In business, a takeover is the purchase of one

company A company, abbreviated as co., is a legal entity representing an association of people, whether natural, legal or a mixture of both, with a specific objective. Company members share a common purpose and unite to achieve specific, declared ...

(the ''target'') by another (the ''acquirer'' or ''bidder''). In the UK, the term refers to the acquisition of a

public company A public company is a company whose ownership is organized via shares of stock which are intended to be freely traded on a stock exchange or in over-the-counter markets. A public (publicly traded) company can be listed on a stock exchange ( ...

whose shares are listed on a stock exchange, in contrast to the acquisition of a

private company A privately held company (or simply a private company) is a company whose shares and related rights or obligations are not offered for public subscription or publicly negotiated in the respective listed markets, but rather the company's stock is ...

. Management of the target company may or may not agree with a proposed takeover, and this has resulted in the following takeover classifications: friendly, hostile, reverse or back-flip. Financing a takeover often involves loans or bond issues which may include junk bonds as well as a simple cash offers. It can also include shares in the new company.

Types

Friendly

A ''friendly takeover'' is an acquisition which is approved by the management of the target company. Before a bidder makes an offer for another company, it usually first informs the company's

board of directors A board of directors (commonly referred simply as the board) is an executive committee that jointly supervises the activities of an organization, which can be either a for-profit or a nonprofit organization such as a business, nonprofit orga ...

. In an ideal world, if the board feels that accepting the offer serves the

shareholder A shareholder (in the United States often referred to as stockholder) of a corporation is an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the legal o ...

s better than rejecting it, it recommends the offer be accepted by the shareholders. In a private company, because the shareholders and the board are usually the same people or closely connected with one another, private acquisitions are usually friendly. If the shareholders agree to sell the company, then the board is usually of the same mind or sufficiently under the orders of the equity shareholders to cooperate with the bidder. This point is not relevant to the UK concept of takeovers, which always involve the acquisition of a public company.

Hostile

A ''hostile takeover'' allows a bidder to take over a target company whose

management Management (or managing) is the administration of an organization, whether it is a business, a nonprofit organization, or a government body. It is the art and science of managing resources of the business. Management includes the activitie ...

is unwilling to agree to a

merger Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, other business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspec ...

or takeover. The party who initiates a hostile takeover bid approaches the shareholders directly, as opposed to seeking approval from officers or directors of the company. A takeover is considered ''hostile'' if the target company's board rejects the offer, and if the bidder continues to pursue it, or the bidder makes the offer directly after having announced its firm intention to make an offer. Development of the hostile takeover is attributed to

Louis Wolfson Louis Elwood Wolfson (January 28, 1912 – December 30, 2007) was an American financier, a convicted felon, and one of the first modern corporate raiders, labeled by '' Time'' as such in a 1956 article.tender offer can be made where the acquiring company makes a public offer at a fixed price above the current market price. An acquiring company can also engage in a

proxy fight A proxy fight, proxy contest or proxy battle (sometimes even called a proxy war) is an unfriendly contest for the control over an organization. The event usually occurs when a corporation's stockholders develop opposition to some aspect of the cor ...

, whereby it tries to persuade enough shareholders, usually a simple majority, to replace the management with a new one which will approve the takeover. Another method involves quietly purchasing enough stock on the open market, known as a ''creeping tender offer'' or ''dawn raid'', to effect a change in management. In all of these ways, management resists the acquisition, but it is carried out anyway. In the United States, a common defense tactic against hostile takeovers is to use section 16 of the Clayton Act to seek an injunction, arguing that section 7 of the act, which prohibits acquisitions where the effect may be substantially to lessen competition or to tend to create a monopoly, would be violated if the offeror acquired the target's stock. The main consequence of a bid being considered hostile is practical rather than legal. If the board of the target cooperates, the bidder can conduct extensive due diligence into the affairs of the target company, providing the bidder with a comprehensive analysis of the target company's finances. In contrast, a hostile bidder will only have more limited, publicly available information about the target company available, rendering the bidder vulnerable to hidden risks regarding the target company's finances. Since takeovers often require loans provided by

bank A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital m ...

s in order to service the offer, banks are often less willing to back a hostile bidder because of the relative lack of target information which is available to them. Under

Delaware Delaware ( ) is a state in the Mid-Atlantic region of the United States, bordering Maryland to its south and west; Pennsylvania to its north; and New Jersey and the Atlantic Ocean to its east. The state takes its name from the adjacent ...

law, boards must engage in defensive actions that are proportional to the hostile bidder's threat to the target company. A well-known example of an extremely hostile takeover was Oracle's bid to acquire PeopleSoft. As of 2018, about 1,788 hostile takeovers with a total value of US$28.86 billion had been announced.

