What Is a Takeover? Definition, How They’re Funded, and Example

The act of seizing, appropriating, or arrogating authority, control, management, etc. This makes it very unappealing to the bidder as it limits his power. In some cases, an organization has a certain attractive and valuable department that tempts other companies to bid for it. The acquirer can find out about certain hidden liabilities and debts which can prove detrimental for him. When someone begins to have control of something and is in charge of responsibilities, people, or duties. CFI is the official provider of the Financial Modeling and Valuation Analyst ™ certification program, designed to transform anyone into a world-class financial analyst.

Takeovers can be friendly if the target accepts the bid willingly. Acquirers mischievously procure target firms without the latter’s knowledge or consent. 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. Keep in mind, if a company owns more than 50% of the shares of a company, it is considered controlling interest. Controlling interest requires a company to account for the owned company as a subsidiary in its financial reporting, and this requires consolidated financial statements.

After the 50% threshold has been breached, the target company should be considered a subsidiary. If a full-on merger or acquisition occurs, shares will often be combined under one symbol. Companies may initiate takeovers because they find value in a target company, they want to initiate change, or they may want to eliminate the competition. The acquisition of a corporation through the purchase or exchange of stock. Firms which are trading at a low value compared to potential may be vulnerable to a takeover. If a firm is badly run with much potential, this may be reflected in the share price.

Then the government gave them an open offer and they acquired 31% more shares through open offer. India’s first hostile takeover in an IT company was successful. 3 co-founders of Mindtree quit after L&T bought the controlling stake. L&T said that Mindtree will run as a separate entity, distinct from L&T infotech and L&T technology services. A friendly takeover which is also known as a welcome takeover refers to a takeover where both of the company’s board of directors is in mutual agreement about the takeover. This means that the management of the target company is informed by the acquiring company about their intention to purchase the company, and the management approves the set purchasing terms.

Legal Definition of takeover

As the name suggests, a poison pill refers to the action of an organization that it takes to look less desirable and less valuable to an outsider with the intent of hostile takeover. A real-life example of the most popular hostile takeover is of Peoplesoft by Oracle in the year 2004. This 10.3 billion dollar bid created a situation of war between the two companies. In cases where a hostile takeover is forcefully being conducted, the target company can adopt strategies that may resist the takeover from being approved.

Therefore the bidder cannot go and bid without the consent of the management. The target company may reject a bid if it believes that the offer undermines the company’s prospects and potential. The two most common strategies used by acquirers in takeover meaning with example a hostile takeover are a tender offer or a proxy vote. Takeovers are common practice—disguised to look like friendly mergers. In a hostile takeover, the acquirer secretly buys the shares of non-controlling shareholders from the open market.

A reverse takeover simply happens to enable a public company to go public without necessarily taking a risk of going through an initial public offering, a process that is costly and tedious. This means that the private company changes to a public company by assuming control over an already listed company. A larger company can initiate a hostile takeover of a smaller firm, which essentially amounts to buying the company in the face of resistance from the smaller company’s management. Either way, the purchasing company essentially finances the purchase of the target company, buying it outright for its shareholders. LnT already had some more percentage of shares in the company and after getting shares from V.G.Siddhartha their total shares reached to 29%.

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Table of Contents

A reverse takeover bid occurs when a private company purchases a public company. The main rationale behind reverse takeovers is to achieve listing status without going through an initial public offering . In other words, in a reverse takeover offer, the private acquiring company becomes a public company by taking over an already-listed company. An acquisition transaction becomes a takeover when the acquiring company purchases the target may or may not through a mutual agreement with the target company’s management. In case it is through mutual consent, it’s a friendly takeover, whereas if it is not, it is called a hostile takeover. In hostile takeovers, the bidding company directly approaches the company’s shareholders or attempts to replace the management to get the deal approved.

A backflip takeover is one where a bidding company becomes the subsidiary of the taken-over company. The reason behind this is to take benefit of the brand value of the taken-over company. For example, AT&T was taken over by SBC, but AT&T’s name was continued as it was a well-known, established brand name. Such takeovers take place when the well-known named company is short of resources to run the company, and the lesser-known company is cash-rich and searching for an investment opportunity. However, there can be many motives behind any takeover, merger, or acquisition.

Merger vs. Takeover: An Overview

We have also seen different types of takeovers and how important takeover and acquisitions are for the increasing Indian economy but in the right way. In the case of a reverse takeover, the dependence on the market reduces significantly. The company does not need to care about the response from investors from the first listing. A reverse takeover converts the private company into a public company, and market conditions do not impact its valuation. In a proxy fight, it tries to persuade enough the majority of stockholders to replace the whole management.

• It does this by purchasing the majority of the target company’s shares, once they are in the market.
• The target firm management and board are unaware of such developments.
• An aquisition involves gaining control over another firm, usually through the purchase of shares of the company or to buy assets of the business directly.
• Another way is that the acquiring company may decide to make an offer directly without giving the management time to make a decision, on whether they support the idea or not.
• The board from the target company will approve the buyout terms and shareholders will get the opportunity to vote in favor of, or against, the takeover.
• The main rationale behind reverse takeovers is to achieve listing status without going through an initial public offering .

Sometimes, the acquirer intends to enter a new market immediately and with little investment. Capturing a huge market share, acquiring valuable resources and assets, attaining economies of scale, and profit maximization are among other motives. A friendly takeover occurs when a target company’s management and board of directors agree to a merger or acquisition proposal by another company.

They are a cost-effective alternative for such companies to go public. Once the company is public, it becomes easier for the shareholders to exit their investment to sell their shares in the market. In addition, access to the capital becomes easier since the company can go for a secondary listing whenever it needs more money. Before going public, there are several other tasks that the company needs to undertake to create a positive sentiment in the market for its IPO, which include roadshows, meetings, and conferences. These tasks require effective management and cost efforts because the company hires investment banks as advisors for these tasks. In fact, it is an effective way for the private company to ‘float’ itself.

Take over = to buy out the ownership of a company

A takeover is considered to be hostile when the advances of the acquirer are not welcomed and the acquiree takes steps to make it more difficult for the acquirer to complete the deal. An example of a backflip takeover bid is the takeover of AT&T by SBC in 2005. In the transaction, SBC purchased AT&T for $16 billion and named the merged company AT&T because of AT&T’s stronger brand image.

However in India the concept emerged only in the 20th century but the concept of hostile takeovers was still unknown. It is harder for the bidder to conduct extensive due diligence if the target is resisting the acquisition attempt. https://1investing.in/ Therefore, hostile takeovers generally carry more risk for the bidder than friendly ones. Due diligence refers to carrying out a thorough examination of the other party’s financial and operational status and history.