A:

When a firm makes an official bid to take over a target company, a legal offer is created. The firm making the offer becomes an offeror, while the target becomes the offeree. If the target firm accepts the offer, the offeror has an obligation to complete the transaction. Both parties are able to cancel the offer, eliminating any legal requirement for the bidder to acquire its target.

The most straightforward way of canceling a bid is for the offeree to reject the offer. The bid offer is also canceled if the length of time of the bid lapses. For example, let's say the acquiring firm demands an answer within one week. If the target does not respond within the given week, the offer will legally be terminated. The last way for the target company to cancel a bid is to produce a counteroffer. The counteroffer eliminates the first bid, but opens the door for additional negotiations by creating a new offer.

Terminating an offer is simple for the bidding company. The offeror may officially withdraw the offer before the offeree accepts the bid. All of the above actions will effectively relieve the bidder of the obligation to purchase the target company.

For related reading, see Pinpoint Takeovers First.

RELATED FAQS

  1. If a company offers a buyback of its shares, how do I decide whether to accept the ...

    Learn why it may often be in the best interest of a shareholder to accept a tender offer made at a premium to the market ...
  2. How is a tender offer used by an individual, group or company seeking to purchase ...

    Learn how tender offers are used in takeover attempts, and understand the difference between a hostile takeover and a friendly ...
  3. Why would it be in the interest of shareholders to accept a tender offer?

    Learn when it is in the best interests of shareholders to accept a tender offer. A tender offer is a bid to buy a large portion ...
  4. How does a company record profits using the equity method?

    Understand what the equity method of accounting is and what it's used for. Learn how a company record profits using the equity ...
RELATED TERMS
  1. Hunting Elephants

    The practice of targeting large companies or customers.
  2. Precedent Transaction Analysis

    A valuation method in which the prices paid for similar companies ...
  3. Poison Put

    A takeover defense strategy in which the target company issues ...
  4. Assented Stock

    A share of stock owned by a shareholder who has agreed to a takeover.
  5. Back-End Plan

    An anti-acquisition strategy in which the target company provides ...
  6. Voting Poison Pill Plan

    An anti-takeover strategy in which the company being targeted ...

You May Also Like

Related Articles
  1. Stock Analysis

    The CVS Target Deal: A Healthy Union?

  2. Investing News

    Most Important Mergers And Acquisitions ...

  3. Investing

    Salesforce Buyout

  4. Investing Basics

    10 Facts You Didn’t Know About Amazon

  5. Stock Analysis

    Intel and Altera: Big Step Forward or ...

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!