Reverse

A ''reverse takeover'' is a type of takeover where a public company acquires a private company. This is usually done at the instigation of the private company, the purpose being for the private company to effectively float itself while avoiding some of the expense and time involved in a conventional IPO. However, in the UK under AIM rules, a reverse takeover is an acquisition or acquisitions in a twelve-month period which for an AIM company would: * exceed 100% in any of the class tests; or * result in a fundamental change in its business, board or voting control; or * in the case of an investing company, depart substantially from the investing strategy stated in its admission document or, where no admission document was produced on admission, depart substantially from the investing strategy stated in its pre-admission announcement or, depart substantially from the investing strategy. An individual or organization, sometimes known as a

corporate raider A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and ...

, can purchase a large fraction of the company's stock and, in doing so, get enough votes to replace the board of directors and the

CEO A chief executive officer (CEO), also known as a central executive officer (CEO), chief administrator officer (CAO) or just chief executive (CE), is one of a number of corporate executives charged with the management of an organization especially ...

. With a new agreeable management team, the stock is, potentially, a much more attractive investment, which might result in a price rise and a

profit Profit may refer to: Business and law * Profit (accounting), the difference between the purchase price and the costs of bringing to market * Profit (economics), normal profit and economic profit * Profit (real property), a nonpossessory inter ...

for the corporate raider and the other shareholders. A well-known example of a reverse takeover in the United Kingdom was

Darwen Group The Darwen Group was a bus manufacturer located in Blackburn, Lancashire, England. The company originated from the purchase of East Lancashire Coachbuilders who went into administration in August 2007. After a series of developments, in June ...

's 2008 takeover of Optare plc. This was also an example of a back-flip takeover (see below) as Darwen was rebranded to the more well-known Optare name.

Backflip

A ''backflip takeover'' is any sort of takeover in which the acquiring company turns itself into a

subsidiary A subsidiary, subsidiary company or daughter company is a company owned or controlled by another company, which is called the parent company or holding company. Two or more subsidiaries that either belong to the same parent company or having a ...

of the purchased company. This type of takeover can occur when a larger but less well-known company purchases a struggling company with a very well-known brand. Examples include: * The

Texas Air Corporation Texas Air Corporation, also known as Texas Air, was an airline holding company, incorporated in June 1980 by airline investor Frank Lorenzo to hold and invest in airlines. The company had its headquarters in the America Tower in the American G ...

takeover of

Continental Airlines Continental Airlines, simply known as Continental, was a major United States airline founded in 1934 and eventually headquartered in Houston, Texas. It had ownership interests and brand partnerships with several carriers. Continental started ...

but taking the Continental name as it was better known. * The SBC takeover of the ailing

AT&T AT&T Inc. is an American multinational telecommunications holding company headquartered at Whitacre Tower in Downtown Dallas, Texas. It is the world's largest telecommunications company by revenue and the third largest provider of mobile ...

and subsequent rename to AT&T. * Westinghouse's 1995 purchase of CBS and 1997 renaming to

CBS Corporation The second incarnation of CBS Corporation (the first being a short-lived rename of the Westinghouse Electric Corporation) was an American multinational media conglomerate with interests primarily in commercial broadcasting, publishing, an ...

, with Westinghouse becoming a brand name owned by the company. * NationsBank's takeover of the

Bank of America The Bank of America Corporation (often abbreviated BofA or BoA) is an American multinational investment bank and financial services holding company headquartered at the Bank of America Corporate Center in Charlotte, North Carolina. The bank ...

, but adopting Bank of America's name. * Norwest purchased

Wells Fargo Wells Fargo & Company is an American multinational financial services company with corporate headquarters in San Francisco, California; operational headquarters in Manhattan; and managerial offices throughout the United States and intern ...

but kept the latter due to its name recognition and historical legacy in the American West. * Interceptor Entertainment's acquisition of 3D Realms, but kept the name 3D Realms. * Nordic Games buying THQ assets and trademark and renaming itself to

THQ Nordic THQ Nordic GmbH (formerly Nordic Games GmbH) is an Austrian video game publisher based in Vienna. Formed in 2011, it is a publishing subsidiary of Embracer Group. Originally named Nordic Games, as was the parent company, both companies were re ...

