Friendly Takeover
A takeover when the management and board of directors of the target company consent to the acquisition by the acquiring company. It is a transaction backed by mutual agreement.
What Is A Friendly Takeover?
A friendly takeover is a merger or acquisition that occurs when the management and board of directors of the target company consent to the acquisition by the acquiring company. It is a transaction backed by mutual agreement.
The acquiring company, in this process, makes a public offer of stock or cash. The target company's board will publicly approve the buyout terms before seeking approval from shareholders and regulatory bodies.
This takeover contrasts sharply with hostile takeovers, in which the target firm does not agree with the buyout and frequently resists it. In contrast, a friendly one provides more opportunities to negotiate and reach final terms.
When the target company's board and shareholders reject the buyout terms, acquisitions that were once perceived as amicable may become hostile. When the board approves a buyout bid from an acquiring company, the shareholders typically follow suit and vote favorably.
Given the target firm's growth prospects, the size of this premium will determine whether it will support the takeover.
Although many takeovers are regarded as favorable, things can also go south. This often occurs when the company's board of directors rejects the offer or the company's shareholders reject the request.
For instance, a corporation's board of directors may feel that a bid is too low or that the proposed acquisition will be bad for everyone concerned and decide not to proceed with the deal.
Key Takeaways
- A friendly takeover occurs when the management and board of directors of the target company agree to be acquired by the acquiring company, signifying a transaction based on mutual consent.
- The acquiring company typically makes a public offer of stock or cash, with the target company's board publicly approving the buyout terms before seeking approval from shareholders and regulatory bodies.
- Unlike hostile takeovers, where the target firm resists the acquisition, a friendly takeover offers opportunities for negotiation and cooperation between both parties, aiming for mutually beneficial outcomes.
- Friendly takeovers typically ensure job security and positive shareholder reactions, while hostile takeovers can lead to layoffs, restructuring, and uncertainty among employees and shareholders.
Components of a Friendly Takeover
There are several different kinds of firm takeovers in the business sector. The four major types of seizures are amicable, aggressive, reverse, and backflip. A friendly takeover occurs when everyone is on the same page.
A hostile takeover happens when an acquirer bypasses management opposed to the purchase and appeals directly to a company's shareholders.
When a private corporation acquires a public company, it is called a reverse takeover. When the buying company becomes a subsidiary of the acquired one, this is referred to as a backflip takeover.
It usually consists of four components discussed below.
Public Offer
The acquiring firm initiates a formal proposal to the target firm's board of directors and management, showing their interest in the firm. The proposal includes the terms of the acquisition, offer price, payment method, and any other relevant details and conditions.
The board must typically approve a public offer of cash or stock made by the bidding corporation of directors of the target company.
Share Premium
The price per share of stock that the acquirer will pay to the stakeholders of the target firm is frequently an essential aspect in deciding whether a transaction will be successful.
To gain the support of the target company's shareholders, the acquirer typically needs to pay a significant premium on each share.
Shareholder Consent
In many cases of friendly takeovers, both the target and the acquiring firm's shareholders should approve. The companies may hold shareholder meetings to vote on general and specific matters related to the takeover.
A majority of the shareholder's vote will contribute towards the initiation of the friendly takeover.
When the board approves an offer of directors of the target firm, shareholders with voting rights cast a vote supporting the transaction. Typically, approval requires a simple majority vote or greater than 50% votes in favor of the motion.
However, the corporate charters of some companies contain supermajority clauses that require a greater threshold of shareholders to approve the transaction, usually in the range of 70% to 90%.
Regulatory Acclaim
Depending upon the jurisdictional vicinity and the industry, the terms and regulations regarding the takeover may vary. It's imperative that both firms adhere to the industrial regulations to avoid future speed bumps.
Even if the target firm's shareholders agree to the acquisition, regulatory permission, such as approval from the Department of Justice, still needs to be obtained.
A friendly purchase may not receive regulatory approval if it violates competition laws, sometimes referred to as antitrust or anti-monopoly laws.
Other buyout terms also have a big impact because the offer is a complex legal document with several laws and clauses.
For instance, the buyout conditions can outline how the target firm's name and business operations would be handled and include significant target company shareholders on the acquirer's board of directors.
Advantages Of A Friendly Takeover
Two key advantages are a better deal and mutual agreement of teamwork to achieve what is best for everyone.
It often provides many benefits to target firms, which is opposed to a hostile takeover. Some of the advantages include the following:
- Better Deal For Both Companies: For the deal to be designed successfully and provide value to the parties concerned, both the bidder and the target firm must be involved. In a friendly takeover, this is the case, and the deal becomes advantageous for both parties.
- The bidder proposes fair rates to purchase the target business. The key determinants of the per-share price are the target firm's development prospects and potential merger synergies.
- Access To New Market And Expertise: Due to mergers or acquisitions, both companies now share cost and supply chain synergies, maximizing profits and minimizing costs related to processes. Access to new markets, technologies, or financial resources can be accessed to promote growth and enhance profitability.
- Increase Market Share: Given the acquiring company doesn't have a physical presence in the region where the target company has its operations, joining presence can increase the market presence and share in the region, leading to increased revenues and profitability in the long-run.
