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Takeover Bid

Takeover Bid
BusinessCorporate Finance and AccountingMergers and AcquisitionsM&A

What Is a Takeover Bid?

A takeover bid is a type of corporate action in which a company makes an offer to purchase another company. In a takeover bid, the company that spreads the word about the offer is as the acquirer, while the subject of the bid is alluded to as the target company. The procuring company generally offers cash, stock, or a combination of both trying to take command of its target.

Understanding Takeover Bids

Any activity that is expected to have a direct, material impact on its stakeholders (e.g., shareholders and creditors) — is called a corporate action. Corporate actions require the endorsement of the company's board of directors (B of D), and, now and again, endorsement from certain partners. Corporate actions can differ, going from bankruptcy and liquidation to mergers and acquisitions (M&A, for example, takeover bids.

Managers of potential acquirers frequently have various purposes behind making takeover bids and may refer to some level of synergy, tax benefits, or diversification. For example, the acquirer might pursue a target firm in light of the fact that the target's products and services line up with its own. In this case, taking it over could assist the acquirer with cutting out the competition or give it access to a brand new market.

The likely acquirer in a takeover for the most part makes a bid to purchase the target, regularly as cash, stock, or a combination of both. The offer is taken to the company's B of D, which either supports or rejects the deal. Whenever approved, the board holds a vote with shareholders for additional endorsement. Would it be advisable for them they be glad to continue, the deal must then be analyzed by the Department of Justice (DOJ) to guarantee it doesn't abuse antitrust laws.

Empirical studies are mixed, yet history shows, in post-merger analysis, a target company's shareholders frequently benefit most, probable from the premiums paid by acquirers. In opposition to numerous well known Hollywood films, most mergers start friendly. Albeit the possibility of the hostile takeovers by sharks makes for good diversion, corporate insiders realize hostile bids are a costly endeavor, and many fail, which can be exorbitant expertly.

Most takeover bids start friendly.

Types of Takeover Bids

There are generally four types of takeover bids: Friendly, hostile, reverse, or backflips.

Friendly

A friendly takeover bid happens when both the acquirer and the target companies cooperate to arrange the terms of the deal. The target's B of D will endorse the deal and suggest that shareholders vote for the bid.

Pharmacy chain CVS acquired Aetna in a friendly takeover for $69 billion in cash and stock. The deal was announced in December 2017, approved by shareholders of the two companies in March 2018, and afterward given the thumbs up by the DOJ in October 2018.

Hostile

Instead of going through the B of D of the target company, a hostile bid includes going directly to the target's shareholders with the bid. Hostile bidders issue a tender offer, offering shareholders the chance to sell their stock to the acquirer at a substantial premium inside a set time period.

Not at all like a friendly takeover, the target is reluctant to proceed with the merger and may resort to certain strategies to try not to be gobbled up. These strategies can incorporate poison pills or a golden parachute.

Reverse

In a reverse takeover bid, a private company bids to buy a public corporation. Since the public company as of now trades on an exchange, this takeover can assist the private company with becoming listed without going through the monotonous and convoluted course of filing the administrative work important to complete a initial public offering (IPO).

Backflip

Backflip takeover bids are genuinely rare in the corporate world. In this sort of bid, an acquirer hopes to turn into a subsidiary of the target. When the merger is completed, the acquirer holds control of the combined corporation, which ordinarily bears the name of the target. This type of takeover is typically utilized when the acquirer comes up short on brand recognition of the target.

Illustration of Takeover Bids

In July 2011, activist investor Carl Icahn offered to pay Clorox shareholders $76.50 a share to take the company private. At that point, Icahn was the company's biggest shareholder, having accumulated a 9% stake starting in December 2010. In any case, his unsolicited bid was denied by the board of directors.

Icahn in this manner raised his offer to $80 a share, esteeming the company at $10.7 billion. This offer, too, was dismissed by the board. His bids having failed, Icahn endeavored to assume control over the company's board of directors. Facing critical resistance from the company and shareholders, he cut short his efforts in September of that year.

Features

  • A takeover bid is a corporate action wherein a company makes an offer to purchase another company.
  • The obtaining company generally offers cash, stock, or a combination of both for the target.
  • Contingent upon the type of bid, takeover offers are regularly taken to the target's board of directors, and afterward to shareholders for endorsement.
  • Synergy, tax benefits, or diversification might be refered to as the explanations for takeover bid offers.
  • There are four types of takeover bids: Friendly, hostile, reverse, or backflips.