Busted Takeover

DEFINITION of 'Busted Takeover'

A highly leveraged corporate buyout that is contingent upon the selling off of some of the acquired company's assets. A busted takeover occurs when an acquired company's assets are sold in order to meet the cost of acquisition. The assets of the company being acquired may be used as collateral for the financing required for the deal to go through. Once the target company is acquired, some of its assets are sold in order to pay back a portion of the funds that the acquiring company used to finance the initial buyout. The acquiring company must properly evaluate the target company's assets to confirm that the sale of the assets will adequately cover the debt.

BREAKING DOWN 'Busted Takeover'

The term 'busted takeover' is used in the world of mergers and acquisitions, or "M&A." Mergers, acquisitions and takeovers allow companies to develop competitive advantages and increase shareholder value. In a merger, two companies mutually agree to join forces and become one company. An acquisition is a corporate action in which one company purchases most or all of a target company's ownership stakes in order to take control of the target company. Acquisitions can be either friendly, where the target company agrees to be acquired, or hostile, where the target company does not agree and resists the acquisition. A hostile acquisition is often called a takeover, or a hostile takeover.

A busted takeover may be a successful strategy when the acquiring company has limited cash (and needs to borrow to fund the purchase) and the target company has undervalued assets that the acquiring company wishes to exploit. For example, assume company ABC wants to acquire company XYZ because it is looking to diversify. Company ABC is cash poor and will need to leverage itself to finance the deal. As a term of the deal, company ABC must agree to sell off some of company XYZ's assets and give the proceeds to the financier, repaying part of the amount that company ABC had to borrow to finance the deal.