What Is a Takeover?

UTC by Beatrice Mastropietro · 8 min read
What Is a Takeover?
Photo: Unsplash

In this guide, we will discuss what takeovers are and some different ways they can be executed. We will also discuss the pros and cons of taking over another company and how to ensure your takeover is successful.

If you’re a business owner, you’ve heard the term “takeover.” What exactly is it? A takeover is when a company buys another company and assumes control of its operations. This can be done in a number of different ways, but the goal is to increase profits for the acquiring company.

Takeover Definition

In business, a takeover is the purchase of one company (the “target”) by another (the “acquirer”). A takeover occurs when the acquirer obtains more than 50% ownership in the target company, thus gaining control.

There are in general two types of takeovers: friendly and hostile. In a friendly takeover, the target company’s management team agrees to the acquisition and works with the acquirer to ensure a smooth transition. In a hostile takeover, the target company’s management team does not agree to the acquisition and may try to block it from happening.

Takeovers can be completed through various methods, including tender offers, asset purchases, and stock purchases. The method used will typically be dictated by the regulations of the target company’s country.

Takeovers can be a tool for companies to grow quickly and increase their market share. They can also be used to acquire valuable assets, such as patents or technology. In some cases, takeovers can be motivated by a desire to remove a competitor from the market.

Hostile takeovers are often tumultuous and can lead to conflict between the management teams of the target and acquirer companies. Friendly takeovers are typically more seamless but can result in changes for the target company’s employees. Doing your research before agreeing to work for a company undergoing a takeover is important.

Types of Takeovers

There are several different types of takeovers, including friendly, hostile, reverse, bailout, and backflip takeovers.

  • A friendly takeover is one where the target company agrees to be acquired by the buyer. This type of takeover usually happens through negotiation between the two companies.
  • A hostile takeover is one where the target company does not want to be acquired, but the buyer makes an offer anyway. This type of takeover often happens through a tender offer, where the buyer makes an offer to buy shares of the target company at a premium above the current market price.
  • A reverse takeover is one where a smaller company acquires a larger company. This can happen when a smaller company has identified a large company that it wants to acquire and makes an offer to buy it. It can also happen when a large company buys a smaller company that then takes over the operations of the larger company.
  • Bailout takeovers take place when another company acquires a company to save it from bankruptcy. This type of takeover often happens when a company is struggling financially and is bought by a larger company that can provide the resources necessary to keep it afloat.
  • A backflip takeover is one where a company that has made an offer to buy another company decides not to go through with the deal. This can happen for various reasons, including if the buyer decides that the target company is not worth the price or if the regulatory environment changes and makes the deal more difficult to complete.

Reasons for Takeovers

There are many reasons why a company might be taken over.

Firstly, takeovers are made to gain control of a valuable resource: This is often the case when a company takes over another company to gain control of its patents, technology, or other valuable assets.

Secondly, it can be done to eliminate competition: If a company is the only player in its market, it can charge higher prices and make more profits than if there were multiple companies competing for customers. A company can eliminate this competition by taking over its competitors and securing its position as the market leader.

Thirdly, takeovers’ aim can be to expand into new markets: A company may take over another company to quickly enter a new market that it otherwise would have had difficulty entering on its own.

Further, a company may take over another company to diversify its business and reduce its dependence on any product or market.

Finally, the reason behind the takeover bid can be the aim to increase shareholder value: A company may take over another company to increase its shares’ value. This is often done by using the cash and assets of the acquired company to pay down debt, buy back shares, or make other improvements that will boost the share price.

Consequences of a Takeover

A takeover can have a number of consequences, both intended and unintended. The most obvious consequence is a change in ownership and control of the company that has been taken over. This can lead to a number of other changes, including a change in management, a change in the company’s strategy, and a change in its operations.

The takeover may also result in the delisting of the company’s shares from its stock exchange, which can impact the liquidity and value of the shares. In addition, takeovers can often be hostile, leading to employees leaving the company, customers taking their business elsewhere, and suppliers refusing to do business with the company.

