Takeover: Definition, Funding Methods, and Notable Examples

A comprehensive exploration of takeovers, including their definition, various funding methods, and notable examples throughout history.

A takeover occurs when an acquiring company makes a successful bid to assume control of a target company. This intricate process is a fundamental aspect of mergers and acquisitions (M&A) in the corporate landscape and can dramatically alter the competitive dynamics within industries.

Definition and Types of Takeovers

Friendly vs. Hostile Takeovers

• Friendly Takeover: This occurs when the target company’s management and board of directors agree to the takeover by the acquiring company. Both parties typically negotiate terms beneficial to shareholders and employees.
• Hostile Takeover: Unlike friendly takeovers, a hostile takeover happens when the acquiring company proceeds with the acquisition despite opposition from the target company’s management. This can involve direct appeals to shareholders or a proxy battle to replace the current management with one more favorable to the takeover.

Tender Offers and Purchase of Assets

• Tender Offer: The acquiring company offers to purchase shares from the target company’s shareholders at a premium. If a sufficient number of shareholders agree, control of the company can shift to the acquirer.
• Asset Purchase: Rather than buying shares, the acquiring company can purchase substantial assets of the target company. This method is less common and may depend on specific regulatory and strategic considerations.

Funding Methods for Takeovers

Cash Offers

In a cash offer, the acquiring company uses cash reserves or borrows funds to buy the target company’s shares. This method is straightforward and often preferred by shareholders looking for immediate liquidity.

Stock Swap

The acquiring company offers its own shares in exchange for shares in the target company. This method can be advantageous if the acquirer’s stock is highly valued, reducing the need for substantial cash outlays.

Leveraged Buyouts (LBOs)

In an LBO, the acquiring company uses a significant amount of borrowed money, leveraging its assets, the target company’s assets, or both, to finance the acquisition. This type of takeover can carry higher risk due to the increased debt burden on the combined entity.

Notable Examples of Takeovers

Vodafone and Mannesmann (2000)

In one of the most significant takeovers, Vodafone, a British telecommunications giant, acquired the German company Mannesmann for approximately $180 billion, marking the largest hostile takeover at the time.

Kraft and Cadbury (2010)

Kraft Foods’ hostile takeover of Cadbury highlighted cultural clashes and strategic differences typical in cross-border acquisitions. The $19.7 billion deal eventually led to the creation of Mondelēz International.

Historical Context and Evolution

Takeovers have existed since the inception of joint-stock companies. However, their prominence grew during the industrialization period in the 19th century and boomed during the mergers and acquisitions wave of the 1980s. Each era brought unique regulatory changes and market dynamics shaping modern M&A activities.

Applicability and Strategic Importance

Takeovers are critical for companies looking to expand their market presence, diversify product lines, or achieve economies of scale. They can also be defensive strategies to prevent competitors from acquiring valuable market share.

Related Terms

• Merger: The combination of two companies to form a new entity.
• Acquisition: The purchase of one company by another without forming a new entity.
• Proxy Fight: An attempt by shareholders to change the company’s management by voting in new directors.

FAQs

What is the difference between a takeover and a merger?

A merger involves two companies joining to create a new entity, while a takeover implies one company acquires control of another, which may or may not result in a new entity.

Can a takeover be friendly?

Yes, takeovers can be friendly if the target company’s management agrees to the acquisition terms.

What is a hostile takeover?

A hostile takeover occurs when an acquiring company attempts to take control of a target company despite resistance from the target’s management.

References

1. Weston, J. Fred, Mitchell, Mark L., and Mulherin, J. Harold. Takeovers, Restructuring, and Corporate Governance. Prentice Hall, 2003.
2. Gaughan, Patrick A. Mergers, Acquisitions, and Corporate Restructurings. John Wiley & Sons, 2017.

Summary

A takeover is a significant corporate event where one company gains control over another, potentially altering the competitive landscape. Understanding the different types of takeovers, funding methods, historical examples, and strategic importance is crucial for stakeholders in the business and financial sectors.