TAKEOVER

TAKEOVER

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.

Types of takeover

Friendly takeovers

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 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 takeovers

A hostile takeover allows a suitor 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, but the bidder continues to pursue it, or the bidder makes the offer directly after having announced its firm intention to make an offer.

The typical hostile takeover process:

1.     Slowly acquire a toehold (beach head) by open market purchase of shares at market prices without attracting attention.

2.     File  statement with OSC at the 10% early warning stage while not trying to attract too much attention.

3.     Accumulate 20% of the outstanding shares through open market purchase over a longer period of time

4.     Make a tender offer to bring ownership percentage to the desired level (either the control (50.1%) or amalgamation level (67%))  - this offer contains a provision that it will be made only if a certain minimum percentage is obtained.

During this process the acquirer will try to monitor management/board reaction and fight attempts by them to put into effect shareholder rights plans or to launch other defensive tactics.

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.

An individual or organization-sometimes known as corporate raider- can purchase a large fraction of the company's stock and in doing so get enough votes to replace the board of directors and the CEO. With a new superior management team, the stock is a much more attractive investment, which would likely result in a price rise and a profit for the corporate raider and the other shareholders.

Backflip takeovers

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 rarely occurs^.


Advantages :

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

9.   Increased efficiency as a result of corporate synergies/redundancies (jobs with overlapping responsibilities can be eliminated, decreasing operating costs)

Disadvantages:

1.   Goodwill, often paid in excess for the acquisition.

2.   Culture clashes within the two companies causes employees to be less-efficient or despondent

3.   Reduced competition and choice for consumers in oligopoly markets. (Bad for consumers, although this is good for the companies involved in the takeover)

4.   Likelihood of job cuts.

5.   Cultural integration/conflict with new management

6.   Hidden liabilities of target entity.

7.   The monetary cost to the company.

8.   Lack of motivation for employees in the company being bought up.

Takeovers also tend to substitute debt for equity. In a sense, government tax policy of allowing for deduction of interest expenses but not of dividends, has essentially provided a substantial subsidy to takeovers. It can punish more conservative or prudent management that don't allow their companies to leverage themselves into a high risk position. High leverage will lead to high profits if circumstances go well, but can lead to catastrophic failure if circumstances do not go favorably. This can create substantial negative externalities for governments, employees, suppliers and other stakeholders.

Strategies of Takeover(Percentage of Equity Share)

1.     10%:  Early Warning

•         When a shareholder hits this point a report is sent to OSC

•         This requirement alters other shareholders that a potential acquisitor is accumulating a position (toehold) in the firm.

2. 20%: Takeover Bid

•         Not allowed further open market purchases but must make a takeover bid

•         This allows all shareholders an equal opportunity to tender shares and forces equal treatment of all at the same price. This requirement also forces the acquisitor into disclosing intentions publicly before moving to full voting control of the firm.

3. 50.1%: Control

•         Shareholder controls voting decisions under normal voting (simple majority)

•         Can replace board and control management

4.       66.7%: Amalgamation

•         The single shareholder can approve amalgamation proposals requiring a 2/3s majority vote (supermajority)

5.       90%:  Minority Squeeze-out

•         Once the shareholder owns 90% or more of the outstanding stock minority shareholders can be forced to tender their shares.

•         This provision prevents minority shareholders from frustrating the will of the majority.