Takeover Meaning, Definition, Types, Sources and Process

Takeover Meaning

A takeover is also known as an acquisition. The takeover means the purchase of one company by another without the formation of a new company. The process of one company obtaining a controlling stake in another company by purchasing its shares. The acquired company’s identity is often absorbed into that of the taking it over. Because of the predatory connotations of the word takeover, those in the business often prefer to talk of merger and acquisition, suggesting the joining of two willing partners (although this is not always the case and realists speak plainly of hostile takeovers). Takeovers can be affected through a formal takeover offer, an on-market offer or various less common means.

A takeover is defined as, “A business transaction whereby a person requires control over the sets of the company, either directly by becoming the owner of those assets or indirectly by obtaining control of the business management. Where the number of shareholders is less, the agreement of the takeover may take place between the acquirer and the shareholders at large, and where the shareholders are large in amber, the agreement may take place between the acquiring party and the controlling party of equity capital by purchases of shares in the stock market or from institutional owners”.

A takeover bid is a technique for carrying out an amalgamation or a takeover. In the case of a takeover, the bid is typically made against the desires of the target company, whereas in the case of an amalgamation, the takeover bid is executed with the consent of both companies’ management. A takeover bid is essentially an offer to acquire the shares of a company addressed to the general body of shareholders to obtain at least sufficient shares to give the offer or voting control of the firm.

In recent times, the Indian companies have undertaken some important acquisitions. Some of those are as follows:

1) Hindalco (Aditya Birla gr. – aluminium producer) acquired Canada-based Novelis. The deal involved a transaction of $5,982 million.

2) Tata Steel acquired Corus Group plc. The acquisition value amounted to $12,000 million.

3) Dr Reddy’s Labs acquired Betapharm through a deal worth $597 million.

Types of Takeover

The takeover may be categorized into the following types:

1) Friendly Takeover

Friendly takeovers often develop a different tone and are easier to manage since they generally have the endorsement of the boards, essential management, and possibly the entire workforce. Although the combined operations may still have lay-offs, the tone of friendly takeovers is generally for the common good of all constituents. A friendly takeover causes much less concern in comparison to a hostile takeover. A friendly takeover may be the result of negotiations by senior management to assure that all constituents of the acquired company have been fairly treated. This does not necessarily mean that management desires the acquisition, but rather that they are meeting their fiduciary responsibility to sell or maximize the company’s value. A merger that is considered highly beneficial and positive may still result in dissatisfaction among certain groups.

2) Hostile Takeover

A hostile takeover of a company can be an intensely emotional event. In this scenario, the company being acquired, including its Board of Directors, senior management, and employees, strongly opposes the acquisition. This opposition can stem from various factors, such as opportunistic valuations due to market conditions, a belief in the current management’s exceptional performance, or concerns about job security. It is a hostile takeover if the company’s management opposes the deal. A hostile takeover is occasionally organized by a corporate raider. Hostile takeovers frequently result in factory shutdowns, job losses, and downsizing for the use of the acquirer or the resulting company. Before releasing any information, it is important to carefully consider the content, tone and selected audiences. This ensures that the message is not only professional but also engaging and easily comprehensible.

3) Other Types of Takeover

Other types of takeover include the following:

i) Bail Out Takeovers: A bailout takeover is the takeover of a financially weak company by a profitable company. These forms of takeovers resort to bailout the sick companies, to allow the company for rehabilitation as per the schemes approved by the financial institutions. The lead financial institution will evaluate the bids received for acquisitions the financial position and the track record of the acquirer.

ii) Reverse Takeovers: A reverse takeover is a type of takeover where a private company acquires a public company. Typically, this is initiated by the larger private company, aiming to take itself public more efficiently and with less cost and time compared to a traditional IPO process.

iii) Backflip Takeovers: A Backflip takeover is any sort of takeover in which the acquiring company turns itself into a subsidiary of the purchased company. This type of takeover rarely occurs.

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Sources of Takeover Gains

The main sources of takeover gains include the following points:

  1. Operating Synergies
  2. Tax Motivations
  3. Financial Synergies
  4. Management Incentive Issues

Sources of Takeover

1) Operating Synergies

Operating synergies are achieved through enhanced productivity and cost reductions. Operating synergies are hard to measure. Sources of synergies:

i) In a vertical merger (merger between supplier and customer), coordination and bargaining problems are eliminated.

ii) In a horizontal merger (merger between competitors), competition is reduced and assets can be shared.

iii) Sharing a distribution network.

iv) Transferring resources from one division to another (if demand fluctuates).

2) Tax Motivations

The Tax Act of 1982 allowed stepping up the basis of the acquired firm’s assets, increasing tax depreciation shields. However, this progress was reversed by the implementation of the Tax Reform Act of 1986. Takeovers increase the interest tax shield: leverage increases because of better diversification or because both firms are underleveraged and this is by the merger. Before the Tax Reform Act of 1986, firms could also benefit by using passed losses as a tax shield. For example, before the implementation of the Tax Reform Act of 1986, the U.S. The tax Code encouraged companies to acquire other companies. Taxes currently play a much less important role in motivating the US. acquisitions. In some cases, however, mergers increase the combined capacity of merged firms to utilize tax-favoured debt.

3) Financial Synergies

Diversification reduces risk, which can result in operating synergies or financial synergies (a reduced cost of capital). Reducing risk may lead to higher leverage and thus lead to an increased tax shield. A merger may also avoid the personal taxes on selling and reinvesting (by internally generated funds). Conglomerates can provide funding for investment projects that independent (smaller) firms would otherwise be unable to fund through the external capital market. To the extent that positive NPV projects receive the funding they would not have otherwise received, conglomerates create value.

4) Management Incentive Issues and Takeovers

In it, the target’s management may not have the appropriate incentives to maximize shareholder value. Disciplinary takeovers are usually hostile, often leading to the breakup of large diversified corporations and resulting in job losses for top managers. In leveraged buyouts (LBOs), a raider (relatively thinly capitalized individual) acquires a bigger enterprise using debt financing. LBOS improve firm value by increasing management incentives and a decreased margin of error. The increased firm value may also be caused by employee layoffs or salary reductions that usually happen during LBOS. Firms acquiring other firms for nonvalue-maximizing reasons have low market-to-book values and their share prices often react negatively to takeover announcements.

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