What is a 'Busted Takeover'

A busted takeover, or bust-up takeover, is a highly leveraged corporate buyout, in which some of the acquired company’s assets are sold in order to repay the loan that financed the takeover.

BREAKING DOWN 'Busted Takeover'

Busted takeovers are used in acquisitions when the acquiring company does not have much cash and the target company has a surplus of undervalued assets. These assets are usually used as collateral for the loan, in order to complete the deal.

Busted takeovers are often leveraged buyouts which are financed by a significant amount of debt — which are sometimes used to combat hostile takeover bids. The resulting corporate structure, with high levels of debt, may subsequently act as a deterrent to hostile bidders.

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. This form of asset stripping can unlock shareholder value, if the assets are sufficiently undervalued.

Example of a Bust-Up Takeover

An example of a bust-up takeover was Pantry Pride's bid to acquire Revlon in 1985. Pantry Pride, a large supermarket chain controlled by Ron Perelman, was smaller than Revlon, the beauty products and healthcare concern, and planned to use debt for the purchase. At the time of the bid, M. C. Bergerac, Revlon's Chairman, stated "Revlon is not for sale. We are not seeking acquisition proposals. Our board of directors believes that the Revlon shareholders should be protected against a junk-bond bust-up takeover."

In other words, Pantry Pride planned to use junk bonds for financing and would also sell off parts of Revlon once the acquisition was final. Pantry Pride was able to purchase Revlon after winning a court case in the Delaware Supreme Court. After acquiring Revlon, Perelman sold about $1.4 billion worth of Revlon’s non-cosmetics businesses.

RELATED TERMS
  1. Revlon Rule

    The Revlon rule is the legal principle that a board of directors ...
  2. Takeover

    A takeover occurs when an acquiring company makes a bid in an ...
  3. Takeover Bid

    A takeover bid is a corporate action in which an acquiring company ...
  4. Hostile Takeover Bid

    A hostile takeover bid occurs when an entity attempts to take ...
  5. Killer Bees

    Killer bees helped companies avoid takeovers, during the 198 ...
  6. Black Knight

    A black knight is a company that makes an unwelcome takeover ...
Related Articles
  1. Investing

    Revlon Embarks on New Digital Transformation

    The NYC cosmetics giant hopes to target Millennial consumers online as part of its comeback plan.
  2. Investing

    Trademarks of a Takeover Target

    These tips on finding viable takeover targets can lead you to little companies with big prospects.
  3. Small Business

    Corporate Takeover Defense: A Shareholder's Perspective

    Find out the strategies corporations use to protect themselves from unwanted acquisitions.
  4. Insights

    Avon Focuses On Overlooked Demographic

    Avon has been losing market share to more tech-savvy competitors. But it has a new plan to win back sales.
  5. Investing

    What Investors Can Learn From M&A Payment Methods

    How a company pays in a merger or acquisition can reveal a lot about the buyer and seller.
  6. Investing

    The Most Famous Leveraged Buyouts

    A look at the largest and most famous leveraged buyouts in history.
  7. Investing

    Loading Up On Convenience Store Stocks

    Thanks to fuel, cigarette and food sales, convenience stores offer the stable cash flows that many investors seek.
  8. Trading

    Trade Takeover Stocks With Merger Arbitrage

    This high-risk strategy attempts to profit from price discrepancies that arise during acquisitions.
  9. Tech

    10 Most Famous Leveraged Buyouts

    Learn about the boldest, riskiest leveraged buyouts in history and how they either become famous for failing miserably or making billions.
RELATED FAQS
  1. How can a company buy back shares to fend off a hostile takeover?

    Learn about why a business might use a stock buyback to thwart a hostile takeover attempt by reducing its total assets and ... Read Answer >>
  2. A Hostile Takeover vs. Friendly Takeover

    Learn about the difference between a hostile takeover and a friendly takeover, and understand how proxy fights and tender ... Read Answer >>
  3. What is a staggered board?

    A staggered board of directors (also known as a classified board) is a board that is made up of different classes of directors. ... Read Answer >>
  4. Why is a shareholder rights plan called a "poison pill?"

    Discover why shareholder rights plans are often called "poison pills" to fight hostile takeovers and give smaller corporations ... Read Answer >>
  5. Why Isn't My Stock Trading at the Buyout Price?

    An acquisition or merger does not necessarily mean the deal will be resolved as originally stated. Read Answer >>
  6. What is the difference between a merger and an acquisition?

    Learn about the legal differences between a corporate merger and corporate acquisition – terms used when companies are either ... Read Answer >>
Trading Center