All of these factors can have a negative impact on the company’s performance and its shareholders’ equity. In some cases, the company may even be forced to declare bankruptcy.

The consequences of a takeover are usually negative for the company and shareholders. However, there are some cases where a takeover can be beneficial. In particular, a takeover can also help improve performance if the company is underperforming or has a weak management team. A takeover can provide the company with much-needed financial resources.

It is important to weigh all potential impacts before deciding whether or not to support a takeover bid.

Takeover vs. Acquisition

There are two types of corporate takeovers: takeovers and acquisitions. The distinction between the two is important because it can impact the target company’s employees, shareholders, and customers.

In a takeover, the acquiring company typically wants to increase its market share or expand its product offerings. To achieve these goals, the acquirer often takes steps to integrate the target company’s operations into its own. This can mean layoffs for some employees, as duplicative roles are eliminated. It can also mean changes in how the business is run, as the acquirer imposes its management style and business practices on the target company. In some cases, the acquirer may relocate the target company’s operations to another city or country.

In an acquisition, the acquiring company is usually more interested in the target company’s assets than its operations. For example, a company might acquire another company for its patents, customer base, or technological expertise. The acquirer might also be interested in the target company’s brand name because it represents a strategic entry into a new market. In an acquisition, the target company’s employees, shareholders, and customers typically see little change, as the acquiring company does not need to make major changes to the acquired business.

The primary difference between a takeover and an acquisition is the extent to which the two companies are integrated. In a takeover, the acquiring company typically takes steps to integrate the target company’s operations into its own. In contrast, in an acquisition, the acquiring company is usually more interested in the target company’s assets than its operations. The type of integration that occurs can have a significant impact on the target company’s employees, shareholders, and customers.

When deciding whether to pursue a takeover or an acquisition, companies should consider the desired outcome, the financial resources of the acquiring company, and the regulatory environment. The desired outcome is typically the most important factor, as it will determine how much integration is necessary and what changes will be made to the target company. The financial resources of the acquiring company are also important, as they will determine how much the company can afford to pay for the target company and how much it can afford to invest in integrating the target company’s operations. Finally, the regulatory environment should be considered, as some countries have laws that make it difficult or impossible to complete a takeover or an acquisition.

Examples

Some examples of business takeovers are:

  • P&G’s successful acquisition of Gillette in 2005;
  • Vodafone’s successful takeover of Mannesmann in 2000;
  • The 2016 hostile takeover bid by Bill Ackman’s Pershing Square Capital Management for ADP;
  • Marriott International’s acquisition of Starwood Hotels & Resorts Worldwide Inc. in 2016;
  • Walt Disney Company‘s acquisition of 21st Century Fox in 2018/2019;
  • Microsoft‘s acquisition of LinkedIn in 2016;
  • Nestlé’s acquisition of Gerber Life Insurance in 2007;
  • Johnson & Johnson‘s acquisition of Pfizer Consumer Healthcare in 2006.

Bottom Line

A takeover is a corporate action in which one company purchases another company. A takeover can be friendly or hostile. In a friendly takeover, the board of directors of the target company approves the offer. In a hostile takeover, the target company’s management does not want to be acquired, but the bidder offers directly to the target company’s shareholders. Takeovers are usually done via a tender offer, in which the bidder provides to purchase shares from shareholders at a premium above the current market price.

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FAQ

What is a takeover?

A takeover is the purchase of one company by another. The purchasing company acquires most of the target company’s shares, making it the new owner. 

What are the types of takeovers?

There are four main types of takeovers: hostile takeover, friendly takeover, reverse takeover, and white knight takeover.

Why do takeovers take place?

There are many reasons why takeovers might occur, but the most common one is simply that the market sees the company being taken over as undervalued. The acquirer believes they can increase shareholder value by taking over the company and running it more effectively.

What does a takeover mean for individual investors?

In a takeover, one company acquires another company. The acquiring company generally offers shareholders of the target company a premium over the current market price for their shares.

How is a takeover different from an acquisition?

The key difference is that a takeover usually happens quickly and is often done without the target company’s approval. A hostile takeover can be a hostile act, leading to legal action.

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