Meaning, Types, Limitations of Takeover

A takeover occurs when one company makes a successful bid to assume control of or acquire another. Takeovers can be done by purchasing a majority stake in the target firm. Takeovers are also commonly done through the merger and acquisition process. In a takeover, the company making the bid is the acquirer and the company it wishes to take control of is called the target.

Takeovers are typically initiated by a larger company seeking to take over a smaller one. They can be voluntary, meaning they are the result of a mutual decision between the two companies. In other cases, they may be unwelcome, in which case the acquirer goes after the target without its knowledge or some times without its full agreement.

Types

Friendly Takeover

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.

Hostile Takeover

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.

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 effect a change in management. In all of these ways, management resists the acquisition, but it is carried out anyway.

Reverse Takeover

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.

Backflip Takeover

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:

• The Texas Air Corporation takeover of Continental Airlines but taking the Continental name as it was better known.
• The SBC takeover of the ailing AT&T and subsequent rename to AT&T.
• Westinghouse’s 1995 purchase of CBS and 1997 renaming to CBS Corporation, with Westinghouse becoming a brand name owned by the company.
• NationsBank’s takeover of the Bank of America, but adopting Bank of America’s name.
• Norwest purchased Wells Fargo 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.
• Infogrames Entertainment, SA becoming Atari SA.
• The Avago Technologies takeover of Broadcom Corporation and subsequent rename to Broadcom Inc.

Drawbacks of Takeovers include:

• High cost involved with the takeover price often proving too high
• Problems of valuation (see the price too high, above)
• Upset customers and suppliers, usually as a result of the disruption involved
• Problems of integration (change management), including resistance from employees
• Incompatibility of management styles, structures and culture
• Questionable motives