DEFINITION of 'Bailout Takeover'

A bailout takeover is an urgent or even forced acquisition of a financially unstable company by a government or a stable enterprise with the goal of returning the troubled business to a position of financial strength. In a bailout takeover, the government or strong company takes over the weak company by purchasing its shares, exchanging shares or both. The acquiring entity develops a rehabilitation plan for the weak company, describing how it will be managed and by whom, how shareholders will be protected, and how its financial position will be turned around.

BREAKING DOWN 'Bailout Takeover'

An example of a bailout takeover was PNC Financial Services' 2008 acquisition of National City Corp. National City experienced massive losses because of the subprime mortgage crisis, and PNC used TARP funds to bail it out. PNC purchased about $5.2 billion in National City’s stock to acquire it; some people said the purchase price was less than National City’s fair market value. PNC became the fifth-largest U.S. bank as a result of the bailout takeover, but numerous National City employees lost their jobs at the bank’s headquarters. Breathtaking name changes also occurred on Wall Street during the crisis, with Bear Stearns and Merrill Lynch succumbing to bailout takeovers.

Another example of a bailout takeover was the U.S. government’s takeover of Chrysler and General Motors in 2008 to prevent the companies’ bankruptcy and massive loss of jobs in the industry. Under the takeover’s terms, the government loaned the two companies $17.4 billion and required them to reduce their debt, decrease workers’ wages and benefits and create restructuring plans. The government retained the ability to call the loans if the companies failed to uphold their end of the bargain. The companies later received additional funds from the government, but they were forced into bankruptcy anyway, causing both stockholders and bondholders to lose everything. The bailout was criticized as primarily benefiting labor unions since workers kept their jobs but investors lost everything.

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