What Is a Takeover Bid?

A takeover bid is a type of corporate action in which a company makes an offer to purchase another corporation. 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. In takeover bids, the acquiring company generally offers cash, stock, or a combination of both.

Key Takeaways

  • A takeover bid is a corporate action in which a company makes an offer to purchase another corporation.
  • 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 brings about change to a corporation and has a direct impact on its stakeholders—shareholders, directors, customers, suppliers, bondholders—is called a corporate action. Corporate actions require the approval of the company's board of directors, and, in some cases, approval from certain stakeholders. Corporate actions can vary, ranging from bankruptcy, liquidation, and mergers and acquisitions such as takeover bids.

Managers of potential acquirers often have different reasons for making takeover bids. They may cite some level of synergy, tax benefits, or diversification for the rationale behind a takeover bid offer. For instance, the acquirer may go after a target firm because the target's products and services align with its own. By doing so, it can cut out the competition through a takeover. Or, the target company may give the potential acquirer access to a brand new market.

The potential acquirer in a takeover normally makes a bid to purchase the target. The bid is normally in the form of cash, stock, or a mixture of both. The offer is taken to the company's board of directors, which either approves or rejects the deal. If approved, the board holds a vote by shareholders for further approval. Once the deal passes through shareholders, the deal must be approved by the Department of Justice to ensure it doesn't violate any antitrust laws.

Empirical studies are mixed, but history shows, in post-merger analysis, a target company's shareholders often benefit most. Likely from 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. More on these and other types of takeover bids below.

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 board of directors 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 and was approved by shareholders of both companies in March 2018. The Department of Justice approved the acquisition in October 2018.

Hostile

Rather than going through the board of directors of the target company, a hostile bid involves a different approach. The acquirer may go directly to the target's shareholders with the bid or it may try to replace the target's management team. 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 may include poison pills or a golden parachute.

The acquirer may try to execute the hostile bid by issuing a tender offer, using a proxy fight or buying enough of stock in the open market to gain control of the target company.

Reverse

In a reverse takeover bid, a private company buys a public corporation. This helps the private company become listed without having to go through the process of an initial public offering (IPO) since the public company already trades on an exchange. By doing so, the private company forgoes the tedious and complicated process of filing the paperwork necessary to compete a public offering.

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 kind of takeover is normally used to help the acquirer, which may be struggling in the market—especially in cases of brand recognition.

Examples of Takeover Bids

A two-tier bid, also known as a two-tiered tender offer, occurs when the acquiring company is willing to pay a premium above and beyond the share's price to convince shareholders to sell their shares. In the initial tier, the acquirer gets control over the target, but then makes another, lower offer for more shares through the second tier that is completed at a future date. By doing so, this reduces the overall cost of the takeover for the acquiring company.

Another example of a takeover bid is the any-and-all bid. In this kind of takeover, the acquiring company offers to buy any of the target firm's outstanding shares at a specific price by a certain date. This kind of bid is normally done through a hostile takeover. By making an any-and-all bid, the acquirer can bypass working with the target's board of directors, and purchase shares to any and all shareholders who want to sell their stock.