What is a takeover in business?
A business takeover can seem complicated to understand. How does it work, and why do companies opt to take part in it? Below, we delve into takeover transactions and why they’re essential for company growth.
What is a takeover in business?
A business takeover is when a company’s bid to acquire or assume control of another company is approved. Takeovers are usually done by acquiring the entirety of another company or a majority share.
In the mergers and acquisitions process, the company buying is often called the acquirer, whilst the company being bought is commonly known as the target.
Typically a takeover is done by a more prominent firm looking to expand its business or acquire potential competitors. However, we’ll take a closer look at why companies opt to take part in takeovers later in the article.
What are the types of business takeovers?
Business takeovers aren’t as simple as seeing a desirable target and then buying. Various takeover types influence the reason and outcome of the transaction. Here are some of the most common types:
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Hostile takeover
In this type of deal, the acquirer attempts to take over against the wishes and opinion of the target’s management. This situation arises when the acquirer does not consult management and instead opts to go directly to the target’s shareholders. To approve such a transaction, acquirers might persuade shareholders to replace the target’s management with a new cooperative team.
This method can lead to a proxy fight within the target company or lead management and shareholders to look for defence mechanisms to ward off the hostile takeover. An effective defensive tactic is the ‘poison pill’, which aims to make the target company look less attractive to the acquirer.
2. Friendly takeover
The complete opposite of a hostile takeover is a friendly one. In this type of transaction, the target company is happy to be acquired by another firm. Generally, the only obstacle in these transactions is whether the shareholders approve the price offered for the target company.
Unlike a hostile takeover, management will not contest the acquirer and will usually be cooperative in the process. As a result, if management agrees with a takeover bid, shareholders tend to follow suit.
Note that the acquirer will often pay a premium for the target company in a friendly takeover, considering its growth and earning potential. The higher price is also essential to ensure that the target’s management and shareholders see the bid favourably.
3. Backflip takeover
This is the first of the less common takeover strategies on this list. A backflip transaction is when the acquirer becomes a subsidiary of the target company after completing the acquisition.
This method is mainly used by companies that want to expand their operations whilst rebranding in the process. A company might want to rebrand if it has suffered a setback that has affected its brand image.
Through a backflip takeover, the acquirer can choose a target with a solid image to merge with, thus remaining in control and improving its brand. On the other hand, the target company benefits from the cash injection and scale of the acquirer.
4. Reverse takeover
Another different takeover method to the conventional acquisition strategies is the reverse takeover. This option is used by private companies that plan to go public without launching an IPO (initial public offering).
When the private company acquires a majority share in a publicly-traded company, the takeover element comes into play. In the process, the name of the acquired public firm usually changes to match the acquirer’s name. This method can be a cheaper alternative to launching an IPO.
Reasons why companies opt for a takeover in business
There are various reasons why a company might opt to take over another. The first, and most obvious reason, is when an acquirer identifies a good investment opportunity, where a target company is offered at an attractive price.
If researched correctly, the takeover will help the acquirer expand, increase its market share value and improve performance through synergies with the target company.
Another reason for a business takeover is when a company identifies a target with a good product or service that requires funding. In these cases, the acquirer will usually bid for a complete takeover of the target company instead of a majority share.
Companies might also look to takeover local competitors or firms whose services could enhance the acquirer’s operations, in addition to eliminating loss of business to a competing firm.
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