A takeover occurs when one company makes a successful bid to acquire control of another company. This can be achieved by purchasing a majority stake in the target firm. Often, takeovers are part of the broader merger and acquisition process. In these scenarios, the company making the bid is known as the acquirer, and the company it aims to take over is referred to as the target.
Takeovers are usually initiated by a larger company seeking to absorb a smaller one. They can either be voluntary, stemming from a mutual agreement between the two entities, or involuntary, where the acquirer pursues the target without its knowledge or full agreement.
In corporate finance, there are various ways to structure a takeover. An acquirer might take over the controlling interest of the company’s outstanding shares, purchase the entire company outright, merge to create new synergies, or acquire the company as a subsidiary.
Key Takeaways
- A takeover occurs when an acquiring company successfully secures control or acquires a target company.
- Typically initiated by a larger corporation, takeovers can be either welcome (friendly) or unwelcome (hostile).
- Companies pursue takeovers to find value in a target company, implement change, or eliminate competition.
Understanding Takeovers
Takeovers are a common occurrence in the business world and can be structured in numerous ways. Whether both parties agree or not often influences how the takeover is set up.
When a company owns more than 50% of another company’s shares, it attains controlling interest. This requires the acquiring company to account for the owned company as a subsidiary, requiring consolidated financial statements. A 20% to 50% ownership stake is accounted for more straightforwardly through the equity method. If a full merger or acquisition occurs, shares are often consolidated under one trading symbol.
Types of Takeovers
Takeovers come in various forms. A friendly or mutually agreed-upon takeover is typically structured as a merger or acquisition, where both companies see it as a beneficial arrangement. Voting by shareholders and board directors usually supports this type of takeover.
In such mergers or acquisitions, shares may be exchanged, combining under one trading symbol.
Unwelcome or hostile takeovers occur without the target company’s cooperation. The acquiring company might employ aggressive tactics, such as a dawn raid, where it buys a substantial stake in the target as soon as the markets open, catching the target off-guard.
The target company may retaliate with strategies like poison pills, allowing current shareholders to buy more shares at a discount to dilute the acquirer’s holdings.
In a reverse takeover, a private company acquires a public company, providing an alternative route to going public without the complexities of an initial public offering (IPO).
A creeping takeover happens when an acquirer gradually increases its ownership in a target company. Once the share ownership exceeds 50%, the target becomes a subsidiary, requiring consolidated financial statements. Activist investors may also incrementally buy shares with the intent of effectuating management changes.
50% - The ownership threshold for controlling versus non-controlling ownership.
Reasons for a Takeover
Companies might initiate a takeover for various strategic reasons. An opportunistic takeover allows the acquirer to capitalize on a target company’s attractive valuation, expecting long-term value, increased market share, economies of scale, reduced costs, and enhanced profitability.
Strategic takeovers enable acquirers to enter new markets without additional investment or risks. Some takeovers aim to eliminate competition.
Activist takeovers driven by shareholders seeking to gain controlling interest to shape management changes or seize voting control are also notable.
Companies that often become attractive targets for takeovers include those with a unique niche, small entities with good products but insufficient financing, nearby companies where a merger would boost efficiency, heavily indebted businesses that could thrive under a larger company, and companies with managerial challenges but strong potential value.
Funding Takeovers
Financing for takeovers varies. When targeting a publicly-traded company, the acquirer may buy shares on the secondary market. In friendly takeovers, the acquirer often proposes to purchase all the target’s outstanding shares using cash, debt, or by issuing new stock in the combined entity.
In debt-financed takeovers, also known as leveraged buyouts, the acquirer raises debt capital through new funding lines or corporate bonds.
Example of a Takeover
One notable example includes ConAgra’s initial friendly attempt to acquire Ralcorp in 2011. When rebuffed, ConAgra planned a hostile takeover, prompting Ralcorp to employ a poison pill strategy. ConAgra responded by offering $94 per share, significantly higher than Ralcorp’s $65 trading price. Ultimately, both companies reengaged discussions, culminating in a friendly takeover at $90 per share after Ralcorp had spun off its Post cereal division.
Note: The above example highlights that tenacity and strategic bargaining can turn a hostile takeover bid into a mutually agreed-upon merger.
Related Terms: Mergers and Acquisitions, Controlling Interest, Equity Method, Hostile Takeover, Poison Pill, Dawn Raid, Reverse Takeover, Consolidated Financial Statement, Market Share.
References
- U.S. Securities and Exchange Commission. “Financial Reporting Manual, Sec. 2200”.
- U.S. Securities and Exchange Commission. “Financial Reporting Manual, Sec. 2400”.
- ConAgra. “ConAgra Foods Reaffirms Its $94 Per Share All-Cash Proposal to Acquire Ralcorp Holdings”.
- ConAgra. “ConAgra Foods Completes Acquisition of Ralcorp”.
- PR Newswire. “Ralcorp Completes Separation of Post Cereals Business”.
