Takeover Bid
It is the price offered by an acquiring company to a target company to acquire, and the offer is made in cash, stock, or a combination.
A takeover bid refers to the price offered by an acquiring company to a target company to acquire. Offers can be made in cash, stock, or a combination. Large companies usually make bids to develop smaller companies in the market.
The simplest form of a takeover bid is a friendly offer, where both the company and the acquirer agree to the request, this way the acquirer suppresses the competition and increases the market share.
It is preserving the value of the business in the form of cash or equity and gaining a broader market. Such acquisitions may result in operational benefits and improved performance for the company, which will benefit the company and its shareholders in the long term.
Hence the acquirers frequently offer takeovers for a variety of reasons. Still, the most common sense is that the target company's goods and services complement the acquirer's own, and for that, the acquirer might pursue the target company.
Therefore public offering activities can be categorized as corporate actions that affect most stakeholders, such as shareholders, directors, and bondholders.
Potential synergies with additional tax benefits from the acquiring company's perspective and diversification can also be a reason for bidding. So it depends on the acquisition price.
Generally, when proposals are made, they are sent to the board of directors for approval and then to shareholders.
Types of Takeover Strategies
Companies can use many different takeover strategies to acquire another company. The most common types of takeover strategies are friendly acquisitions, hostile acquisitions, and tender offers.
- Friendly acquisitions occur when the two companies involved in the transaction agree to the terms of the deal and work together to complete the purchase.
- Hostile acquisitions occur when one company attempts to take over another without the approval of the target company's management.
- Tender offers happen when a company offers to buy shares of another company at a specific price.
Each type of takeover strategy has its advantages and disadvantages. For example, friendly acquisitions tend to be less expensive and disruptive than hostile ones but can take longer to complete.
Hostile acquisitions can be quicker and more decisive, but they often lead to bad blood between the companies involved. Tender offers are often used as the first step in a hostile takeover but can also be used as a standalone strategy.
The type of takeover strategy that a company chooses should depend on its goals, its financial situation, and the willingness of the target company's management to cooperate.
Friendly Bid
As its name implies, a friendly takeover is where the management of both companies mutually agrees to buy and sell the company.
For example, in a friendly takeover, Company A wants to acquire Company B. If Company B's board of directors agrees to the takeover's terms, it is said to be a friendly takeover.
However, even if B's board of directors rejects the proposal, A can make a hostile takeover. When talking about a seizure, the first image that comes to mind is of a Hostile takeover. However, this kind of situation can often be viewed positively.
A company may be presented with a merger proposal that is beneficial to the company and beneficial to its stakeholders. In such cases, the company's board of directors will gladly accept the offer and put it to a vote of the shareholders.
Many takeovers turn into hostile situations. This usually happens when the company's board of directors disagrees with the proposal or when shareholders vote against it.
For example, the company's board of directors may think that the offer is too low or that the acquisition would be negative for the company and its shareholders.
If the takeover offer is rejected, the acquiring company will force the acquisition by purchasing a sufficient number of shares in the other company to gain control of the company, with or without the consent of the board of directors.
An excellent example of a friendly takeover is when Facebook bought WhatsApp for $19 billion in 2014. Facebook acquired all of WhatsApp's outstanding shares and options for $4 billion in cash and 183 million shares of Facebook Class A common stock.
Hostile Takeover
A hostile takeover is the acquisition of one company by another that is accomplished by making a tender offer to buy the target company's shares or assets and then completing the purchase without the target company's consent.
The acquiring company usually employs a "creeping tender offer" strategy in which it purchases small amounts of the target company's stock on the open market until it owns enough to make a takeover bid.
In most cases, hostile takeovers are completed with the help of investment banks and law firms.
A hostile takeover can be a very effective way for one company to acquire another. It allows the acquiring company to circumvent the board of directors of the target company and directly approach the shareholders.
In many cases, shareholders are more receptive to a hostile takeover than a friendly merger or acquisition because they stand to make a lot of money from it.
However, hostile takeovers can also be very risky. They often lead to litigation and damage employee, customer, and supplier relationships.
In addition, they can be costly and time-consuming. For these reasons, companies typically only pursue hostile takeovers if they believe the benefits outweigh the risks.
