Takeover

Takeover

[teyk-oh-ver]

In business, a takeover is the purchase of one company (the target) by another (the acquirer, or bidder). In the UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to the acquisition of a private company.

Friendly takeovers

Before a bidder makes an offer for another company, it usually first informs that company's board of directors. If the board feels that accepting the offer serves shareholders better than rejecting it, it recommends the offer be accepted by the shareholders.

In a private company, the shareholders and the board are usually the same people or closely connected with one another. So, private acquisitions are usually friendly, because if the shareholders agree to sell the company then the board is usually of the same mind or sufficiently under the orders of the 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 takeovers

If management may not be acting in the best interest of the shareholders (or creditors, in cases of bankrupt firms), a hostile takeover allows a suitor to bypass intransigent management. This enables the shareholders to choose the option that may be best for them, rather than leaving approval solely with management. In this case, a hostile takeover may be beneficial to shareholders, which is contrary to the usual perception that a hostile takeover is "bad."

A takeover is considered "hostile" if:

  • The board rejects the offer, but the bidder continues to pursue it, or
  • The bidder makes the offer without informing the board beforehand

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. Tender offers in the USA are regulated with the Williams Act. 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.

The main consequence of a bid being considered hostile is practical rather than legal. If the board of the target cooperates, the bidder can conduct extensive due diligence into the affairs of the target company. It can find out exactly what it is taking on before it makes a commitment. But a hostile bidder knows about the target only the information that is publicly available, and so takes a greater risk. Also, banks are less willing to back hostile bids with the loans that are usually needed to finance the takeover.

Reverse takeovers

A reverse takeover is a type of takeover where a private company acquires a public company. This is usually done at the instigation of the larger, 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, under AIM rules, a reverse take-over 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

Financing a takeover

Funding

Often a company acquiring another pays a specified amount for it. This money can be raised in a number of ways. The company may have sufficient funds available in its account, but this is unusual. More often, it will be borrowed from a bank, or raised by an issue of bonds. Acquisitions financed through debt are known as leveraged buyouts, and the debt will often be moved down onto the balance sheet of the acquired company. The acquired company then has to pay back the debt. This is a technique often used by private equity companies. The debt ratio of financing can go as high as 80% in some cases. In such a case, the acquiring company would only need to raise 20% of the purchase price.

Loan note alternatives

Cash offers for public companies often include a "loan note alternative" that allows shareholders to take part or all of their consideration in loan notes rather than cash. This is done primarily to make the offer more attractive in terms of taxation. A conversion of shares into cash is counted a disposal that triggers a payment of capital gains tax, whereas if the shares are converted into other securities, such as loan notes, the tax is rolled over.

All share deals

A takeover, particularly a reverse takeover, may be financed by an all share deal. The bidder does not pay money, but instead issues new shares in itself to the shareholders of the company being acquired. In a reverse takeover the shareholders of the company being acquired end up with a majority of the shares in, and so control of, the company making the bid. The company has managemental rights.

Mechanics

In the United Kingdom

Takeovers in the UK (meaning acquisitions of public companies only) are governed by the City Code on Takeovers and Mergers, also known as the "City Code" or "Takeover Code". The rules for a takeover, can be found what is primarily known as 'The Blue Book'. The Code used to be a non-statutory set of rules that was controlled by City institutions on a theoretically voluntary basis. However, as a breach of the Code brought such reputational damage and the possibility of exclusion from City services run by those institutions, it was regarded as binding. In 2006 the Code was put onto a statutory footing as part of the UK's compliance with the European Directive on Takeovers (2004/25/EC).

The Code requires that all shareholders in a company should be treated equally, regulates when and what information companies must and cannot release publicly in relation to the bid, sets timetables for certain aspects of the bid, and sets minimum bid levels following a previous purchase of shares.

In particular:

  • a shareholder must make an offer when its shareholding, including that of parties acting in concert (a "concert party"), reaches 30% of the target;
  • information relating to the bid must not be released except by announcements regulated by the Code;
  • the bidder must make an announcement if rumour or speculation have affected a company's share price;
  • the level of the offer must not be less than any price paid by the bidder in the three months before the announcement of a firm intention to make an offer;
  • if shares are bought during the offer period at a price higher than the offer price, the offer must be increased to that price;

The Rules Governing the Substantial Acquisition of Shares, which used to accompany the Code and which regulated the announcement of certain levels of shareholdings, have now been abolished, though similar provisions still exist in the Companies Act 1985.

Strategies

There are a variety of reasons why an acquiring company may wish to purchase another company. Some takeovers are opportunistic - the target company may simply be very reasonably priced for one reason or another and the acquiring company may decide that in the long run, it will end up making money by purchasing the target company. The large holding company Berkshire Hathaway has profited well over time by purchasing many companies opportunistically in this manner.

Other takeovers are strategic in that they are thought to have secondary effects beyond the simple effect of the profitability of the target company being added to the acquiring company's profitability. For example, an acquiring company may decide to purchase a company that is profitable and has good distribution capabilities in new areas which the acquiring company can use for its own products as well. A target company might be attractive because it allows the acquiring company to enter a new market without having to take on the risk, time and expense of starting a new division. An acquiring company could decide to take over a competitor not only because the competitor is profitable, but in order to eliminate competition in its field and make it easier, in the long term, to raise prices. Also a takeover could fulfill the belief that the combined company can be more profitable than the two companies would be separately due to a reduction of redundant functions.

Perceived pros and cons of takeover

Perceived pros and cons of a takeover differ from case to case but still there are a few worth mentioning.

Pros:

  1. Increase in sales/revenues (e.g. Procter & Gamble takeover of Gillette)
  2. Venture into new businesses and markets
  3. Profitability of target company
  4. Increase market share
  5. Decrease competition (from the perspective of the acquiring company)
  6. Reduction of overcapacity in the industry
  7. Enlarge brand portfolio (e.g. L'Oréal's takeover of Bodyshop)
  8. Increase in economies of scale

Cons:

  1. Reduced competition and choice for consumers in oligopoly markets. (Bad for consumers, although this is good for the companies involved in the takeover)
  2. Likelihood of job cuts.
  3. Cultural integration/conflict with new management
  4. Hidden liabilities of target entity.
  5. The monetary cost to the company.

Occurrence

Corporate takeovers occur frequently in the United States, Canada, United Kingdom, France and Spain. They happen only occasionally in Italy because larger shareholders (typically controlling families) often have special board voting privileges designed to keep them in control. They do not happen often in Germany because of the dual board structure, nor in Japan because companies have interlocking sets of ownerships known as keiretsu, nor in the People's Republic of China because the state majority-owns most publicly listed companies.

Tactics against hostile takeover

See also

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