Takeover
A takeover represents a change in the controlling interest of a corporation. This can transpire in a friendly manner, where the management and shareholders of the target company agree to the acquisition or merger. Alternatively, it can occur through an unfriendly or hostile bid, where the acquiring company tries to take control without the consent of the target company’s management. Unfriendly bids might trigger defensive measures commonly referred to as shark repellents, which are strategies employed by the target company to make itself less attractive or more difficult to acquire.
Examples of Takeovers
- Friendly Takeover: When a company overtakes another company with mutual agreement. Example: Disney’s acquisition of Pixar in 2006.
- Unfriendly Takeover: When the target company’s management does not consent. Example: Hewlett-Packard’s hostile takeover of Compaq in 2002.
- Leveraged Buyout (LBO): Using borrowed funds to acquire a target company. Example: The leveraged buyout of HCA in 2006 by a consortium of private equity firms.
Frequently Asked Questions (FAQs)
Q: What differentiates a takeover from a merger?
A: A takeover generally refers to one company acquiring another, establishing control. A merger, on the other hand, is a more equal combination where two companies consolidate to form a new entity.
Q: What is a hostile takeover?
A: A hostile takeover occurs when the acquiring company attempts to take control of the target company against the wishes of its management, often directly approaching shareholders.
Q: What are shark repellent techniques?
A: Shark repellent techniques are defensive measures deployed by the target company to ward off hostile takeover attempts. Examples include poison pills, golden parachutes, and staggered board elections.
Q: What is a poison pill?
A: A poison pill is a strategy to make the target company less attractive to the potential acquirer, often by allowing existing shareholders to purchase additional shares at a discount, diluting the acquirer’s holdings.
Q: Can a takeover be considered illegal?
A: Takeovers are typically legal and governed by corporate laws and regulations. However, they can be subject to antitrust laws if they significantly reduce market competition.
- Acquisition: The process of one company purchasing most or all of another company’s shares to gain control.
- Merger: The combination of two or more companies into a single corporate entity, often with the aim of improving financial and operational efficiency.
- Hostile Bid: A type of takeover attempt where the acquiring company proposes to purchase the target company without support from the target’s management.
- Poison Pill: A defensive tactic used by a target company to prevent or discourage a hostile takeover by making its stock less attractive or more difficult to acquire.
- Golden Parachute: A large severance package offered to executives should the company be taken over and the executives be laid off as a result.
- Leveraged Buyout (LBO): The acquisition of a company using a significant amount of borrowed money.
Online References
- Investopedia: Takeover
- Wikipedia: Takeover
- Harvard Law School Forum on Corporate Governance
Suggested Books for Further Studies
- “Mergers and Acquisitions For Dummies” by Bill Snow
- “The Art of M&A: A Merger Acquisition Buyout Guide” by Stanley Foster Reed
- “Mergers & Acquisitions: An Insider’s Guide to the Purchase and Sale of Middle Market Business Interests” by Dennis J. Roberts
Fundamentals of Takeover: Business Strategy Basics Quiz
### What is a key characteristic that differentiates an acquisition from a merger?
- [x] Control typically shifts unilaterally in an acquisition, whereas a merger is a more equal consolidation.
- [ ] Both involve equal stake control by the acquiring company.
- [ ] Acquisitions always result in new company formations.
- [ ] Mergers involve hostile takeovers while acquisitions do not.
> **Explanation:** In an acquisition, control typically shifts unilaterally with one company taking over another, whereas a merger involves a more balanced blending of two entities.
### Which type of takeover is likely to be contested by the target company’s management?
- [ ] Friendly Takeover
- [x] Hostile Takeover
- [ ] Merger of Equals
- [ ] Cooperative Takeover
> **Explanation:** A hostile takeover is often contested by the target company’s management as it involves an acquisition attempt without their consent.
### What is a "shark repellent" in the context of corporate takeovers?
- [x] Defensive strategies to prevent hostile takeovers.
- [ ] A type of regulatory approval needed for mergers.
- [ ] A form of financial incentive for employees.
- [ ] Cooperation agreements between two merging companies.
> **Explanation:** Shark repellents are defensive measures implemented by a company to prevent or discourage unwelcome takeover attempts.
### What is a "poison pill" strategy?
- [ ] Offering to buy the acquirer's shares at a premium.
- [ ] Diluting the target company's shares, making them less attractive.
- [x] Allowing existing shareholders to buy new shares at a discount.
- [ ] Immediately merging with a third company.
> **Explanation:** A poison pill strategy permits existing shareholders to buy additional shares at a discount to dilute the potential acquirer's equity.
### What does a "golden parachute" entail?
- [ ] Giving shareholders extra dividends in the event of a takeover.
- [ ] Severance benefits for board members during hostile takeovers.
- [x] Substantial severance packages for executives if they lose their jobs post-takeover.
- [ ] Preemptive legal action against the hostile acquirer.
> **Explanation:** A golden parachute involves substantial severance compensation for executives if they're terminated after a takeover.
### What typically characterizes a friendly takeover?
- [ ] Forced acquisition followed by executive replacement.
- [ ] Hostile bid without management's consent.
- [x] Agreement and cooperation from the target company's management.
- [ ] Asset stripping and selling.
> **Explanation:** A friendly takeover is characterized by mutual agreement and cooperation from the target company's management, ensuring smoother transitions.
### Which of the following is a common method for financing aggressive takeovers?
- [ ] Equity crowdfunding
- [ ] Corporate bonds solely
- [ ] Reinvested profits
- [x] Leveraged buyout (LBO)
> **Explanation:** A leveraged buyout (LBO) is often used for financing aggressive takeovers, utilizing borrowed funds to acquire the target company.
### What does the term "target company" refer to in a takeover?
- [ ] The company initiating the takeover.
- [ ] Stakeholder group affected by the takeover.
- [x] The company being pursued for acquisition.
- [ ] Auditing firm verifying the takeover deal.
> **Explanation:** The target company is the entity being pursued or targeted for acquisition.
### What happens to the shares of a target company in a typical acquisition scenario?
- [x] Acquiring company buys majority or all shares.
- [ ] Shares are dissolved immediately.
- [ ] Shareholders retain their shares post-takeover.
- [ ] Target company issues new shares.
> **Explanation:** In a typical acquisition, the acquiring company buys the majority or all shares of the target company to establish control.
### Why are antitrust regulations crucial in the context of corporate takeovers?
- [ ] To manage internal governance compliance.
- [ ] To increase premium bids for target companies.
- [x] To prevent monopolistic practices and maintain fair competition.
- [ ] To ensure higher bonuses for executives.
> **Explanation:** Antitrust regulations prevent monopolistic practices and ensure fair competition in the marketplace by scrutinizing corporate takeovers that might impede market equity.
Thank you for exploring the intricate world of corporate takeovers and challenging yourself with these fundamental questions. Continue your studies for deeper understanding and strategic insights!