. * Infogrames Entertainment, SA becoming Atari SA. * The Avago Technologies takeover of

Broadcom Corporation Broadcom Corporation is an American fabless semiconductor company that makes products for the wireless and broadband communication industry. It was acquired by Avago Technologies in 2016 and operates as a wholly owned subsidiary of the merged ...

and subsequent rename to Broadcom Inc. * Overkill Software's takeover of Starbreeze

Financing

Funding

Often a company acquiring another pays a specified amount for it. This money can be raised in a number of ways. Although the company may have sufficient funds available in its account, remitting payment entirely from the acquiring company's cash on hand is unusual. More often, it will be borrowed from a

, or raised by an issue of bonds. Acquisitions financed through debt are known as leveraged buyouts, and the debt will often be moved down onto the

balance sheet In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business ...

of the acquired company. The acquired company then has to pay back the debt. This is a technique often used by private equity companies. The debt ratio of financing can go as high as 80% in some cases. In such a case, the acquiring company would only need to raise 20% of the purchase price.

Loan note alternatives

Cash offers for public companies often include a "loan note alternative" that allows shareholders to take a part or all of their

consideration Consideration is a concept of English common law and is a necessity for simple contracts but not for special contracts (contracts by deed). The concept has been adopted by other common law jurisdictions. The court in '' Currie v Misa'' declar ...

in loan notes rather than cash. This is done primarily to make the offer more attractive in terms of

taxation A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, o ...

. A conversion of shares into cash is counted as a disposal that triggers a payment of capital gains tax, whereas if the shares are converted into other securities, such as loan notes, the tax is rolled over.

All-share deals

A takeover, particularly a reverse takeover, may be financed by an all-share deal. The bidder does not pay money, but instead issues new shares in itself to the shareholders of the company being acquired. In a reverse takeover the shareholders of the company being acquired end up with a majority of the shares in, and so control of, the company making the bid. The company has managerial rights.

All-cash deals

If a takeover of a company consists of simply an offer of an amount of money per share, (as opposed to all or part of the payment being in shares or loan notes) then this is an all-cash deal. This does not define how the purchasing company sources the cash- that can be from existing cash resources; loans; or a separate issue of shares.

Mechanics

In the United Kingdom

Takeovers in the UK (meaning acquisitions of public companies only) are governed by the City Code on Takeovers and Mergers, also known as the 'City Code' or 'Takeover Code'. The rules for a takeover can be found in what is primarily known as 'The Blue Book'. The Code used to be a non-statutory set of rules that was controlled by city institutions on a theoretically voluntary basis. However, as a breach of the Code brought such reputational damage and the possibility of exclusion from city services run by those institutions, it was regarded as binding. In 2006, the Code was put onto a statutory footing as part of the UK's compliance with the European Takeover Directive (2004/25/EC). The Code requires that all shareholders in a company should be treated equally. It regulates when and what information companies must and cannot release publicly in relation to the bid, sets timetables for certain aspects of the bid, and sets minimum bid levels following a previous purchase of shares. In particular: * a shareholder must make an offer when its shareholding, including that of parties acting in concert (a " concert party"), reaches 30% of the target; * information relating to the bid must not be released except by announcements regulated by the Code; * the bidder must make an announcement if rumour or speculation have affected a company's share price; * the level of the offer must not be less than any price paid by the bidder in the twelve months before the announcement of a firm intention to make an offer; * if shares are bought during the offer period at a price higher than the offer price, the offer must be increased to that price; The Rules Governing the Substantial Acquisition of Shares, which used to accompany the Code and which regulated the announcement of certain levels of shareholdings, have now been abolished, though similar provisions still exist in the Companies Act 1985.

Strategies

There are a variety of reasons why an acquiring company may wish to purchase another company. Some takeovers are ''opportunistic'' – the target company may simply be very reasonably priced for one reason or another and the acquiring company may decide that in the long run, it will end up making money by purchasing the target company. The large

holding company A holding company is a company whose primary business is holding a controlling interest in the securities of other companies. A holding company usually does not produce goods or services itself. Its purpose is to own shares of other companies ...

Berkshire Hathaway has profited well over time by purchasing many companies opportunistically in this manner. Other takeovers are ''strategic'' in that they are thought to have secondary effects beyond the simple effect of the profitability of the target company being added to the acquiring company's profitability. For example, an acquiring company may decide to purchase a company that is profitable and has good

distribution Distribution may refer to: Mathematics * Distribution (mathematics), generalized functions used to formulate solutions of partial differential equations *Probability distribution, the probability of a particular value or value range of a vari ...

capabilities in new areas which the acquiring company can use for its own products as well. A target company might be attractive because it allows the acquiring company to enter a new market without having to take on the risk, time and expense of starting a new division. An acquiring company could decide to take over a competitor not only because the competitor is profitable, but in order to eliminate competition in its field and make it easier, in the long term, to raise prices. Also a takeover could fulfill the belief that the combined company can be more profitable than the two companies would be separately due to a reduction of redundant functions.

