Takeover Bid

Takeover bid refers to the price offered by the acquiring company to the target company to purchase it; the offer can be in cash, equity, or a combination of both; bids are generally placed by bigger companies to acquire the smaller ones in the market.

In this process, the acquiring company takes control of the target. The target company’s share price usually rises after the deal since the acquiring company pays a premium for the stocks. The aim is to get a better market share, acquire assets, and gain tax benefits or synergy. This also helps to reduce competition in the market.

• A takeover bid is an offer given by the probable acquirer to the target company to acquire the target company.
• This offer can be in cash acquisition, equity acquisition, or a combination of both. The acquirer offers this offer to the target company.
• In the process of a takeover bid, the acquirer identifies the target company, then devises a financial and strategic plan for the acquisition; the takeover bid is placed, accepted, and then undertaken from a legal perspective.
• The types of takeover bids are friendly, hostile, reverse, and backflip.

Takeover bid is the process in which one company acquires another by paying either cash or stocks for better growth and synergy.

The most basic form of the process is a friendly takeover bid, where both the companies mutually agree to the offer, and the acquiree sells the company to acquire. In this way, the acquirer kills the competition or increases its strength in the market, and the acquirer gets the company's worth in terms of cash or equity with a broader market to capture.

Such takeovers may bring operational advantages or performance improvement for the company, which in the long run, is beneficial for both the company and the shareholders. Therefore, it can be categorized under corporate action, where an activity of the bid will affect most stakeholders like shareholders, directors, bondholders, and so on.

From the acquiring company’s viewpoint, there may be synergy involved with additional tax benefits, and diversification may also be a reason for making the bid. So, it depends on the takeover bid rules. Generally, once the bid is placed, it is taken to the board of directors for approval and then to the shareholders.

• The a friendly takeover bid first step is the acquiring company spots the target company and bids to purchase that company. The reason to bid may vary from company to company. Some common reasons are tax benefits, synergy, diversification, an increase in market share, and so on.
• A bid is placed in cash, equity, or a blend of both. The offer is passed on to the board of directors of the target company to approve or disapprove the deal.
• If all goes well as per the takeover bid rules the deal is approved, and it goes for voting to the company's shareholders for further proceedings and approval.
• The last and final clearance of the deal comes from the legal perspective, where the department of justice checks if there are no antitrust laws to be breached.
• That's it, the deal is done, and the promised price and benefits are transferred to the shareholders of the target company.

There are four broad types of the bid which we shall discuss below:

#1 - Friendly

A friendly takeover is where the acquirer and the target company mutually agree to the price and takeover. Then, they sit at a table to negotiate the price, and the target company reviews the terms of the buyout post, which is passed onto the shareholders to approve or reject the deal.

#2 - Hostile

A hostile takeover occurs when the target company has no intention of merging or selling off the company. However, the acquirer company seeks to buy out the company. The acquiring company even bids to buy the company, which may be unacceptable by the target company and its shareholders. Here in hostile takeover bid, target companies reject the deal considering that the deal and price undermine the company's objectives. The two very common ways through which the acquiring company tries to take over the target company are:

• Tender Offer: The company offers to buy the shares at a premium price, which is higher than the market price, and tries to acquire a huge stake in the company.
• Proxy Vote: Try to convince the existing shareholders to vote out from the management and sell their portion of shares to the acquiring company.

#3 - Reverse

Unlike a hostile takeover bid , in the reverse process, , a private company makes a bid to buy the public listed company. The main reason for this type of takeover is that the private company saves itself from going through the entire process of IPO and gets a listed status from the acquired public company. Since the IPO process is too tedious and effortful, the acquiring company chooses to take over the listed company instead of having its IPO. In the end, it will result in the desired outcome. The private company gets listed status through the target company.

#4 - Backflip

As the name suggests, this is a Backflip bid where the acquiring company becomes the subsidiary of the target company. The main reason is that the target company might have a very strong brand name in the market, and the acquiring company might be well off by being a subsidiary of the target company.

Let us look at the takeover bid example to understand the process.

• The classic example of a takeover bid eventually resulted in a Backflip takeover between Southwestern Bell, popularly known as SBC, and AT&T (American telecom operator). In 2005, SBC bid to take over AT&T for $16 Billion. However, AT&T was a well-established brand compared to SBC, so eventually, SBC ended by merging and operating under the brand name of AT&T.

Thus, the above takeover bid example makes the concept clear.

Both takeover bid and plan of arrangement are methods through which one organization acquires another. However, there are some differences between them as follows.

This article has been a guide to the meaning of Takeover Bid. We explain it along with examples, types, differences with plan of arrangement and its various steps. You may learn more about financing from the following articles –

• Reverse Takeover
• Acquisition Premium (Takeover)
• Change of Control
• Asset Stripping