Hostile bids are usually conducted in one of three ways stock purchases, proxy fights, or tender offers. These ways are:
A company or group of investors may purchase shares from the open market to take control of the company.
However, once a certain percentage of ownership is reached, the acquisition must be disclosed and may trigger a hostile takeover defense by the target company's management.
2. Tender offer
A premium over the current stock price offered to the target company's shareholders is known as a tender offer. Moreover, they are announced to the public.
Takeover bids are generally considered hostile takeover tactics but are not hostile when the purpose is to create shareholder value, which is often the case when takeovers are approved.
3. Proxy Fight
In a proxy fight, the acquirer tries to persuade existing shareholders to vote against existing management in an attempt to buy the target company.
In this case, the hostile acquirer's objective is to persuade existing shareholders to oppose existing management and the board to initiate a proxy contest.
Reverse Takeover (RTO)
A reverse takeover, also known as a backdoor listing or a reverse IPO, is a private company buying a public company, so the private company goes public without an IPO.
In this process, the private company acquires enough public company shares to have control over it. Shareholders of the private company then exchange the shares of the private company for the public company shares.
This allows private companies to go public, effectively avoiding the costly and time-consuming public offering process. This process is also known as a reverse merger.
One example of a Reverse takeover bid is when Warren Buffet took his company Berkshire Hathaway public in 1965. He bought Hathaway's textile company but later liquidated the company's clothing and merged it with his insurance company.
He took his holding company public through what is now known as one of history's most famous reverse takeovers.
Another famous example is Burger King Inc., when back in 2012, Justice Holdings, a publicly traded shell company co-founded by Bill Ackman, a renowned hedge fund manager, acquired Burger King.
This comes just 18 months after the fast food chain went private after being bought out by 3G Capital. A deal between Justice Holdings and 3G Capital has brought Burger King back to the public market.
Backflip Takeover
In a backflip takeover, the bidder becomes a subsidiary of the acquired company. The reason is to profit from the brand name of the acquired company.
For example, AT&T was acquired by SBC, but the AT&T name survived because it was a well-known and established brand name.
Such acquisitions occur when well-known companies lack the resources to run their businesses and lesser-known companies have sufficient capital and are looking for investment opportunities. However, many motivations behind acquisitions, mergers, and takeovers exist.
There can be several reasons why companies choose to backflip takeover. A target company with a broader customer base and a better reputation than the acquirer automatically leads the acquirer to consider a backflip acquisition.
The acquirer acquires the target company but acts as a subset of the (acquired) target company and retains the brand name. A backflip takeover is assumed even if the acquirer's reputation is lower than that of the acquired one. A low reputation does not necessarily mean that the brand is unpopular.
Creeping Takeover
A creeping takeover bid is a slow accumulation of shares in a target company to gain control of the company by obtaining significant voting rights. A creeping takeover bid is made by purchasing the stock from the open market rather than a formal takeover bid.
With a Creeping takeover, the acquirer can obtain a portion of the shares necessary to exercise control at current market prices rather than the inflated price they might have to pay in a formal takeover bid. An acquirer may also acquire a sufficient number of shares to have a seat on a company's board.
However, if the acquirer fails to gain a controlling stake in the company, it will leave with a large percentage of shares it will have to sell sometime in the future, possibly at a loss.
However, it is still possible to apply pressure on the target company to force the repurchase of the shares at some premium to avoid a loss or even generate a profit.
Summary
Mergers and acquisitions have become standard business strategies for companies looking to expand into new markets or geographies, gain a competitive advantage, or acquire new technologies and skills.
Mergers and acquisitions are prevalent in the professional services space amid a growing wave of baby boomer retirees and rapidly changing economies and markets.
Takeover usually occurs when a company makes a bid to acquire another company. It is often done by purchasing a controlling interest in the target company.
The bidding firm is called the buyer in the acquisition process. In contrast, a company a buyer, wants to acquire is called a target. Large companies typically make bids for smaller companies.
They may be mutually agreed between the two companies. In other circumstances, they may be rejected, in which case the larger organization will pursue the goal of acquiring the smaller company by hostile means.
Acquisitions that combine two companies into one offer significant benefits and improved performance for the organization and its shareholders.
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