Agency problems

Takeovers may also benefit from

principal–agent problem The principal–agent problem refers to the conflict in interests and priorities that arises when one person or entity (the "agent") takes actions on behalf of another person or entity (the " principal"). The problem worsens when there is a gre ...

s associated with top executive compensation. For example, it is fairly easy for a top executive to reduce the price of his/her company's stock – due to

information asymmetry In contract theory and economics, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. Information asymmetry creates an imbalance of power in transactions, which ...

. The executive can accelerate accounting of expected expenses, delay accounting of expected revenue, engage in

off-balance-sheet Off balance sheet (OBS), or incognito leverage, usually means an asset or debt or financing activity not on the company's balance sheet. Total return swaps are an example of an off-balance-sheet item. Some companies may have significant amounts ...

transactions to make the company's profitability appear temporarily poorer, or simply promote and report severely conservative (i.e. pessimistic) estimates of future earnings. Such seemingly adverse earnings news will be likely to (at least temporarily) reduce the company's stock price. (This is again due to information asymmetries since it is more common for top executives to do everything they can to window dress their company's earnings forecasts.) There are typically very few legal risks to being 'too conservative' in one's accounting and earnings estimates. A reduced share price makes a company an easier takeover target. When the company gets bought out (or taken private) – at a dramatically lower price – the takeover artist gains a windfall from the former top executive's actions to surreptitiously reduce the company's stock price. This can represent tens of billions of dollars (questionably) transferred from previous shareholders to the takeover artist. The former top executive is then rewarded with a golden handshake for presiding over the

fire sale A fire sale is the sale of goods at extremely discounted prices. The term originated in reference to the sale of goods at a heavy discount due to fire damage. It may or may not be defined as a closeout, the final sale of goods to zero inventor ...

that can sometimes be in the hundreds of millions of dollars for one or two years of work. (This is nevertheless an excellent bargain for the takeover artist, who will tend to benefit from developing a reputation of being very generous to parting top executives.) This is just one example of some of the principal–agent /

perverse incentive A perverse incentive is an incentive that has an unintended and undesirable result that is contrary to the intentions of its designers. The cobra effect is the most direct kind of perverse incentive, typically because the incentive unintentional ...

issues involved with takeovers. Similar issues occur when a publicly held asset or non-profit organization undergoes

privatization Privatization (also privatisation in British English) can mean several different things, most commonly referring to moving something from the public sector into the private sector. It is also sometimes used as a synonym for deregulation when ...

. Top executives often reap tremendous monetary benefits when a government owned or non-profit entity is sold to private hands. Just as in the example above, they can facilitate this process by making the entity appear to be in financial crisis. This perception can reduce the sale price (to the profit of the purchaser) and make non-profits and governments more likely to sell. It can also contribute to a public perception that private entities are more efficiently run, reinforcing the political will to sell off public assets.

Pros and cons

While pros and cons of a takeover differ from case to case, there are a few recurring ones worth mentioning. Pros: * Increase in sales/revenues * Venture into new businesses and markets * Profitability of target company * Increase market share * Decreased competition (from the perspective of the acquiring company) * Reduction of overcapacity in the industry * Enlarge brand portfolio * Increase in

economies of scale In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation, and are typically measured by the amount of output produced per unit of time. A decrease in cost per unit of output enables ...

* Increased efficiency as a result of corporate synergies/redundancies (jobs with overlapping responsibilities can be eliminated, decreasing operating costs) * Expand strategic distribution network Cons: * Goodwill, often paid in excess for the acquisition * Culture clashes within the two companies causes employees to be less-efficient or despondent * Reduced competition and choice for consumers in

oligopoly An oligopoly (from Greek ὀλίγος, ''oligos'' "few" and πωλεῖν, ''polein'' "to sell") is a market structure in which a market or industry is dominated by a small number of large sellers or producers. Oligopolies often result f ...

markets (bad for consumers, although this is good for the companies involved in the takeover) * Likelihood of job cuts * Cultural integration or conflict with new management * Hidden liabilities of target entity * The monetary cost to the company * Lack of motivation for employees in the company being bought * Domination of a subsidiary by the parent company, which may result in piercing the corporate veil Takeovers also tend to substitute debt for equity. In a sense, any government tax policy of allowing for deduction of interest expenses but not of

dividend A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-i ...

s, has essentially provided a substantial subsidy to takeovers. It can punish more-conservative or prudent management that does not allow their companies to leverage themselves into a high-risk position. High leverage will lead to high profits if circumstances go well but can lead to catastrophic failure if they do not. This can create substantial

negative externalities In economics, an externality or external cost is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party's (or parties') activity. Externalities can be considered as unpriced goods involved in either co ...

for governments, employees, suppliers and other stakeholders.

