Takeover

What is a Takeover?

In mergers and acquisitions (M&A), a takeover is an event when a company or group of investors successfully acquire another public company and assume control of it. A takeover can occur when a party acquires a majority stake in another company, or in some cases, all of its shares.

takeover

They can be sought after and negotiated by both parties, for example, an M&A deal between two companies, or it can take the form of a hostile takeover, where a company is unwillingly bought by another, and its management team scrapped altogether.

Takeovers can be financed by multiple methods. A company might buy another in a cash deal. A private equity firm or risk tolerant investor may use leverage to buy companies unwillingly through leveraged buyouts, or a company may be bought out after all its shares are purchased from shareholders. 

What separates a takeover from an acquisition, is that management or the board generally do not consent to a takeover. In an acquisition deal these parties may be involved in every aspect of a deal.

Large takeovers often make for big news headlines.

Reasons for takeovers

One reason a company might take another over is sector expansion to enter new markets. It may not be strong or have experience in some industries and markets, and may wish to merge with another company that does. 

Another reason is that it may want to expand market share, and may look totakeover a competitor to increase their market share and eliminate competition in the process. However, doing so may give rise to monopolies, which can draw scrutiny and regulation. 

A great example of this is the telecom industry, where massive telecom companies have constantly acquired and merged with one another. For instance, AOL took over Time Warner Cable for 182 billion.

If a company has highly desirable patents or other intellectual property, it may make them a target for a takeover. 

Sometimes, a competitor may have a better distribution and supply chain system. In such cases, taking over the competitor to acquire their distribution systems may also be a reason for a takeover. 

Types of takeovers 

There are 4 types of takeovers, hostile, friendly, creeping and reverse takeover, and each can be accomplished through various ways. Each of them are briefly described below along with their benefits and situations in which they are used.

Hostile takeovers 

The most controversial type of takeover is a hostile takeover. It is when the management and/or board do not consent to a buyout from an acquirer. Hostile takeovers can be conducted by companies for a variety of reasons, or may be conducted by a group of activist shareholders who wish to change the operations and/or management of a company.

An acquirer might entice shareholders to sell out by offering to acquire shares above the current market price. For example, if a company's stock is $12, a firm may offer a buyout at $20 a share to shareholders, making this profit of $8 ($20 - $12) very enticing to shareholders. In return, they get a majority stake in the acquired company and can influence decisions around its management and operations.

A famous example of a hostile takeover is AOL's takeover of Time Warner Cable in 2000. The takeover was valued at 164 billion dollars, and was the deal of a century at the time. Initially, TWC did not consent to the takeover. When the dotcom bubble burst, the merged company was a fraction of its original value.

Hostile takeovers can take two forms, through tender offers and proxy fights.

In a tender offer, shareholders sell their stakes in a company to the acquirer who offers to purchase shares from shareholders at a price higher than the market price of the shares. This can often be done without the approval of the board as the shareholders can sell their shares directly for a healthy premium, effectively giving control of the company to the acquirer.

In a proxy fight, a potential acquirer will attempt to convince shareholders to vote out a target company's current management team. Doing so can make it easier to take over a company. If a current company's management is unpopular with shareholders, a proxy fight can easily be successful. 

Creeping takeover 

A creeping takeover is when a company slowly accumulates another company's shares over time, usually at the market price. These transactions are carried out on the open markets, and there often is no initial bid to the board of directors to purchase shares at a premium. The goal is to acquire enough shares and then make an offer to the board.

If a creeping takeover bid fails, an acquirer is often stuck with a large position in a company that it must liquidate. If the market price of the stock is lower than the company's average cost, they might end up selling their positions at a loss. 

An example of a creeping takeover is Porsche's acquisition of Volkswagen. They slowly accumulated shares of VW, with the intent to take control of the company. Eventually, the financial crisis took place, which prevented Porsche from acquiring VW, and hence accumulated large amounts of debt. Creditors stopped lending to Porsche, and so the takeover was cancelled. VW would eventually buy 100% of Porsche shares and become its parent company. 

Reverse takeover 

In a reverse takeover, a private company takes over a public company in a quick way to become public themselves. In this scenario, a private company purchases most if not all shares of a public company, and then converts the target companies shares into their own shares, making them a public entity.

A reverse takeover can be used to go public quicker than an IPO or direct listing, making it an attractive choice for companies who want to go public as soon as possible. Recently, a form of reverse merger known as a SPAC has become popular amongst companies who want to go public in a short timeframe. 

The IPO or direct listing process can sometimes take up to a year or longer for longer companies. A takeover can take a relatively shorter time, which makes it a good idea for a company to pursue this method. 

Friendly takeover

In a friendly takeover, a takeover bid is generally accepted by shareholders and the board alike. Very often, it is they who search for an acquirer in the first place especially in cases where a takeover might be a preferable situation. 

For example, if a target company was struggling, they may try to find an acquirer who would find their assets attractive. This outcome tends to be better than closing down the entire company due to bankruptcy for instance, as the acquirer may have funds to pay off the debts or generate the required returns due to synergies.

