What is Corporate Takeover?
A Corporate Takeover describes an acquisition of a company, in which the acquirer obtains a controlling stake in the target.
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How Does a Corporate Takeover Work?
A corporate takeover occurs when a strategic or financial buyer acquires a majority stake in a target company.
Corporate takeovers can be categorized as hostile or friendly, which is based on the receptiveness of the target company’s management team and board of directors to the initial acquisition offer, i.e. their openness to consider the offer and negotiate the terms.
- Friendly Takeover → A friendly takeover occurs if the target company’s management team and board of directors are open to the offer and agree to be acquired.
- Hostile Takeover → In a hostile takeover, both the management and the board reject the initial offer to acquire the target company. The buyer might back out in response, or continue to pursue the acquisition, which sets the premise of a hostile takeover.
The profile of the acquirer is often a strategic buyer or financial buyer in such M&A takeover transactions.
- Strategic Buyers in M&A → Strategic acquirers engage in corporate takeovers, specifically for the potential long-term revenue and cost synergies related to consolidating a market, offering a more comprehensive, improved mix of products and services, increased expansion to end markets (i.e. more reachability to customers), and the removal of competition.
- Financial Buyers in M&A → In contrast, financial buyers – namely, private equity firms (PE) – participate in corporate takeovers to achieve a specific investment return on behalf of their limited partners (LPs), i.e. the investors that provided the firm with the capital to engage in such activities.
What is the Corporate Takeover Process?
The process of a corporate takeover is complex, but from a high level, the following list summarizes the general timeline:
| Timeline | Description |
|---|---|
| 1. Tender Offer |
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| 2. Internal Meetings |
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| 3. Hiring of 3rd Party Advisory |
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| 4. Negotiation of Terms |
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| 5. Shareholder Vote Meeting |
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Hostile Takeover vs. Friendly Takeover: What is the Difference?
Corporate takeovers, as mentioned earlier, can be classified as either a friendly takeover or a hostile takeover:
- Friendly Takeover → The target company’s management and board of directors – in most friendly takeovers – might understand the merits of the acquisition and the synergies rationalizing the offer, i.e. the revenue benefits and cost savings from the business combination. The negotiation process is not necessarily easier, but the two parties are more open to arriving at amicable terms, resulting in a higher probability of closure (and fewer complexities, such as M&A defense tactics like the poison pill defense).
- Hostile Takeover → On the other hand, a hostile takeover tends to follow an unsuccessful attempt at a friendly bid and subsequent collapsed negotiations with the company’s executives. However, the bidder – despite objections from management and the board – can still pursue the acquisition by directly reaching the shareholders and convincing enough of them to vote in favor of the acquisition.
Generally speaking, most shareholders who actively participate and vote tend to trust management’s guidance, unless there have been recent events that have transpired, causing an erosion in trust in management’s judgment and decisions (i.e. stock price decline, less shareholder value creation).
In a proxy fight, the hostile acquirer attempts to convince a sufficient percentage of existing shareholders to vote against the existing management team to complete the proposed acquisition.
One critical factor here in terms of shareholder sentiment is the recent performance of the company in terms of its earnings reports and stock price, as underperformance tends to work in favor of the hostile bidder.