- Improved Financial Performance: The takeover can be extremely beneficial to the corporation as it opens the doors to increased capital. The extra capital can help the corporation enhance its operations, improve financial performance because of shared expertise, and improve management practices.
Considering the advantages, it is considerably better than a hostile takeover for everyone involved. This statement implies that the deal is often better for the target and acquiring companies.
Example Of A Friendly Takeover
Facebook has completed the historic $19 billion acquisition of WhatsApp, a transaction that was hammered out over a few days in February at Mark Zuckerberg's home and sealed over a bottle of Jonnie Walker whisky.
Since then, WhatsApp has operated entirely autonomously, but the signing of the agreement heralds the beginning of a gradual merger as Facebook provides the most extensive mobile messaging service worldwide with legal and administrative assistance.
Jan Koum and Brian Acton, the creators of WhatsApp, became millionaires in February when Facebook announced it would acquire the business they had founded five years earlier for an astounding $19 billion.
Until that point, the founders mainly avoided venture capital investments and held substantial interests.
At the time of the purchase, Koum still held around 45% of the company, netting the immigrant of Ukrainian descent $6.8 billion and Acton, a former Yahoo engineer, $3.5 billion after taxes.
Jan Koum, the creator of WhatsApp, will continue to hold the CEO position and receive a $1 basic salary yearly. Koum's new remuneration is comparable to the basic pay of several well-known tech CEOs, including Mark Zuckerberg.
In an SEC filing, Facebook said it will now distribute 177.8 million shares of its Class A common stock, $4.59 billion in cash, and 45.9 million shares to WhatsApp's staff as part of the agreement.
According to Peter Kafka of Re/code, the purchase is now worth around $21.8 billion, thanks to Facebook's share price increase since the agreement was first announced in February.
The European Union gave the deal the go-ahead after clearing a few regulatory hurdles.
According to Forbes, WhatsApp generates around $20 million in income annually by charging a $1 yearly membership in a small number of nations, with transparent carrier billing systems and intense credit card penetration.
That doesn't justify a $19 billion price tag, so Facebook is probably considering alternative revenue streams for the messaging service.
According to Statista, WhatsApp was the most widely used messaging app internationally in 2014, with more than 600 million monthly active users from Europe to South America to Asia.
As a result, offering some money transfer services for the world's expanding international workforce may be one solution.
It is commonly known that Facebook is interested in money transfers. In April, it was revealed that Facebook has been developing a money transfer and storage service for all of Europe since late 2013.
Facebook had already integrated parts of a payments infrastructure into Messenger for iOS, even though it still needed to be enabled.
Hostile Takeover vs. Friendly Takeover
In case of a friendly takeover, the purchasing company often makes a public offer, typically in stock and/or money.
Most friendly takeovers are amicable and cooperative, with support from the board of directors and management. Although hostile takeovers are uncommon, they can garner much media attention.
A friendly takeover occurs when a company's shareholders and management agree upon a contract. If the company's management is uncooperative, the acquiring corporation may begin a hostile takeover by directly appealing to shareholders.
The acquiring business might attempt to close the deal through so-called hostile methods, even if managers oppose the acquisition.
A hostile takeover occurs when a target company is acquired without the acquiring company's knowledge and wishes. This can be accomplished by acquiring shares or replacing its management.
Differences between both types of takeovers
The differences between the two types of takeover can be summarized as 3 points as follows:
- Situations they occur in
- The roles of the company's directors and shareholder
- What would both parties do in the takeover
| Aspect | Friendly Takeover | Hostile Takeover |
|---|---|---|
| Nature Of Approach | A takeover that is mutually agreed upon and negotiated. | Hostile takeovers are aggressive and unrequested. |
| Target Company's Response | The companies extend their fair share of cooperation and collaboration. | Preventive strategies are usually employed by the target firms to evade the hostile takeover. |
| Level Of Hospitality | Often these takeovers are cordial negotiations and discussions. | Proxy fights, tender offers, and hostile bids are some of the ways predatory firms can approach an acquisition. |
| Legal Implications | The firms involved in the takeover follow all of the rules and regulations. | The predatory firm can face legal action, and regulatory scrutiny, depending upon the approach. |
| Timing | Comparatively, a friendly takeover takes less time because of the cooperation and amicable discussions. | A hostile takeover can take a lot of time because there is no mutual agreement or cooperation from the target firm. |
| Financing | Financing these deals is quite simple since the communication between the firms is already established, facilitating smooth funding. | The element of uncertainty can bring a lot of challenges to finance the acquisition. |
| Success Rate | A high success rate can be guaranteed due to mutual cooperation and agreement between the firms. | When compared to friendly takeovers, these takeovers have a lower success rate. |
| Impact On Employees | Since there is transparent communication between the management and employees, job assurance and smooth integration are guaranteed. | Often lead to lay-offs, heavy and costly restructuring, and uncertainty among employees. |
| Impact On Shareholders | When there is a mutual agreement between the firms, its positively understood by the shareholders. | If the deal on paper is lucrative and positive, it can also have a positive impact on the shareholders in the short term. However, this can vary in the long term. |
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