Backflip takeover

A backflip takeover is a type of takeover bid in which the acquirer company becomes a subsidiary of the target company. In this type of takeover, the acquirer will take on the brand and identity of the acquired company. It is rare and very unconventional. 

In this type, the acquiring company is generally a much more financially healthy company but has a lower brand image than competitors. These companies generally acquire those with a better-perceived brand. Despite the acquirer becoming the subsidiary, the brand of the acquired company will be used as the company name, due to its brand image. 

Protecting against takeovers

The threat of acquisition and removal of a management team or board of directors may cause managers to implement anti takeover measures to protect a company from such an event. In the event of a takeover, there are things which can be done to prevent a takeover from moving forward.

Poison pill 

The poison pill is among the most common deterrent to takeovers. It is called so because while it is an effective deterrent to takeovers, the pill can be painful to swallow.

Two types of poison pills exist, flip in, and flip over. 

In a flip-in poison pill scenario, a company may offer shares at a discount to shareholders, buying shares at a significantly lower price than the current market value, or the ability to buy multiple shares for the price of one. 

In a flip-over poison pill scenario, a company may offer shareholders the right to buy shares of an acquired company for a discount, diluting share prices in the event that a takeover is successful.

The poison pill can be a very effective strategy to ward off potential or ongoing takeovers, however it can dilute shares and lower share prices, and it can ward off potential institutional investors who see a company with a poison pill clause as too risky. 

In 2012, activist investor Carl Icahn acquired 10% of netflix, which quickly adopted a poison pill clause, which targeted investors who held a 10% position or higher position in the company. This move was successful, and Icahn shrunk his position in Netflix to under 4%. 

People poison pill 

A people poison pill is a takeover protection method in which key management professionals will resign in the event of a takeover, leaving the acquirer with a lack of talent who understands the operations and management of the company.  This tactic also leaves behind no negotiating party that could make a deal with an acquirer. 

A people poison pill could also include key experienced employees to leave in the case of a takeover as well. Experienced employees are much more important to a company than managers, who are often the "people" in a people poison pill.

The first people poison pill was first introduced in 1989. The Borden Corporation, a food and beverage company, introduced a people poison pill clause in the case of a takeover. If the company was to be the target of a takeover, key management would quit. The provision was accepted by the company's board of directors. Management earned stock options in exchange for agreeing to the provision. 

Scorched earth 

Scorched earth tactics are a last resort to prevent an ongoing takeover. These tactics have the potential to destroy companies or leave them in a terrible state for an acquirer to pick up, making them less attractive candidates for a takeover, or damage an acquirer if a takeover is inevitable. The goal of a scorched earth policy is to damage an acquirer if a takeover is successful.

For example, in the case of an impending takeover, a target company may sell off valuable assets, such as machinery, car fleets, real estate, anything of value, especially if those assets were critical in an acquirer's decision to take over a company.

Pac man defense

Another less common tactic to defend against hostile takeovers is the pac man defense, in which a target company raises enough capital to acquire their acquirer. Companies can raise this capital by selling equipment, borrowing money, or through its cash reserves. In some cases, a company will buy back large amounts of shares from an acquirer, and purchase sales of the acquirer.

Often, a company will lay off experienced and highly specialized workers, making it harder to be replaced in the event of a takeover.

 A pac man defense can be very costly to both parties, and can damage them severely.

Some target companies resort to acquiring as much debt as possible when being taken over, leaving an acquirer saddled with this debt. 

A big issue when implementing a scorched earth policy is opposition from shareholders. Scorched earth tactics can damage a company's value, and decrease shareholder value, as well as decrease earnings and dividends. 

Some companies will keep a war chest of assets and liquidity in the case of a hostile takeover.

Poison Put 

A poison put occurs when a target company issues bonds that can be claimed before their maturity date, usually in the event of a takeover. In the case that an acquisition is successful, an acquirer will be obligated to pay a large amount of coupon payments to bondholders. 

The provision that a bondholder can claim bonds before its maturity date, to be executed in the event of a takeover is written in the bonds covenant.

Essentially, a target company is loading itself with excess debt in order to repel a takeover or damage an acquirer if an acquisition is inevitable.

A poison put may not be a suitable option for a company with a large amount of debt, as a poison put can add much more debt to a company, and draw the ire of creditors.

For example, if a target company issues 100 million dollars in poison put bonds, the acquiring company must be able to repay these bonds to bondholders, on top of the cost of acquiring the company. If an acquirer cannot afford to repay these bonds, then the takeover cannot be completed.

Sale of crown jewels

A form of scorched earth policy, the sale of crown jewels refers to a company selling its most valuable or most revenue generating assets to harm a potential acquirer, and to destroy the value of the company. 

This tactic is common when a takeover is inevitable, however it can have drastic consequences. 

Operating revenue will collapse, and share prices will plummet. It might be an unpopular move with shareholders, but a successful move can cripple a potential acquirer, leaving them with baggage and high costs to replace these assets. 

Shareholders may be vehemently opposed to a sale of crown jewels. In the shareholders eyes, it is preferable to sell their shares to a potential acquirer at a premium, than to have a company sell off its most valuable assets, and face a decline in the value of their equity.

