Creeping Takeover

What Is A Creeping Takeover?

In Mergers and Acquisitions (M&A), a creeping takeover, also often known as a creeping tender offer, is a hostile takeover strategy in which the company taking over gradually purchases the target company's shares. 

This process is done on the open market with the ultimate aim of gaining a controlling interest in the target company. 

This is done by companies or investors who want to gain control of the company but don't want to go through the regulations, formalities, or costs associated with an open offer. The acquisition of equity beyond a certain point requires companies to make open offers. 

For example, in India, the Securities and Exchange Board (SEBI) requires that if a firm acquires over 10% share in another company, it will have to give an open offer. This, however, tends to be costly. 

In a such takeover, the takeover is gradual, and over a longer period, no such open offers are required, and the firm can save money. 

Understanding Creeping takeover

This method is a form of hostile takeover as it is more often than not involuntary and done without the knowledge of the public, shareholders, and board of directors. It is called "creeping" because it is a gradual and slow process. 

This process involves the acquiring company purchasing the target company's shares on the open market little by little. Through this method, the shares are purchased at the current market price, thus removing the need to pay very high premiums. 

One of the major reasons behind going for this method is to obtain the majority stake in a company more cheaply than through a tender offer. This process can be a cheaper alternative for the acquiring company than a method like a bear hug, which requires the company to pay high premiums. 

Once the 50% equity threshold has been crossed, the target company is usually considered a subsidiary of the acquiring company. Thus, the acquiring company must account for the target company through consolidated financial statement reporting. 

The 50% is thus important benchmark businesses need to consider while going for creeping takeovers. If the acquiring company wants to have a major chunk of the business but doesn't want the responsibility of controlling the business, it should remain below the 50% level. 

If it wants to get a controlling stake, it would want to cross the 50% threshold and gain a majority. In some countries, however, certain regulations govern this process and require that companies offer a formal bid upon acquiring a certain percentage of equity. 

The rationale behind creeping takeovers

These takeovers are done gradually and through smaller transactions. This is the main rationale behind it, as this removes the need for disclosing this information to other shareholders. 

This type of takeover is often preferred due to how cheap it is compared to other methods. In addition, this takeover removes the need for premiums, as the shares are purchased at market prices. 

This method may also be used to get around various regulations. In the United States, for example, it is used to get around the provisions of the Williams Act. These provisions state the following:

• All shareholders must be offered the same price for their shares in a tender offer. 
• An investor or a group buying a large block of shares must file all relevant details of their tender offer with the Securities and Exchange Commission (SEC).

Thus, a creeping takeover avoids the regulations of a tender offer, saving the investor time and money. 

Additionally, these takeovers may also involve activist investors. These investors buy a stake in the company to influence how it runs. The main intent of these investors may be to create more value through management changes. 

As these takeovers usually span longer, such a takeover is appropriate. 

Risks associated with creeping takeover

This takeover method, however, comes with its own set of risks. If the takeover attempt is unsuccessful, the company originally attempting the takeover is stuck with a large block of shares of the target company. These shares essentially become useless, as the firm did not succeed in gaining control of the target company.

The company may have to liquidate the shares in the near future, which may also sometimes be at a huge loss. Thus, these attempts may be cheaper, but they have a higher chance of failure, which can cause huge losses. There are still ways to minimize these risks.

First, the company holding the shares can still pressure the target company to buy back the equity at a higher price. This may work as; even if the acquiring company does not have the majority, they will still own a large enough block of shares to have some degree of influence. 

Examples of creeping takeover

One of the most commonly cited examples of a creeping takeover is that of Porsche and Volkswagen. This took place between 2005 and 2008, wherein Porsche started to buy shares of Volkswagen from the open market slowly. 

This went on for a while until Porsche had a decent block of shares of Volkswagen, finally publicly revealing that it was trying to take control of Volkswagen. The 2008 financial crisis, however, prevented the takeover attempt, and Porsche couldn’t successfully acquire the Volkswagen Group. 

The process eventually ended with Volkswagen becoming the parent company of Porsche in August 2012 after buying 100% of their shares

The detailed scenario of the takeover attempt is as follows:

• In 2005 Porsche began acquiring shares of Volkswagen and announced that they wanted to acquire up to 20%, with their stake reaching 25% by 2006. 
• They, however, stated that they didn’t plan to control Volkswagen and only wanted a stake in the company. They went on to state that they wanted to be a ‘white squire,’ i.e., to protect Volkswagen from other hostile takeover attempts.
• In 2008 it was revealed Porsche owned over a 43% stake in the company and wanted to acquire 32%. They finally stated their true intentions of gaining control of Volkswagen.
• In the 2008 crisis, however, Porsche couldn’t acquire enough funds to complete the takeover attempt and faced a liquidity crisis. 
• The situation became worse with creditors at their door asking for loan repayments. Volkswagen ended up bailing them out by buying them in August 2012.  

This example shows the advantages and disadvantages of the takeover. Due to the gradual process, Porsche could buy a huge stake in the company without official notice.

However, as made clear in this case, there is no guarantee of a successful acquisition. Furthermore, the takeover attempt led to a liquidity crisis for Porsche, as they were left with a large block of shares with no way to gain control and complete the acquisition.

Researched and authored by Soumil De | LinkedIn

Reviewed and edited by James Fazeli-Sinaki | LinkedIn

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources:

• Divesting
• Due Diligence
• Initial Public Offering (IPO)
• Joint Venture (JV)
• Mergers & Acquisitions (M&A)