What is a ‘Takeover’
A takeover occurs when an acquiring company makes a bid in an effort to assume control of a target company, often by purchasing a majority stake. If the takeover goes through, the acquiring company becomes responsible for all of the target company’s operations, holdings and debt. When the target is a publicly traded company, the acquiring company makes an offer for all of the target’s outstanding shares.
Explaining ‘Takeover’
A welcome takeover, such as an acquisition or merger, generally goes smoothly because both companies consider it a positive situation. In contrast, an unwelcome or hostile takeover can be quite aggressive as one party is not participating voluntarily.
Hostile Takeover
The acquiring firm can use unfavorable tactics, such as a dawn raid where it buys a substantial stake in the target company as soon as the markets open, causing the target to lose control of the company before it realizes what is happening. The target firm’s management and board of directors may strongly resist takeover attempts through tactics such as a poison pill, which lets the target’s shareholders purchase more shares at a discount to dilute the acquirer’s holdings and make a takeover more expensive.
Reasons for a Takeover
A takeover is virtually the same as an acquisition, except the term “takeover” has a negative connotation, indicating the target does not wish to be purchased. A company may act as a bidder by seeking to increase its market share or achieve economies of scale that help it reduce its costs and thereby increase its profits. Companies that make attractive takeover targets include those that have a unique niche in a particular product or service; small companies with viable products or services but insufficient financing; a similar company in close geographic proximity where combining forces could improve efficiency; and otherwise viable companies that are paying too much for debt that could be refinanced at a lower cost if a larger company with better credit took over.
ConAgra’s Hostile Takeover Attempt of Ralcorp
ConAgra initially attempted a friendly sale to acquire Ralcorp in 2011. When initial advances were rebuffed, ConAgra intended to work a hostile takeover. Ralcorp responded by using the poison pill strategy. ConAgra responded by offering $94 per share, which was significantly higher than the $65 per share price Ralcorp was trading at when the takeover attempt began. Ralcorp denied the attempt, though both companies returned to the bargaining table the following year.
Further Reading
- The performance of UK firms acquiring large cross-border and domestic takeover targets – www.tandfonline.com [PDF]
- The price of corporate acquisition: determinants of cash takeover premia – www.tandfonline.com [PDF]
- State takeover statutes and shareholder wealth. – elibrary.ru [PDF]
- Financing bidders in takeover contests – www.sciencedirect.com [PDF]
- A hostile takeover of nature? Placing value in conservation finance – onlinelibrary.wiley.com [PDF]
- Characteristics of Takeover Targets in China Equity Market [J] – en.cnki.com.cn [PDF]
- ESOPs, takeover protection, and corporate decision-making – link.springer.com [PDF]
- Do managers make takeover financing decisions that circumvent more effective outside blockholders? – www.sciencedirect.com [PDF]
- Does the 'Market for Corporate Control'hypothesis explain takeover targets? – www.tandfonline.com [PDF]
