Busted Takeover

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Acquisition

    A corporate action in which a company buys most, if not all, ...
  2. Revlon Rule

    The legal requirement that a company’s board of directors make ...
  3. Takeover

    A corporate action where an acquiring company makes a bid for ...
  4. Self-Tender Defense

    A form of takeover defense against a hostile bid, in which the ...
  5. Hostile Takeover Bid

    An attempt to take over a company without the approval of the ...
  6. Leverage

    1. The use of various financial instruments or borrowed capital, ...
Related Articles
  1. Fundamental Analysis

    Mergers And Acquisitions: Understanding Takeovers

    In the dramatic world of M&As, battleground terms meld with bizarre metaphors to form the language of the game.
  2. Options & Futures

    The Basics Of Mergers And Acquisitions

    Learn what corporate restructuring is, why companies do it and why it sometimes doesn't work.
  3. Investing Basics

    What is the effect of price inelasticity on demand?

    Find out why price inelasticity of demand shows the relationship between demand and price if the price of an inelastic good is either lowered or raised.
  4. Fundamental Analysis

    How do I calculate the debt-to-equity ratio in Excel?

    Understand the basics of the debt to equity ratio, how it is interpreted as a measure of financial stability and how it is calculated in Microsoft Excel.
  5. Brokers

    Arbitrage Opportunities in Spread Betting

    While the opportunities are few and far between, investors may use arbitrage to take advantage of price differences in financial spread betting.
  6. Brokers

    The Exciting World Of The Top Spread Betting Brokers

    Spread betting can be fun, but it's risky and you will want a reliable broker. Here are the top spread betting brokers.
  7. Mutual Funds & ETFs

    Are there leveraged ETFs that track the utility sector?

    Discover leveraged ETFs tracking the utilities sector, and learn the advantages and disadvantages they present to investors.
  8. Technical Indicators

    How To Use Technical Indicators To Master Financial Spread Betting

    As a popular tool of investing in the United Kingdom, spread betting encompasses the buying or selling of an underlying asset when a strike price is met.
  9. Investing Basics

    What are historic cases of companies failing to do their due diligence?

    Learn about the America Online-Time Warner merger. Explore how America Online's stock was not properly valued due to poor due diligence.
  10. Brokers

    Is there a downside to having a high liquidity ratio?

    Find out why it might be disadvantageous for a company to have liquidity ratios that are too high, and learn how to find a healthy liquidity range for a firm.

You May Also Like

Hot Definitions
  1. Prospectus

    A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details ...
  2. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  3. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  4. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  5. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  6. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
Trading Center