What Is a Takeover?

A takeover occurs when one company makes a bid to assume control of or acquire another, often by purchasing a majority stake in the target firm. In the takeover process, the company making the bid is the acquirer while the company it wishes to take control of is called the target.

Takeovers are typically initiated by a larger company for a smaller one. They can be voluntary, meaning they are the result of a mutual decision between the two companies. In other cases, they may be unwelcome, in which case the larger company goes after the target without its knowledge.

A takeover, which merges two companies into one, can bring major operational advantages and improvements to performance and for shareholders.

Understanding Takeovers

Takeovers are fairly common in the business world. They are similar to mergers in that both processes combine two companies into one. Where they differ is that a merger involves two equal companies while a takeover generally involves unequals—a larger company that targets a smaller one.

There are many reasons why companies may initiate a takeover. An acquiring company may pursue an opportunistic takeover, where it believes the target is well priced. By buying the target, the acquirer may feel there is long-term value.

Some companies may opt for a strategic takeover. This allows the acquirer to enter a new market without taking on any extra time, money, or risk. The acquirer may also be able to eliminate competition by going through a strategic takeover.

If the takeover goes through, the acquiring company becomes responsible for all of the target company’s operations, holdings, and debt.

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Takeover

Types of Takeovers

Takeovers can take many different forms. A welcome or friendly takeover, such as an acquisition, generally goes smoothly because both companies consider it a positive situation. In these cases, the management of the target company approves the transaction.

An unwelcome or hostile takeover can be quite aggressive as one party is not a willing participant. The acquiring firm can use unfavorable tactics such as a dawn raid, where it buys a substantial stake in the target company as soon as the markets open, causing the target to lose control before it realizes what is happening.

The target firm’s management and board of directors may strongly resist takeover attempts by implementing tactics such as a poison pill, which allows the target’s shareholders to purchase more shares at a discount to dilute the acquirer’s holdings and make a takeover more expensive.

A reverse takeover happens when a private company takes over a public one. The acquiring company must have enough capital to fund the takeover. Reverse takeovers happen in order for the private company to go public without having to take on the risk or added expense of going through an initial public offering (IPO).

The acquiring company may issue a tender offer or a public takeover bid—an open offer to buy shares from each shareholder of the target for a certain price at a certain time.

Reasons for a Takeover

A takeover is virtually the same as an acquisition, except the term takeover has a negative connotation, indicating the target does not wish to be purchased. A company may act as a bidder by seeking to increase its market share or achieve economies of scale that help it reduce its costs and thereby increase its profits. Companies that make attractive takeover targets include:

  • Those with a unique niche in a particular product or service
  • Small companies with viable products or services but insufficient financing
  • Similar companies in close geographic proximity where combining forces could improve efficiency
  • Otherwise viable companies that pay too much for debt that could be refinanced at a lower cost if a larger company with better credit took over

Funding Takeovers

Financing takeovers can come in many different forms. When the target is a publicly-traded company, the acquiring company makes an offer for all of the target’s outstanding shares. Instead of issuing paying cash, the bidder issues new shares of itself for shareholders of the target company.

All cash deals is an offer that involves a certain amount of money by the bidding company for each share of the target company.

The other option is to fund the takeover from its existing cash reserves, although this is a very unusual and rare source of funds. Debt is more frequently used as a source to fund a takeover. When a company uses debt, it's known as a leveraged buyout. The debt is moved onto the balance sheet of the target company.

Example of a Takeover

ConAgra initially attempted a friendly sale to acquire Ralcorp in 2011. When initial advances were rebuffed, ConAgra intended to work a hostile takeover. Ralcorp responded by using the poison pill strategy. ConAgra responded by offering $94 per share, which was significantly higher than the $65 per share price Ralcorp was trading at when the takeover attempt began. Ralcorp denied the attempt, though both companies returned to the bargaining table the following year.

Key Takeaways

  • A takeover occurs when an acquiring company makes a bid to assume control of or acquire a target company, often by purchasing a majority stake in the target.
  • Takeovers are typically initiated by a larger company for a smaller one.
  • Takeovers can be welcome and friendly, or unwelcome and hostile.
  • Companies may initiate takeovers because they may find value in a target company, or they may want to eliminate the competition.

The deal was ultimately made as part of a friendly takeover with a per-share price of $90. By this time, Ralcorp had completed the spinoff of its Post cereal division, resulting in the price offered by ConAgra being significantly higher than the offer the previous year.