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In business, a takeover is the purchase of one company (the target) by another (the acquirer, or bidder). In the UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to the acquisition of a private company.
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.
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. In an ideal world, if the board feels that accepting the offer serves the shareholders 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.
A hostile takeover allows a bidder to take over a target company whose management is unwilling to agree to a merger or takeover. 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 tender is attributed to Louis Wolfson.[ citation needed ]
A hostile takeover can be conducted in several ways. A 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, 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, to affect 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 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 banks 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 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$28.86B have been announced.
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:
An individual or organization, sometimes known as a corporate raider, 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. 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 for the corporate raider and the other shareholders.
A well-known example of a reverse takeover in the United Kingdom was Darwen Group'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.
A backflip takeover is any sort of takeover in which the acquiring company turns itself into a subsidiary 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:
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 bank, 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 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.
Cash offers for public companies often include a "loan note alternative" that allows shareholders to take a part or all of their consideration in loan notes rather than cash. This is done primarily to make the offer more attractive in terms of taxation. 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.
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.
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.
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.
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.
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 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 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.
Takeovers may also benefit from principal–agent problems 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. The executive can accelerate accounting of expected expenses, delay accounting of expected revenue, engage in off-balance-sheet 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 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 issues involved with takeovers.
Similar issues occur when a publicly held asset or non-profit organization undergoes privatization. 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.[ citation needed ]
While pros and cons of a takeover differ from case to case, there are a few recurring ones worth mentioning.
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 dividends, 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 for governments, employees, suppliers and other stakeholders.
Corporate takeovers occur frequently in the United States, Canada, United Kingdom, France and Spain. They happen only occasionally in Italy 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 because of the dual board structure, nor in Japan because companies have interlocking sets of ownerships known as keiretsu, nor in the People's Republic of China because the state owned majority owns most publicly listed companies.
There are quite a few tactics or techniques which can be used to deter a hostile takeover.
In corporate finance, mergers and acquisitions (M&A) are transactions in which the ownership of companies, other business organizations, or their operating units are transferred or consolidated with other entities. As an aspect of strategic management, M&A can allow enterprises to grow or downsize, and change the nature of their business or competitive position.
A shareholder rights plan, colloquially known as a "poison pill", is a type of defensive tactic used by a corporation's board of directors against a takeover.
In business, a corporate raid is the process of buying a large stake in a corporation and then using shareholder voting rights to require the company to undertake novel measures designed to increase the share value, generally in opposition to the desires and practices of the corporation's current management. The measures might include replacing top executives, downsizing operations, or liquidating the company.
A leveraged buyout (LBO) is one company's acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company. The use of debt, which normally has a lower cost of capital than equity, serves to reduce the overall cost of financing the acquisition. The cost of debt is lower because interest payments often reduce corporate income tax liability, whereas dividend payments normally do not. This reduced cost of financing allows greater gains to accrue to the equity, and, as a result, the debt serves as a lever to increase the returns to the equity.
In corporate finance a stock swap is the exchange of one equity-based asset for another, where, during the merger or acquisition, the swap provides an opportunity to pay with stock rather than with cash; see Mergers and acquisitions #Stock.
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 potential takeover.
A management buyout (MBO) is a form of acquisition in which a company's existing managers acquire a large part, or all, of the company, whether from a parent company or non-artificial person(s). Management-, and/or leverage (finance)d buyout became noted phenomena of 1980s business economics. These so-called MBOs originated in the US, spreading first to the UK and then throughout the rest of Europe. The venture capital industry has played a crucial role in the development of buyouts in Europe, especially in smaller deals in the UK, the Netherlands, and France.
In corporate finance, a tender offer is a type of public takeover bid. The tender offer is a public, open offer or invitation by a prospective acquirer to all stockholders of a publicly traded corporation to tender their stock for sale at a specified price during a specified time, subject to the tendering of a minimum and maximum number of shares. In a tender offer, the bidder contacts shareholders directly; the directors of the company may or may not have endorsed the tender offer proposal.
In business, a white knight is a friendly investor that acquires a corporation at a fair consideration with the support from the corporation's board of directors and management. This may be during a period while it is facing a hostile acquisition from another potential acquirer or it is facing bankruptcy. White knights are preferred by the board of directors and/or management as in most cases as they do not replace the current board or management with a new board, whereas, in most cases, a black knight will seek to replace the current board of directors and/or management with its new board reflective of its net interest in the corporation's equity.
Risk arbitrage, also known as merger arbitrage, is an investment strategy that speculates on the successful completion of mergers and acquisitions. An investor that employs this strategy is known as an arbitrageur. Risk arbitrage is a type of event-driven investing in that it attempts to exploit pricing inefficiencies caused by a corporate event.
Lock-up provision is a term used in corporate finance which refers to the option granted by a seller to a buyer to purchase a target company’s stock as a prelude to a takeover. The major or controlling shareholder is then effectively "locked-up" and is not free to sell the stock to a party other than the designated party.
AirTran Holdings was a Nevada corporation, based in Orlando, Florida, United States, that operated as an airline holding company. Its primary asset was AirTran Airways until Southwest Airlines acquired AirTran on May 2, 2011.
A squeeze-out or squeezeout, sometimes synonymous with freeze-out (freezeout), is the compulsory sale of the shares of minority shareholders of a joint-stock company for which they receive a fair cash compensation.
Share repurchase is the re-acquisition by a company of its own shares. It represents a more flexible way of returning money to shareholders.
Trinidad Drilling Ltd. was a corporation headquartered in Calgary, Alberta, Canada that operated in the drilling and well servicing sectors of the North American oil and gas industry. Trinidad was acquired by Ensign Energy Services between late 2018 to early 2019, and was amalgamated into Ensign in 2019.
Private equity in the 1980s relates to one of the major periods in the history of private equity and venture capital. Within the broader private equity industry, two distinct sub-industries, leveraged buyouts and venture capital experienced growth along parallel although interrelated tracks.
Stock is all of the shares into which ownership of a corporation is divided. In American English, the shares are collectively known as "stock". A single share of the stock represents fractional ownership of the corporation in proportion to the total number of shares. This typically entitles the stockholder to that fraction of the company's earnings, proceeds from liquidation of assets, or voting power, often dividing these up in proportion to the amount of money each stockholder has invested. Not all stock is necessarily equal, as certain classes of stock may be issued for example without voting rights, with enhanced voting rights, or with a certain priority to receive profits or liquidation proceeds before or after other classes of shareholders.
In mergers and acquisitions, a mandatory offer, also called a mandatory bid in some jurisdictions, is an offer made by one company to purchase some or all outstanding shares of another company, as required by securities laws and regulations or stock exchange rules governing corporate takeovers. Most countries, with the notable exception of the United States, have provisions requiring mandatory offers.
Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, was a landmark decision of the Delaware Supreme Court on hostile takeovers.
The following is a glossary which defines terms used in mergers, acquisitions, and takeovers of companies, whether private or public.