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Corporate Takeover

Guide to Understanding Corporate Takeovers

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Corporate Takeover

Corporate Takeover: M&A Strategy (Step-by-Step)

A corporate takeover occurs when a majority stake in a target company is acquired by a strategic or financial buyer.

Corporate takeovers can be categorized as either hostile or friendly, which is predicated 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.

Strategic acquirers engage in corporate takeovers namely for the potential long-term revenue and cost synergies related to consolidating a market, offering a more comprehensive, improved mix of products and services, end market expansion (i.e. the increased reachability to customers), and the removal of competition.

In contrast, financial buyers (i.e. private equity firms) 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.

The process of a corporate takeover is rather complex, however from a high level, the following list summarizes the general timeline:

Timeline Description
Step 1. Tender Offer
  • A corporate takeover is most often initiated by the acquirer in the form of a tender offer.
  • The tender offer must be registered with the SEC if public entities are involved and will formally express the acquirer’s interest in purchasing the target company with the preliminary terms attached.
  • The structure of the proposal and the regulatory requirements are contingent on the circumstances, such as the acquirer profile and status of the target (i.e. public or private).
Step 2. Internal Meetings
  • Upon receipt of the tender offer, the management team and board of directors hold internal meetings to discuss the proposal behind closed doors.
Step 3. Hiring of 3rd Party Advisory
  • If the offer is under serious consideration, an investment bank and other related 3rd parties are soon hired for their advisory services related to negotiating the acquisition terms and ensuring the value received by shareholders is maximized.
  • In short, agreeing to the acquisition must be in the “best interests” of the target’s shareholders.
Step 4. Negotiation of Terms
  • The purchase consideration of the takeover bid can be in the form of cash, stock, or a blend.
  • The terms in an all-cash deal states the pre-defined offering price per share at which the existing shareholders would be bought out, or the number of shares received if the purchase consideration is entirely or partially in the form of stock.
Step 5. Shareholder Vote
  • Once the acquisition terms have been formalized, the final step is to announce the proposal to the shareholders as part of the voting process, with the outcome ultimately deciding whether the takeover is completed.
  • If enough shareholders vote in favor of the acquisition, the takeover is completed, albeit unexpected events can often emerge afterward to block the deal.
  • The process conducted for private companies is similar, but at a smaller scale (i.e. participants are existing investors such as venture capital and growth equity firms), and the information is kept far more confidential.

Types of Corporate Takeovers: Hostile Takeover vs. Friendly Takeover

Corporate takeovers can be categorized as either a friendly takeover or a hostile takeover.

  • Friendly Takeover: A friendly takeover occurs if the target company’s management team and board of directors are receptive to the offer and agree to be acquired.
  • Hostile Takeover: In a hostile takeover, the initial offer to acquire the target company is rejected by management and the board. The buyer might back out in response, or continue to pursue the acquisition, which sets the premise of a hostile 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, however, 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).

Generally speaking, most shareholders that actively participate and vote tend to trust the guidance of management, although there are exceptions.

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 going directly to the shareholders and convincing enough of them to vote in favor of the acquisition.

In a proxy fight, the hostile acquirer attempts to convince a sufficient number 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 with regard to its earnings reports and stock price, as underperformance tends to work in the favor of the hostile bidder.

Reverse Takeover and Backflip Takeover Bids

Two other less traditional types of corporate takeovers include reverse takeovers and back-flip takeovers:

  • Reverse Takeover: In a reverse takeover, a privately-held company assumes a controlling stake in a publicly traded company. The objective of the acquirer is to “go public” without undergoing an initial public offering (IPO), which can be time-consuming and costly. Thus, the private company targets a public company, which can either be a shell company or an operating company. For example, the return of Dell to the public markets would be an example of the latter.
  • Back-Flip Takeover: In a back-flip takeover, the transaction rationale is similar to that of a reverse takeover (i.e. to become publicly listed) but the distinction is that the acquirer becomes a subsidiary of the target post-closing.

Risks of Corporate Takeovers: Anti-Trust, Activist and Cross-Border M&A

  • Antitrust Violations: While not applicable to all M&A transactions, regulatory agencies like the U.S. Department of Justice (DOJ) could potentially step in and further complicate matters. The potential for antitrust violations – i.e. engaging in business practices that discourage fair competition in the free markets – is a major concern to U.S. regulatory bodies, as seen in the case of Microsoft’s ongoing attempt to acquire Activision Blizzard.
  • Activist Investors: Recent underperformance and a declining share price could contribute to the erosion of trust in management’s judgment among shareholders. In such scenarios, an external risk that could disrupt the acquisition is an activist investor that raises valid criticism of a given M&A transaction and could sway enough votes to oppose the deal.
  • Cross-Border M&A: Furthermore, cross-border M&A is also closely monitored by U.S. regulatory bodies like the Committee on Foreign Investment in the United States (CFIUS), especially for M&A activity conducted by China in recent years.

Corporate Takeover Example: Adobe Acquisition of Figma (2022)

In September 2022, the news was announced that Adobe (Nasdaq: ADBE) would acquire Figma at a $20 billion valuation.

According to Adobe’s press release, the acquisition was completed to expand the product portfolio and improve Adobe’s Creative Cloud suite by integrating Figma’s real-time collaboration and rapid prototyping capabilities.

Figma, led by CEO Dylan Feld, had increasingly built its name in the design space, in which its collaborative design tools had made its offerings a rival to Adobe.

The target of the corporate takeover, Figma, is not publicly-traded, whereas Adobe is a public company.

The press release from Figma, written by Feld, stated that “Adobe is deeply committed to keeping Figma operating autonomously, and I will continue to serve as CEO” – which implies the friendly nature of transaction, where the terms of the deal were amicable to both parties.

The market landscape in design had shifted from individual contributions to collaboration-based work, which was the niche in which Figma’s platform appeared to be taking notable share away from Adobe.

Therefore, Adobe’s acquisition of Figma puts them right at the forefront of innovative creative design and workplace collaboration-oriented tools, while removing a fast-growing competitor from the market that had presented a major threat.

Corporate Takeover Example - Figma Adobe

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