Takeover Bid

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 makes the offer is known as the acquirer, while the subject of the bid is referred to as the target company. The acquiring company generally offers cash, stock, or a combination of both in an attempt to assume control of its target.

Understanding Takeover Bids

Any activity that brings about change to a corporation and has a direct impact on its stakeholders — shareholders, directors, customers, suppliers, bondholders, employees, competitive dynamics, community, and ecosystem — is called a corporate action. Corporate actions require the approval of the company's board of directors (B of D), and, in some cases, approval from certain stakeholders. Corporate actions can vary, ranging from bankruptcy and liquidation to mergers and acquisitions (M&A) such as takeover bids.

Managers of potential acquirers often have different reasons for making takeover bids and may cite some level of synergy, tax benefits, or diversification. For instance, the acquirer may go after a target firm because the target's products and services align with its own. In this case, taking it over could help the acquirer to cut out the competition or give it access to a brand new market.

The potential acquirer in a takeover usually makes a bid to purchase the target, normally in the form of cash, stock, or a mixture of both. The offer is taken to the company's B of D, which either approves or rejects the deal. If approved, the board holds a vote with shareholders for further approval. Should they be happy to proceed, the deal must then be examined by the Department of Justice (DOJ) to ensure it doesn't violate any antitrust laws.

Empirical studies are mixed, but history shows, in post-merger analysis, a target company's shareholders often benefit most, likely from the premiums paid by acquirers. Contrary to many popular Hollywood movies, most mergers begin friendly. Although the idea of the hostile takeovers by sharks makes for good entertainment, corporate insiders know hostile bids are an expensive undertaking, and many fail, which can be costly professionally.

Most takeover bids begin friendly.

Types of Takeover Bids

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

Friendly

A friendly takeover bid takes place when both the acquirer and the target companies work together to negotiate the terms of the deal. The target's B of D will approve the deal and recommend that shareholders vote in favor of the bid.

Drug store 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 both companies in March 2018, and then given the go-ahead by the DOJ in October 2018.

Hostile

Rather than going through the B of D of the target company, a hostile bid involves a different approach. The acquirer may go directly to the target's shareholders with the bid or it may try to replace the target's management team. Unlike a friendly takeover, the target is unwilling to go through with the merger and may resort to certain tactics to avoid being swallowed up. These strategies can include poison pills or a golden parachute.

The acquirer may try to execute the hostile bid by issuing a tender offer, using a proxy fight, or buying enough stock in the open market to gain control of the target company.

Reverse

In a reverse takeover bid, a private company aims to buy a public corporation. Since the public company already trades on an exchange, this takeover can help the private company become listed without having to go through the tedious and complicated process of filing the paperwork necessary to complete an initial public offering (IPO).

Backflip

Backflip takeover bids are fairly rare in the corporate world. In this kind of bid, an acquirer looks to become a subsidiary of the target. Once the merger is completed, the acquirer retains control of the combined corporation, which usually bears the name of the target. This type of takeover is normally used to help the acquirer, which may be struggling in the market — especially in cases of brand recognition.

Examples of Takeover Bids

A two-tier bid, also known as a two-tiered tender offer, occurs when the acquiring company is willing to pay a premium above and beyond the target's current market price in order to convince its shareholders to sell their shares. In the initial tier, the acquirer gets control over the target, but then makes another, lower offer for more shares through the second tier that is completed at a future date. This process reduces the overall cost of the takeover for the acquiring company.

Another example of a takeover bid is the any-and-all bid. In this kind of takeover, the acquiring company offers to buy any of the target firm's outstanding shares at a specific price by a certain date. This kind of bid is normally done through a hostile takeover. By making an any-and-all bid, the acquirer can bypass working with the target's B of D, and purchase shares from any and all shareholders who want to sell their stock.