What is a takeover?

A takeover happens when a business successfully bids to purchase or take over another. A takeover may be carried out by acquiring most of the target company. The merger and acquisition procedure is another popular way that takeovers are carried out. In a takeover, the business placing the offer is known as the acquirer, and the business it wants to buy is known as the target.

A larger corporation looking to acquire a smaller one usually initiates takeovers. They may be optional, meaning both businesses choose to proceed with them voluntarily. They may only be welcome in other circumstances, in which case the acquirer pursues the target with the target’s awareness or sometimes even with its consent in full.

Within the field of corporate finance, takeovers may be structured in a multitude of ways. A buyer may acquire a majority stake in the company’s existing shares, purchase the business outright, combine an acquired business to generate new synergies or purchase the business as a subsidiary.

Comprehending Takeovers

Takeovers occur often in the business sector. They may, however, be organized in a variety of ways. The takeover structure is often influenced by whether or not both sides agree.

Remember that a firm is said to have a controlling interest if it has more than 50% of the shares in the company. Consolidated financial statements are necessary when a firm has a controlling interest because they force the owned company to be treated as a subsidiary in financial reporting.

The equity technique makes accounting for an ownership holding of 20% to 50% easier.

In the event of a complete merger or acquisition, shares are often merged under a single symbol.

Different Takeover Types

Takeovers come in a variety of shapes and sizes. A friendly or welcoming takeover is often organized as a merger or purchase. Because the boards of directors of both firms often see it as a favorable position, these normally move smoothly. There still has to be a peaceful takeover for voting to occur. However, takeover voting is more accessible when the board of directors and significant shareholders support the takeover.

In mergers or acquisitions, shares are often united under a single symbol. Shares of the target company may be exchanged for shares of the merged company to accomplish this.

A hostile or unwanted takeover may be violent when one side isn’t participating voluntarily. The purchasing firm may employ unfavorable tactics like a “dawn raid,” in which it buys a sizable portion of the target company as soon as the markets open, causing the target to lose control before it realizes what is happening.

The target company’s board of directors and management may vehemently oppose takeover efforts by using strategies like a poison pill, which enables the target’s shareholders to buy more shares at a discount to reduce the ownership and voting rights of the possible acquirer.

The acquisition of a public corporation by a private one is known as a reverse takeover. To finance the acquisition, the purchasing business needs to have sufficient money. A private firm may become publicly traded through reverse takeovers without incurring the risk or additional costs associated with an initial public offering (IPO).

A gradual growth in one company’s ownership stake in another is known as a “creeping takeover.” The acquiring firm must use consolidated financial statement reporting to account for the target’s operations if share ownership reaches 50% or above.

Because some businesses may not desire the duties of managing ownership, the 50% level is a crucial barrier. Once the target company’s 50% criterion is met, it should be considered a subsidiary.

Activists who purchase more and more firm shares to change management may also engage in a creeping takeover. Over time, an activist takeover would probably occur gradually.

50%

The ownership cutoff point between controlling and non-controlling interests.

Motives behind a Takeover

Companies may start a takeover for a variety of reasons. If an acquiring business thinks the target is reasonably priced, it may attempt an opportunistic takeover. The buyer may believe there is a long-term value in purchasing the target. The acquiring business often gains economies of scale, lowers costs, expands its market share, and boosts profits via synergies with these takeovers.

A strategic takeover is an option for some firms. This spares the acquirer from investing more time, funds, or risk to join a new market. Through a strategic acquisition, the acquirer could also crush the competitors.

Additionally, activist takeovers are possible. Through these takeovers, a shareholder aims to obtain ownership of a controlling stake to effect change or get control over voting rights.

Businesses that are desirable acquisition candidates include:

• Those who have a specialization in a specific item or service
• Small businesses with marketable goods or services but little funding
• Comparable businesses nearby where joining forces might increase productivity
• Companies that are otherwise sustainable but overpay for debt that might be refinanced more cheaply if a more extensive, better-crediting business took control
• Businesses with significant promise yet complex management

Finance Takeovers

Takeover financing may take many different forms. If the target is publicly listed, the purchasing firm may purchase company stock on the secondary market. An offer is made for all of the target’s outstanding shares in a friendly merger or acquisition. The merged company may issue new shares, take on debt, or use cash to finance a favorable merger or acquisition.

A corporation that employs debt is said to be engaging in a leveraged buyout. The issue of new company bonds or additional finance lines might provide the buyer with debt money.

A Takeover Example

In 2011, ConAgra made its first attempt at a cordial takeover of Ralcorp. After being rejected in their earlier attempts, ConAgra planned to execute a hostile takeover. In response, Ralcorp used the poison pill tactic. In response, ConAgra offered $94 per share, far more than Ralcorp’s selling price of $65 at the start of the acquisition effort. Although both businesses returned to the negotiating table the following year, Ralcorp rejected the effort.

Ultimately, the $90 per share sale was part of a friendly takeover.

By this point, Ralcorp had finished spinning off its post-cement business, which led to ConAgra giving around the same sum for a marginally smaller overall firm.

Conclusion

• When a bid to take over or purchase a target firm is completed, it’s a takeover.
• A larger corporation looking to acquire a smaller one usually initiates takeovers.
• Takeovers may be cordial and welcomed or nasty and unwanted.
• Businesses may start takeovers because they see potential in the target firm, want to start a change, or want to destroy the competition.