A takeover is a corporate restructuring strategy. It generally means a company taking over the management of another company. It is a form of acquisition of a company rather than a merger. Takeovers are always a reality in the competing world of business. Merger and acquisition transactions depend a lot on the approval of a target company. It is not rare to find companies merging with each other’s consent. However, many hostile takeovers are definitely camouflaged to look like a friendly mergers. This is the reason managers rely on defensive measures against such takeovers.
Definition of Takeover
An acquisition transaction becomes a takeover when the acquiring company purchases the target may or may not through a mutual agreement with the target company’s management. In case it is through mutual consent, it’s a friendly takeover, whereas if it is not, it is called a hostile takeover. In hostile takeovers, the bidding company directly approaches the company’s shareholders or attempts to replace the management to get the deal approved.
Read more about other corporate restructuring strategies.
Types of Takeovers
There are the following 4 types of Takeovers:
In a friendly takeover, the company is duly informed before the bidding company puts up an offer. The management of the company has sufficient time to evaluate the takeover terms. If it is found in the better interest of all stakeholders and it projects wealth maximization of the shareholders, the management will support offering a price to shareholders. Normally, private company takeovers are friendly because there is hardly any difference between the board of directors and the shareholders. A simple reason is that the company’s management has almost complete control over the company’s equity. Therefore the bidder cannot go and bid without the consent of the management.
When an unlisted private company buys a listed public company, it is called a reverse takeover. A common intention of a private company behind this is to achieve listing status. This merger can be a friendly or hostile one. The reason behind choosing this mode to become a listed company is to save on the costs of listing, which is quite significant for smaller companies.
A backflip takeover is one where a bidding company becomes the subsidiary of the taken-over company. The reason behind this is to take benefit of the brand value of the taken-over company. For example, AT&T was taken over by SBC, but AT&T’s name was continued as it was a well-known, established brand name. Such takeovers take place when the well-known named company is short of resources to run the company, and the lesser-known company is cash-rich and searching for an investment opportunity. However, there can be many motives behind any takeover, merger, or acquisition.
In hostile takeovers, normally, the management is not consulted, and a direct offer is given to shareholders without the knowledge of management. Or, it may be a case that management rejected the offer by the bidding company, and the bidder is still pursuing a direct deal with shareholders.
Strategies To Ward Off Hostile Takeovers
The most commonly known takeover out of all is a hostile takeover. At times, the takeover and hostile takeover are used interchangeably. The hostile takeover is achieved through a proxy fight or a tender offer. The management of the target company has these two options when an acquirer attempts this takeover:
- Sell their company to a third party or a hostile bidder.
- Decide to stay independent and resist the offer through various defensive measures.
In cases where a hostile takeover is forcefully being conducted, the target company can adopt strategies that may resist the takeover from being approved.
The strategies that can be put into action are:
- Poison pill
- Poison put
- Restrictive takeover laws
- Staggered board
- Restricted voting rights
- Supermajority voting provisions
- Fair price amendments
- Golden parachutes
- ‘Just say no’ defense
- Share repurchase
- Leveraged recapitalization
- ‘Crown jewel’ defense
- ‘Pac-man’ defense
- White knight defense
- White squire defense
For an interesting perspective, we recommend Hostile Takeover.