Bailout Takeover

A type of takeover in which a struggling company is bought by another company to keep it from going bankrupt. 

In the business world, a bailout takeover is a type of takeover in which a struggling company is bought by another company, usually a private equity firm, investment bank, or the government, to keep it from going bankrupt. 

Bailout takeovers are typically done to make a profit, but they can also be done to keep a company's assets from being liquidated.

This action, especially in the form of a government bailout where the government steps in to take control of a failing company to prevent it from potential bankruptcy or insolvency, can be controversial. 

Opponents of the government bailout argue that it is a form of crony capitalism, where the government intervenes in the marketplace to rescue mismanaged businesses. 

Supporters contend that bailouts are necessary to prevent even more significant problems, such as mass layoffs and widespread economic turmoil.

There are several reasons why bailout takeovers have become more common in recent history:

1. Global Economic Slowdown

Slower economies pressure many companies, making them more susceptible to financial difficulties. 

2. Rising Number of Private Equity Firms

Larger pools of capital give way to financing these types of takeovers.

3. Increased Regulation of the Financial Sector

Regulation makes it more difficult for companies to raise capital in traditional ways, making bailout takeovers an attractive alternative.

Whether you are an opponent or supporter of the bailout takeover, it can indeed be a helpful way to keep struggling companies afloat.

What Is a Bailout Takeover

It is a type of takeover in which a company is bought out by the government or a financially stable company to save it from bankruptcy or insolvency. It is often done in cases where the company being purchased is seen as vital to the economy or national interests. 

To help save the operations of the troubled company, the acquiring entity would typically develop a rescue plan and assign someone to lead the recovery project while safeguarding shareholders' interests.

The form of the bailout can be stock, bonds, loans, and cash. If a takeover is done in stock, the acquired company would have to buy back the shares from the acquirer once it regains its financial integrity.

Bailout takeovers can have a positive or negative effect on the company being bought out and the economy as a whole. However, in some cases, such as the 2008 financial crisis, it can stabilize a failing company and help it to regain its financial strength. 

However, the takeover can lead to job losses and further financial instability in other cases. The bailout may not work or be prolonged and would only serve as a temporary delay to a persistent problem.

Bailout takeovers can benefit both the acquiring company and the acquired company. For the acquiring company, they can purchase a struggling company for a fraction of its worth and turn it around, then sell it off for profit. 

For the acquired company, it can avoid bankruptcy and keep its business running. However, it can also be risky, as the acquired company may not be able to make a successful turnaround.

Why Do Companies Get Bailouts

There are a lot of different reasons why companies get bailouts. Sometimes it's because they're in financial trouble and need a little help to stay afloat. Other times, it's because they're facing a legal issue or are undergoing a restructuring. 

$100 notes

And sometimes, it's because the government wants to protect a company's interests. But, this is usually because the company is considered essential to the economy.

If the company were to go bankrupt, it would have such a negative impact on the economy that it would be better to bail it out than to let it fall. However, this practice is often criticized, as it can reward companies for bad behavior.

Critics of bailouts claim that they are unfair to the taxpayers who have to foot the bill and get little to nothing in return. 

In addition, they argue that bailouts can create a moral hazard empowering large businesses to engage in risky and irresponsible actions as they expect to be bailed out if they run into any trouble.

Furthermore, government bailouts also discourage those productive and stable businesses that are carefully managed, preventing resources from being put to better use and making the markets less efficient.

Despite the criticism, government bailouts continue. Here is a tracker of the $700 billion bailout of the U.S. financial system following the 2008 financial crisis. 

So why do companies get bailouts? It usually boils down to one thing: the company is considered too big or too important to fail.

How Does a Bailout Takeover Work?

In a typical corporate bailout takeover, a private equity firm will purchase a controlling stake in the target company from its existing shareholders. The private equity will then work with the acquired company's management to turn around the business. 

This can involve a variety of measures, such as:

  1. Reducing Costs
  2. Improving Efficiency
  3. Increasing Revenue

Private equity firms typically invest their own money in these takeover deals but may also raise money from other institutional investors. 

Once the private equity has taken control of the acquired company, it will typically hold the acquired company for three to five years before selling it off again, hopefully at a profit.