One of the most well known examples of the Crown Jewels defense is the Sun Pharma/Taro case. Sun Pharma and Taro are Pharmaceutical companies, located in India and the US respectively.  Sun was close to a takeover of Taro Pharma, who then sold off its Irish research and development unit to another company. This successfully deferred Sun from acquiring Taro Pharma, and the takeover was canceled. 

Other strategies to protect against hostile takeovers

  • Macaroni Defense:

In a macaroni defense, a target company will issue bonds that must be redeemed at a higher than normal price by the acquirer. This makes the cost of acquisition even higher, making a takeover less attractive. 

For example, a target company may issue 500 million in bonds with the condition that they are bought back for a 100% premium in the event of a takeover. An acquiring company would then have to pay 1 billion to repay the bonds. 

  • Dead - Hand provision:

A dead hand provision is a form of poison pill. In a dead hand provision, a target company will issue shares to all shareholders, in order to dilute the shares and make a prospect takeover seem less attractive.

A provision would be made that would deny a potential acquirer from receiving these shares, shrinking their holdings in a target company

  • Just say no:

In a just say no scenario, managers and board members will outright refuse to negotiate or discuss the terms of a takeover with a potential acquirer. Often, a board will outright refuse to communicate at all with a potential acquirer, ignoring all letters, phone calls, etc. No dialogue happens between both parties, however an acquirer can buy up as many shares as possible on the open market.

  • Sale of crown jewels:

A form of scorched earth policy, the sale of crown jewels refers to a company selling its most valuable or most revenue generating assets to harm a potential acquirer, and to destroy the value of the company. This tactic is commonly done when a takeover is inevitable, however it can have drastic consequences. Operating revenue will collapse, and share prices will plummet. It might be an unpopular move with shareholders, but a successful move can cripple a potential acquirer, leaving them with baggage and high costs to replace these assets. 

Shareholders may be vehemently opposed to a sale of crown jewels. In the shareholders eyes, it is preferable to sell their shares to a potential acquirer at a premium, than to have a company sell off its most valuable assets, and face a decline in the value of their equity. 

  • Golden parachute:

The golden parachute refers to a policy in which a company's executives are paid a large payout in cash or stock if a takeover is successful. This event would make it extremely costly for an acquirer to take over a business, as the acquirer would be on the hook for executive bonuses as management is terminated. 

These payouts are often excessive, designed to ward off potential acquirers. 

Activist investors 

Often, acquirers are not companies, but groups of investors or a single investor themself. Some investors wish to take over companies to change operations, or managers. Individual or investor groups with these goals are considered activist investors. 

Activist investors can have their own goals, such as implanting themselves on the board or in another leadership position within the company or taking over the company to change its strategy. Some activist investors, known in the 80s and 90s as raiders, seek to takeover companies and then dismantle them later in order to turn a quick profit. 

Activist investors may often initially take a large position in a company, often at least 10%. Slowly, an activist will continue to acquire more shares, and at this point, an investor's intentions will be well known by the board. 

For example, activist investor Carl Icahn purchased 10% of Netflix, which immediately implemented poison pill provisions, with the goal of preventing Icahn from taking an even larger position. This plan succeeded, and Icahn lowered his position to under 4% within a couple of years. 


(source: Marketwatch)

Benefits of takeovers

Takeovers can be beneficial to both parties in numerous ways. 

Many takeovers are conducted on struggling companies, that can benefit from an influx of capital from a takeover. These underperforming companies can be made efficient and profitable by a competent acquirer. 

An acquirer can receive intangible assets such as patents and trademarks and other intellectual properties from target companies.

Shareholder value is often increased during a takeover, and acquirers will often pay shareholders a premium for the shares that they own. In many cases, this premium can be in the billions of dollars in value.

Drawbacks of takeovers 

Takeovers can have drastic consequences on all parties.

First, takeovers can be very costly. In many cases acquirers are paying a premium on the market value of shares to entice shareholders and management to sell out. In some aggressive takeover cases, an acquirer might end up overpaying for a company. A company that pays too high of a premium on shares may have to deal with a lower stock price and limited ability to raise funds.

The employees of a targeted company may not like their new owners, and find employment elsewhere. They may be at odds with new policies created by their new managers, and may find them incompetent and not knowing how to run their newly acquired company. 

One of the sole reasons of a takeover is the belief that a target companies current management is incompetent, and must be replaced by an acquirers management team. If the new management team cannot efficiently run the business, it will be in a worse place than it originally was before the takeover. 

A takeover might disrupt supply chains, creating an unfavorable environment for suppliers, who may increase costs for the newly merged companies. 

In some cases, customers may not approve of the takeover, and may suffer from a declining brand image. Customers might buy products from other competitors.

When a takeover is ongoing, many resources are allocated to completing the transaction. During this time, competitors might use this opportunity to increase its market share while its competitors are fighting over a takeover, putting them in a stronger position, especially if a takeover deal did not go smoothly. 

Excel Modeling Course

Everything You Need To Master Excel Modeling

To Help You Thrive in the Most Prestigious Jobs on Wall Street.

Learn More

Free Resources

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