What is a takeover? Definition and meaning
The definition and meaning of a takeover in the world of business, a takeover, also known as an acquisition, is the purchase of one company by another. The purchaser is called the bidder or acquirer, while the one being acquired is called the target. It is a type of merger, but not of equals, there is a predator and a prey.
A takeover may also refer to the acquisition or colonization of a country, as in “the American takeover of Puerto Rico,” or “The British takeover of India.” This article focuses on the word’s meaning in the world of business.
There are different types of takeovers, including friendly, hostile, backflip and reverse ones.
A friendly takeover is an acquisition of one company by another where the owners of both companies agree to the terms of the transaction.
A friendly takeover
As the name suggests, a friendly takeover occurs when the target company is happy to be acquired – its directors and shareholders have approved the offer or bid.
In a friendly takeover situation, the bidder will tell the target’s board of directors about its intention and makes an offer. When the board advises its shareholders to accept the offer, the friendly takeover usually goes ahead.
In the majority of private companies – not publicly listed ones – given that the board members tend to be the main shareholders, or if not will work very closely with them, takeovers tend to be friendly.
A hostile takeover
In a hostile takeover situation, the target company does not want to be acquired by the bidder. This can only really happen in a publicly-listed company, because in a private company the board members are nearly always the majority shareholders, and if they don’t like the bidder they won’t sell their shares, and no deal is possible.
When a company wants to acquire another company, but the target does not want to be taken over, the situation is called a hostile takeover.
If a company’s board of directors (board) in a publicly-listed company rejects the offer, and the bidder is not put off by this – it decides to pursue the planned acquisition – it is considered a hostile takeover situation.
Sometimes there may also be a hostile takeover situation if the bidder announces its firm intention to make an offer, and then immediately makes the offer directly – thus, not giving the board time to get organized.
If the bidder is able to divide board and or shareholder opinion or allegiances, it has a better chance of succeeding. A hostile takeover can be conducted in many different ways.
The bidder may make a public offer at a fixed price above the current market price, i.e. offer more per share than is currently being quoted on the stock market – this is known as a ‘tender offer’.
In the United States, tender offers are regulated by the Williams Act of 1968. The federal act requires bidders to include comprehensive details of a tender offer in their filing to the Securities and Exchange Commission (SEC) and the target company. The filing must include data on the bidder’s plans for the company after it has acquired it, its cash source, and offer terms.
The bidder can also engage in a proxy fight, in which it tries to persuade enough stockholders, for example a simple majority, to replace the whole management or some key members with more takeover-friendly people.
Another strategy is to discreetly buy enough stocks of the company in the open market – this is known as a ‘creeping offer’. Eventually enough shares may be bought to effect a change in management.
In a reverse takeover, a private company acquires a public one. This usually occurs because the bidder does not want to go through the time, expense and hassle of an initial public offering (IPO).
In all successful hostile takeovers, the management tries to resist the acquisition, but eventually fails.
Targets of hostile takeovers in the US often seek a preliminary injunction under section 16 of the Clayton Act, to enjoin the acquisition by alleging that it would violate section 7 of the Act.
Hostile takeovers are riskier
It is harder for the bidder to conduct extensive due diligence in the affairs of the target company if it does not want to cooperate. In other words, a hostile takeover generally carries more risk for the bidder than a friendly one. Due diligence refers to carrying out a thorough examination of the other party’s financial and operational status and history.
If the bidder requires loans in order to be able to purchase the target company, it will find it harder to convince banks to lend the money because of the relative lack of target information which is available to it.
A famous hostile takeover was AOL’s acquisition of the considerably larger and successful Time Warner. In 2000, it was hailed the deal of the millenium. However, the new AOL Time Warner company lost over $200 billion in value in less than two years after the dotcom bubble burst.
Google is a company that has been involved in many takeovers over the past decade. It will probably acquire many more firms in the years to come.
A reverse takeover
A reverse takeover occurs when a private company purchases a publicly-listed company.
This is usually prompted by the larger, private company. It is an effective way for the private company to ‘float’ itself without having to go through all the expense and time involved in a conventional IPO (initial public offering).
This occurs when the acquiring company becomes a subsidiary of the company it purchases.
Imagine your company is called John Doe Inc., and it has lots of money but very few people globally have heard of it. You hear that BaliBubu Plc – a company with products that everybody has heard of – is in financial trouble. If you acquire it, you will probably drop the John Doe name and continue with BaliBubu.
Texas Air Corporation acquired debt-laden Continental Airlines in 1982 – as Continental was better known, that name prevailed in the merged company.
According to lexicon.ft.com, a takeover is:
“The acquisition of a majority or controlling interest in a company, normally through the purchase of shares. A takeover may be friendly or hostile. Depending on how many shares a potential acquirer buys in the market, a formal offer to other shareholders may be required under stock exchange regulations.”
“If this potential acquirer (see raider) makes a hostile takeover bid, the takeover target (also called target company) could put into effect a variety of strategies aimed at fending off the attempt.”
As a noun, the term is one word – takeover. However, as a verb it is two words – to take over. As in: “John Smith took over the responsibilities of marketing after the death of our Marketing Director,” and “The takeover of John Doe Inc. by Bulan Ltd was finally completed.”
Quotes using ‘Takover’
“Experience tells us that we do not need more overspending or higher taxes to grow jobs. We do not need more regulations or more government control – such as the government takeover of health care or the restrictions in domestic energy production,” (Timothy Lee ‘Tim’ Walberg – an American politician and former pastor).
“It’s interesting to see what people are saying about me. I like keep up with the latest rumors! A while back there was a rumor that I was going to do a film with Demi Moore about the takeover of Commodore computers.” (Warwick Davis – a British actor, television presenter, writer, director, producer and comedian).
“I am proud of the fact that the U.K. is an open trading country. I welcome inward investment such as that of Nissan, and the takeover of struggling British companies by foreign companies who turn them around, as in the case of Jaguar Land Rover. I also accept that job losses sometimes have to occur to restore failing companies to health,” (David Sainsbury, Baron Sainsbury of Turville – a British businessperson and politician, former Chairman of supermarket chain J Sainsbury’s PLC).
“The corporate system dictates what gets made, and the movies are so bad because of the economic structure of Hollywood. The big business takeover of Hollywood is at fault rather than American storytellers – it’s what keeps textured movies from getting made,” (James Gray – an American film director and screenwriter).
“When bureaucrats talk about increasing our ‘access’ to x, y or z, what they’re really talking about is increasing exponentially their control over our lives. As it is with the government health care takeover, so it is with the newly approved government plan to ‘increase’ Internet ‘access’,” (Michelle Malkin – an American conservative blogger, political commentator, and author).
Difference between a merger and a takeover (acquisition): a merger is a fusion of two consenting companies, which create a new legal entity. After a takeover, the target company (usually) ceases to exist as a legal entity, unless it is a reverse takeover.
Video – Hostile Takeovers
This Marketplace APM video explains what happens when companies don’t agree and the takeover goes hostile.