeover is a strategic move of a business entity to purchase a large stake (usually more than 50%) of the target company and get control over the latter. The company that buys another firm is called the acquirer, while the newly acquired business is referred to as the target. Takeovers can be friendly if the target accepts the bid willingly. With conflicting interests, takeout battles turn hostile. Acquirers mischievously procure target firms without the latter’s knowledge or consent.

Takeover Explained

Takeover deals can be paid in cash, stocks, or both depending on the mutual agreement of parties. MergersMergersMerger refers to a strategic process whereby two or more companies mutually form a new single legal venture. For example, in 2015, ketchup maker H.J. Heinz Co and Kraft Foods Group Inc merged their business to become Kraft Heinz Company, a leading global food and beverage firm.read more, acquisitionsAcquisitionsAcquisition refers to the strategic move of one company buying another company by acquiring major stakes of the firm. Usually, companies acquire an existing business to share its customer base, operations and market presence. It is one of the popular ways of business expansion.read more, and subsidiariesSubsidiariesA 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 are the most common strategies followed. What motivates buyouts? At times, the acquirer may see an immense scope of growth and long-term value in a target firm. Sometimes, the acquirer intends to enter a new market immediately and with little investment. Capturing a huge market share, acquiring valuable resources and assets, attaining economies of scale, and profit maximization are among other motives.

Moreover, a larger company may be willing to eliminate competition by buying a smaller company. In an activist buyout, the acquirer intends to gain a controlling stake and initiate changes. Sometimes the reason behind an acquisition can be as crazy as a great deal, where a target company is available for a steal.

Types of Takeovers

Following are the different types of takeovers:

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Friendly Takeover: When the target firm’s management and most stakeholdersStakeholdersA stakeholder in business refers to anyone, including a person, group, organization, government, or any other entity with a direct or indirect interest in its operations, actions, and outcomes.read more voluntarily agree to sell off the company’s significant share to the acquirer, the move is welcomed.Hostile Takeover: Sometimes, acquirers secretly buy the sharesBuy The SharesKnowing how to buy shares is crucial for a person who wants exposure to the equity market. Equity markets are volatile, and timing is very important. Shares trade in exchanges, but you just can’t go and buy a share from the exchange. There are several steps involved in purchasing a share.read more of non-controlling stakeholders from the open market. Over time they slowly grab a majority stake in the target company. The management and board of the target firm are unaware of such developments.Reverse Takeover: It is a strategy that private firms adopt to get listed. Instead of spending much, they procure a listed public companyPublic CompanyPublicly Traded Companies, also called Publicly Listed Companies, are the Companies which list their shares on the public stock exchange allowing the trading of shares to the common public. It means that anybody can sell or buy these companies’ shares from the open market.read more. It helps companies sell shares without going through the complex IPO procedure.Bailout Takeover: Struggling businesses get rescued under the rehabilitation schemes set forth by the financial institutionsFinancial InstitutionsFinancial 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. The acquirer has to put forward a proposal to the financial institution for acquiring the target company.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. 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.

How to Takeover a Company?

The systematic procedure for buyouts are as follows:

Set an Objective: The foremost step is to ascertain the reason for buying and the business goal.Evaluate Market Opportunities: The interested acquirer surfs the market to determine various growth opportunities and ranks them based on business feasibility. The acquirer proactively searches for potential target firms.Identify the Perfect Match: Next, acquirers need to select a target firm that best serve their purpose.Evaluate the Financial Position of Target Company: In this stage, the acquiring company has to analyze 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 and its future business viability.Take the Decision: Based on the expected benefits and limitations of the buyout, the acquirer has to assess the strategic value addition of the combined entity before making the final call.Assess Value of Target Company: In this stage, the acquirer conducts a financial valuation of the target company at the price consideration. Additionally, the acquirer looks at alternatives that can finance the buyout transaction.Make the offer: The acquiring company has to send a buyout proposal to the target firm.Conduct Due Diligence: Once the offer has been accepted, the acquirer undertakes complete due diligenceDue DiligenceDue diligence is a thorough examination of information and strict adherence to the applicable rules and regulations. It ensures asset protection as well as the avoidance of malpractices and conflicts.read more of the target company. This stage involves a thorough investigation and inspection of the target company’s legal, financial, and operational position.Implement the Takeover: Finally, the definitive agreement is prepared, and the deal is closed.

Takeover Examples

Following are some real-world examples of takeovers.

Example #1

In November 2018, CVS Health and Aetna entered into a $69 billion merger agreement. It is an example of a friendly acquisition. CVS Health first announced the merger back in December 2017; both entities expected significant synergiesSynergiesSynergy is a strategy where individuals or entities combine their efforts and resources to accomplish more collectively than they could individually.read more. In addition, the merger resulted in the amalgamationAmalgamationAmalgamation is the consolidation or combination of two or more companies, known as amalgamating companies, usually in the same or similar line of business, to produce a new legal entity, known as the amalgamated company, with the same shareholders, assets, and liabilities.read more of CVS Health pharmacies with Aetna’s insurance business, resulting in lower operating expenses.

Example #2

In November 2009, Kraft Foods offered $16.2 billion to Cadbury, and the offer was rejected straightaway. In response, Kraft Foods turned hostile. Kraft took the proposal directly to the shareholders to start a hostile buyout battle that lasted three months. However, in January 2010, Kraft Foods increased its offer up to $21.8 billion, and Cadbury agreed. Eventually, the acquisition was realized. This is an example of a transaction that was hostile at the beginning but ended in mutual agreement.

Advantages and Disadvantages

A backflip helps lesser-known firms as they now get a brand name. Whereas, in a reverse buyout, companies can get listed without the 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 hustle. Target firms also benefit from buyouts. In a sinking company, the investors, 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, and 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 can recover losses. Employees also escape getting laid out.

Buyouts come with their own risks. When a quick deal is set up, the acquirer might run out of time. A rigorous valuation of the target’s assets and resources is not possible. Thus, the acquirer may end up paying higher than required. Buyouts directly affect work culture. If the ethos of new and old management differs significantly, there could be clashes in objectives and policies.

The acquirer can be caught unaware of undisclosed liabilities of the target business; also, the new entity may end up with two sets of employees that perform the same role. As a result, many end up losing jobs.

Difference Between Takeover and Acquisition

There is a slight difference between the two. Takeovers or buyouts may or may not be welcomed by target firms. In contrast, acquisitions are always friendly.

In a hostile takeover, the target firm’s management may not cooperate with the acquirer. The old management does not guide the new owners in administration and internal affairs. In contrast, acquisitions are met with the complete support of the management and board.