Takeover Bid

What Is a Takeover Bid?

A takeover bid is a type of corporate action in which a company makes an offer to purchase another company. In a takeover bid, the company that makes the offer is known as the acquirer, while the subject of the bid is referred to as the target company. The acquiring company generally offers cash, stock, or a combination of both in an attempt to assume control of its target.

Key Takeaways

  • A takeover bid is a corporate action in which a company makes an offer to purchase another company.
  • The acquiring company generally offers cash, stock, or a combination of both for the target.
  • Synergy, tax benefits, or diversification may be cited as the reasons behind takeover bid offers.
  • Depending on the type of bid, takeover offers are normally taken to the target's board of directors, and then to shareholders for approval.
  • There are four types of takeover bids: Friendly, hostile, reverse, or backflips.

Understanding Takeover Bids

Any activity that is expected to have a direct, material impact on its stakeholders (e.g., shareholders and creditors)—is called a corporate action. Corporate actions require the approval of the company's board of directors (B of D), and, in some cases, approval from certain stakeholders. Corporate actions can vary, ranging from bankruptcy and liquidation to mergers and acquisitions (M&A) such as takeover bids.

Managers of potential acquirers often have different reasons for making takeover bids and may cite some level of synergy, tax benefits, or diversification. For instance, the acquirer may go after a target firm because the target's products and services align with its own. In this case, taking it over could help the acquirer to cut out the competition or give it access to a brand new market.

The potential acquirer in a takeover usually makes a bid to purchase the target, normally in the form of cash, stock, or a mixture of both. The offer is taken to the company's B of D, which either approves or rejects the deal. If approved, the board holds a vote with shareholders for further approval. Should they be happy to proceed, the deal must then be examined by the Department of Justice (DOJ) to ensure it doesn't violate antitrust laws.

Empirical studies are mixed, but history shows, in post-merger analysis, a target company's shareholders often benefit most, likely from the premiums paid by acquirers. Contrary to many popular Hollywood movies, most mergers begin friendly. Although the idea of the hostile takeovers by sharks makes for good entertainment, corporate insiders know hostile bids are an expensive undertaking, and many fail, which can be costly professionally.

Most takeover bids begin friendly.

Types of Takeover Bids

There are generally four types of takeover bids: Friendly, hostile, reverse, or backflips.

Friendly

A friendly takeover bid takes place when both the acquirer and the target companies work together to negotiate the terms of the deal. The target's B of D will approve the deal and recommend that shareholders vote in favor of the bid.

Drug store chain CVS acquired Aetna in a friendly takeover for $69 billion in cash and stock. The deal was announced in December 2017, approved by shareholders of both companies in March 2018, and then given the go-ahead by the DOJ in October 2018.

Hostile

Rather than going through the B of D of the target company, a hostile bid involves going directly to the target's shareholders with the bid. Hostile bidders issue a tender offer, giving shareholders the opportunity to sell their stock to the acquirer at a substantial premium within a set timeframe.

Unlike a friendly takeover, the target is unwilling to go through with the merger and may resort to certain tactics to avoid being swallowed up. These strategies can include poison pills or a golden parachute.

Reverse

In a reverse takeover bid, a private company bids to buy a public corporation. Since the public company already trades on an exchange, this takeover can help the private company become listed without having to go through the tedious and complicated process of filing the paperwork necessary to complete an initial public offering (IPO).

Backflip

Backflip takeover bids are fairly rare in the corporate world. In this kind of bid, an acquirer looks to become a subsidiary of the target. Once the merger is completed, the acquirer retains control of the combined corporation, which usually bears the name of the target. This type of takeover is normally used when the acquirer lacks the brand recognition of the target.

Example of Takeover Bids

In July 2011, activist investor Carl Icahn offered to pay Clorox shareholders $76.50 a share to take the company private. At the time, Icahn was the company's largest shareholder, having accumulated a 9% stake starting in December 2010. Nevertheless, his unsolicited bid was refused by the board of directors.

Icahn subsequently raised his offer to $80 a share, valuing the company at $10.7 billion. This offer, too, was rejected by the board. His bids having failed, Icahn attempted to take over the company's board of directors. Facing significant resistance from the company and shareholders, he aborted his efforts in September of that year.

Article Sources
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