Bailout takeovers can be risky ventures, but if successful, they can result in a substantial return on investment for the private equity firm and its investors.

As mentioned above, in a government bailout takeover, the government steps in to take control of a failing company to prevent it from going bankrupt. This process typically takes place when a company is too large or essential to the economy to be allowed to fail.

This type of bailout takeover can work in a few different ways. Sometimes, the government will take over the company and run it themselves. In other cases, the government will provide financial assistance to the company to help them get back on their feet.

Scale, paper, pen, and documents

And in some cases, the government will work with private investors to help them take over the company.

Bailout Deal

In recent years, the term "bailout deal" has become increasingly common in business. It is a term that describes the point of interaction between the acquirer and the failing company that is being purchased. 

Piggy bank

A bailout deal is a type of financial transaction in which a company or individual receives financial assistance from another party to avoid bankruptcy or default. 

Bailout deals protect a company's investors, who would otherwise lose their money if the company went bankrupt. They are often used in extreme financial distress when it is clear that the entity will not be able to meet its obligations without outside help.

While bailout deals can be a lifeline for struggling businesses, they often come with strict conditions that the company must adhere to receive the funds. This can include making significant changes such as selling off assets or giving up control to the party providing the bailout funding.

In the current economic climate, bailout deals have become increasingly common. We've seen bailout deals for banks, car companies, and countries. As the world economy becomes more and more interconnected, we'll likely see even more bailout deals in the years to come.

What Happens to a Company's Stock?

The impact of a bailout deal can vary, but one of the most common effects is that the acquired company's stock price takes a hit. This is because the market views a bailed-out company as less stable and less trustworthy than one that does not need external assistance. 

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As a result, investors may be less likely to buy the company's stock, which can lead to a decline in the stock's price. However, there are some cases where the stock value will go up. This is usually when the company is saved from bankruptcy and again seen as a good investment.

The impact of a bailout deal on a company's stock price is usually temporary and depends on the overall market conditions. Generally, a bailout deal is intended to help a company stay afloat, so it is usually seen as a positive thing for the company's stock price in the long run.

Examples

The 2008 financial crisis was a turning point for the U.S. economy. The collapse of the housing market and the implosion of mortgage-backed securities (MBS) severely destabilized the financial system and pushed many companies to bankruptcy or insolvency. 

The severity of the crisis triggered the unprecedented federal intervention in which the U.S. government bailed out multiple large companies with toxic assets, such as Fannie Mae, Freddie Mac, Bear Stearns, and the American International Group. 

The Troubled Assets Relief Program

As mentioned above, the financial crisis of 2008 led to the largest bailout in U.S. history. The federal government committed more than $700 billion to rescue the failing banking system. 

The Troubled Asset Relief Program, or TARP, was created to purchase toxic assets from banks to stabilize the economy. The purpose of this program was to make money markets more liquid, reducing the collateral losses of the owning institutions. 

The program shifted focus later and allowed the government to buy equity in financial institutions, initially giving the Treasury $700 billion and later reducing that to $475 billion in purchasing power.

In October 2008, Congress passed the Emergency Economic Stabilization Act, which authorized the TARP. The TARP was overseen by the Office of Financial Stability, which the Act created. 

The TARP was initially run by Neel Kashkari, who Herb Allison replaced in 2009. It was controversial originally, as many felt it was a way for the government to bail out the banks. 

It's still not clear whether or not the bailout was successful. But one thing is sure: the government's intervention in the economy was unprecedented.

American International Group

In 2008, the federal government took over the failing insurance giant American International Group (AIG) for $180 billion. The company struggled to stay afloat after making several poor investment decisions.

It was believed that the failure of AIG would jeopardize the financial stability of not only its trading partners like Goldman Sachs, Bank of America, and Morgan Stanley but also multiple central European banks. 

The AIG takeover was one of the most high-profile bailouts in recent history, and it was a controversial move by the government. Some people felt that the government should have let AIG fail, while others believed that the bailout was necessary to prevent a more significant financial crisis.

The AIG bailout is still controversial today and provides an excellent example of how the government can step in to save a struggling company.

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Researched and authored by Jake Heimowitz | LinkedIn

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