Occurrence

Corporate takeovers occur frequently in the

United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...

Canada Canada is a country in North America. Its ten provinces and three territories extend from the Atlantic Ocean to the Pacific Ocean and northward into the Arctic Ocean, covering over , making it the world's second-largest country by to ...

United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and ...

France France (), officially the French Republic ( ), is a country primarily located in Western Europe. It also comprises of Overseas France, overseas regions and territories in the Americas and the Atlantic Ocean, Atlantic, Pacific Ocean, Pac ...

and

Spain , image_flag = Bandera de España.svg , image_coat = Escudo de España (mazonado).svg , national_motto = '' Plus ultra'' (Latin)(English: "Further Beyond") , national_anthem = (English: "Royal March") , ...

. They happen only occasionally in

Italy Italy ( it, Italia ), officially the Italian Republic, ) or the Republic of Italy, is a country in Southern Europe. It is located in the middle of the Mediterranean Sea, and its territory largely coincides with the homonymous geographical ...

because larger shareholders (typically controlling families) often have special board voting privileges designed to keep them in control. They do not happen often in

Germany Germany,, officially the Federal Republic of Germany, is a country in Central Europe. It is the second most populous country in Europe after Russia, and the most populous member state of the European Union. Germany is situated betwee ...

because of the dual board structure, nor in

Japan Japan ( ja, 日本, or , and formally , ''Nihonkoku'') is an island country in East Asia. It is situated in the northwest Pacific Ocean, and is bordered on the west by the Sea of Japan, while extending from the Sea of Okhotsk in the n ...

because companies have interlocking sets of ownerships known as keiretsu, nor in the

People's Republic of China China, officially the People's Republic of China (PRC), is a country in East Asia. It is the world's List of countries and dependencies by population, most populous country, with a Population of China, population exceeding 1.4 billion, slig ...

because many publicly listed companies are state owned.

Tactics against hostile takeover

There are quite a few tactics or techniques which can be used to deter a hostile takeover. * Bankmail *

Crown jewel defense In business, when a company is threatened with takeover, the crown jewel defense is a strategy in which the target company sells off its most attractive assets to a friendly third party or spins off the valuable assets in a separate entity. Conseq ...

* Golden parachute *

Greenmail Greenmail or greenmailing is the action of purchasing enough shares in a firm to challenge a firm's leadership with the threat of a hostile takeover to force the target company to buy the purchased shares back at a premium in order to prevent the ...

* Killer bees *

Leveraged recapitalization In corporate finance, a leveraged recapitalization is a change of the company's capital structure, usually substitution of debt for equity. Overview Such recapitalizations are executed via issuing bonds to raise money and using the proceeds to ...

* Lobster trap * Lock-up provision * Nancy Reagan defense * Non-voting stock * Pac-Man defense * Poison pill (shareholder rights plan) ** Flip-in ** Flip-over ** Jonestown defense ** Pension parachute ** People pill ** Voting plans *

Safe harbor A safe harbor or harbour is literally a "place of shelter and safety, esp. for ships". It is used in many contexts: Film and television * Safe harbor (broadcasting), established in 1978 in the US, the time period in a television schedule during wh ...

* Scorched-earth defense * Staggered board of directors * Standstill agreement * Targeted repurchase * Top-ups *

Treasury stock A treasury stock or reacquired stock is stock which is bought back by the issuing company, reducing the amount of outstanding stock on the open market ("open market" including insiders' holdings). Stock repurchases are used as a tax efficie ...

* Gray knight *

White knight A white knight is a mythological figure and literary stock character. They are portrayed alongside a black knight as diametric opposites. A white knight usually represents a heroic warrior fighting against evil, with the role in medieval literatu ...

Whitemail Whitemail, coined as an opposite to blackmail, has several meanings. Economics In economics, whitemail is an anti-takeover arrangement in which the target company will sell significantly discounted stock to a friendly third party. In return, ...

References

Works cited

External links

* {{Authority control Mergers and acquisitions Corporate finance