Definition of takeover


What is a buyback?

A takeover occurs when one company succeeds in taking control or acquiring another. Takeovers can be done by purchasing a controlling stake in the target company. Takeovers are also generally made through the merger and acquisition process. In a takeover bid, the company making the offer is the acquirer and the company it wants to take control of is called the target.

Buyouts are usually initiated by a large company looking to buy out a smaller one. They can be voluntary, that is to say they result from a mutual decision between the two companies. In other cases, they may be unwelcome, in which case the acquirer attacks the target without his knowledge or sometimes without his full consent.

In corporate finance, there are different ways to structure a recovery. An acquirer can choose to take control of the outstanding shares of the company, buy the entire company, merge an acquired company to create new synergies, or acquire the company as a subsidiary.

Key points to remember

  • A takeover occurs when an acquiring company successfully concludes an offer to take control or acquire a target company.
  • Buyouts are usually initiated by a large company looking to buy out a smaller one.
  • Takeovers can be welcome and friendly, or they can be intrusive and hostile.
  • Companies may initiate buyouts because they find value in a target business, they want to initiate change, or they may want to eliminate competition.

Understanding buybacks

Buyouts are quite common in the business world. However, they can be structured in multiple ways. Whether both parties agree or not, this will often influence the structuring of a takeover.

Keep in mind that if a company owns more than 50% of the shares of a company, it is considered a controlling interest. Majority ownership requires a company to account for the company held as a subsidiary in its financial reports, which requires consolidated financial statements.A 20 to 50% stake is accounted for more simply by the equity method.In the event of a merger or complete acquisition, the shares will often be grouped together under one symbol.

Types of redemptions

Redemptions can take different forms. A welcome or friendly takeover will generally be structured as a merger or acquisition. These generally go smoothly as the boards of directors of both companies generally consider this to be a positive situation. The vote has yet to take place in a friendly takeover. However, when the board of directors and key shareholders are in favor of the takeover bid, the takeover vote can more easily be obtained.

Usually, in these cases of mergers or acquisitions, the shares will be grouped under one symbol. This can be done by exchanging shares of the shareholders of the target for shares of the combined entity.

An unwanted or hostile takeover can be quite aggressive because one party is not a willing participant. The acquiring firm may use unfavorable tactics such as a dawn raid, where it purchases a substantial stake in the target company as soon as the markets open, causing the target to lose control before it realizes this. that is happening.

The management and board of directors of the target company can strongly resist takeover attempts by implementing tactics such as a poison pill, which allows the target’s shareholders to buy more shares from a company. reduced price to dilute the holdings and voting rights of the potential purchaser.

A reverse takeover occurs when a private company takes over a public company. The acquiring company must have sufficient capital to finance the takeover. Reverse takeovers allow a private company to go public without having to assume the risk or additional costs of an initial public offering (IPO).

A creeping takeover occurs when one company slowly increases its stake in another. Once the shareholding reaches 50% or more, the acquiring company is required to report on the activity of the target through consolidated financial reports.The 50% level can therefore be an important threshold, especially since some companies may not want to take on the responsibilities of controlling ownership. After crossing the 50% threshold, the target company must be considered as a subsidiary.

Creeping takeovers can also involve activists buying more and more shares of a company with the intention of creating value through changes in leadership. An activist takeover would likely occur gradually over time.


The ownership threshold for the controlling property versus the non-controlling property.

Reasons for a buyout

There are many reasons why companies can initiate a takeover. An acquiring company can pursue an opportunistic takeover, when it considers that the target is well valued. By buying the target, the buyer can sense that there is long-term value. With these buyouts, the acquiring company typically increases its market share, realizes economies of scale, reduces costs and increases profits through synergies.

Some companies may opt for a strategic takeover. This allows the acquirer to enter a new market without taking additional time, money or risk. The acquirer may also be able to eliminate competition through a strategic takeover.

There may also be takeovers of activists. With these takeovers, a shareholder seeks to hold a majority stake in order to initiate a change or acquire majority voting rights.

Companies that are attractive buyout targets include:

  • Those who have a unique niche in a particular product or service
  • Small businesses with viable products or services but insufficient funding
  • Similar businesses in geographic proximity where the combination of strengths could improve efficiency
  • Otherwise viable businesses that overpay for debt that could be refinanced at a lower cost if a larger business with better credit took over
  • Companies with good value potential but management challenges

Buy-back financing

Funding buybacks can take different forms. When the target is a publicly traded company, the acquiring company can buy shares of the company in the secondary market. In a friendly merger or acquisition, the acquirer makes an offer for all of the target’s outstanding shares. A friendly merger or acquisition will generally be funded by cash, debt or a new issue of shares of the combined entity.

When a business uses debt, it’s called a leveraged buyout. The debt capital of the acquirer can come from new lines of financing or from the issuance of new corporate bonds.

Example of recovery

ConAgra initially attempted a friendly acquisition of Ralcorp in 2011. When the initial advances were pushed back, ConAgra intended to proceed with a hostile takeover. Ralcorp responded using the poison pill strategy. ConAgra responded by offering $ 94 per share, which was significantly higher than the $ 65 per share that Ralcorp was trading at when the buyout attempt began. Ralcorp denied the attempt, although the two companies returned to the negotiating table the following year.

The deal was ultimately made in a friendly takeover with a price per share of $ 90.By that time, Ralcorp had completed the split of its Post grain division, resulting in roughly the same offer price by ConAgra for a slightly smaller total business.

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