Acquisition And Takeover

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Acquisition And Takeover


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About Acquisition And Takeover

Takeovers and acquisitions are common occurrences in the business world. In some cases, the terms takeover and acquisition are used interchangeably, but each has a slightly different connotation. A takeover is a special form of acquisition that occurs when a company takes control of another company without the acquired firm’s agreement. Takeovers that occur without permission are commonly called hostile takeovers. Acquisitions, also referred to as friendly takeovers, occur when the acquiring company has the permission of the target company’s board of directors to purchase and take over the company.

Acquisition

An acquisition is a situation whereby one company purchases most or all of another company's shares in order to take control. An acquisition occurs when a buying company obtains more than 50% ownership in a target company. As part of the exchange, the acquiring company often purchases the target company's stock and other assets, which allows the acquiring company to make decisions regarding the newly acquired assets without the approval of the target company’s shareholders.

In a simple acquisition, the acquiring company obtains the majority stake in the acquired firm, which does not change its name or legal structure. An example of this transaction is Manulife Financial Corporation's 2004 acquisition of John Hancock Financial Services, where both companies preserved their names and organizational structures.

Takeover

As per the Regulation 2(1) (b) of the Takeover Code, SEBI specifies the term Takeover as an "acquisition" as "directly or indirectly, acquiring or agreeing to acquire shares or voting rights in, or control over, a target company"

Benefits

TAKEOVER

  • External Growth whereby firms can expand horizontally, vertically and in conglomerate direction.
  • Diversification into alike markets or increase sales
  • Vertical Integration by linking a series of sequentially related input assembly operations
  • Reducing costs and redundancies, enhance economy of scale

Reasons

Acquisition

  • Companies perform acquisitions for various reasons. They may seek to achieve economies of scale, greater market share, increased synergy, cost reductions, or new niche offerings. If they wish to expand their operations to another country, buying an existing company may be the only viable way to enter a foreign market, or at least the easiest way: The purchased business will already have its own personnel (both labor and management), a brand name, and other intangible assets, which helps to ensure that the acquiring company will start off with a solid customer base.
  • Acquisitions often become a part of a company's growth strategy when it is more beneficial to acquire an existing firm's operations than it is to expand its own. Sometimes expanding compromises efficiency. Whether because the company is becoming too bureaucratic or it runs into physical or logistical resource constraints, eventually its marginal productivity peaks. To find higher growth and new profits, the large firm may look for promising young companies to acquire and incorporate into its revenue stream.
  • When an industry attracts too many competitor firms or when the supply from existing firms ramps up too much, companies may look to acquisitions to reduce excess capacity, eliminate the competition, or focus on the most productive providers.
  • If a new technology emerges that could increase productivity, a company may decide that it is more cost-efficient to purchase a company that has successfully implemented the technology rather than spending on internal research and development, which can often be too costly and time-consuming.

Mode of Takeovers

As per business context

Horizontal Takeover

Happens between companies from the same industry . The main purpose is increasing the market share or achieving economies of scale. Example Lipton India and Brooke Bond, Bank of Madura with ICICI Bank.

Vertical Takeover

Happens between companies operating at different stages of production within the same industry. Example is Tata Motors acquiring 80% stakes in Trilix Srl

Conglomerate takeover

Happens between companies operating in totally different industries. The main purpose of this kind of takeover is diversification. Example Reliance Industries (RIL) taking over Reliance Petroleum (RPL)

As per law

Friendly takeover

Negotiation happens between the promoters of a company and the investors in a friendly manner.

Bail-out takeover

Takeover of a financially sick company by a finically well-off company to bail them out from losses as per Sick Industrial Companies (Special Provisions) Act, 1985

Hostile takeover

where the investors actively pursue the takeover without the knowledge of other company attempted through a public tender offer. as per SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997.

Corporate Raiders

Making an offer to shareholders after the board of directors have refused or by completely bypassing them.

Frequently Asked Questions

What is the difference between a takeover and an acquisition?

In some cases, the terms takeover and acquisition are used interchangeably, but each has a slightly different connotation. Acquisitions, also referred to as friendly takeovers, occur when the acquiring company has the permission of the target company's board of directors to purchase and take over the company.

How does a company takeover work?

A takeover occurs when an acquiring company makes a bid in an effort to assume control of a target company, often by purchasing a majority stake in the target firm. If the takeover goes through, the acquiring company becomes responsible for all of the target company's operations, holdings, and debt.

What is acquisition?

An acquisition is commonly mistaken with a merger – which occurs when the purchaser and the target both cease to exist and instead form a new, combined company. Acquisitions can be either hostile or friendly.

What is a takeover offer?

A takeover bid is a type of corporate action in which an acquiring company makes an offer to the target company's shareholders to buy the target company's shares to gain control of the business. Takeover bids can either be friendly or hostile

What is a friendly takeover?

A friendly takeover is an acquisition which is approved by the management of the target company. Before a bidder makes an offer for another company, it usually first informs the company's board of directors.

How do you Hostile a company takeover?

A bidder may initiate a hostile takeover through a tender offer, which means that the bidder proposes to purchase the target company's stock at a fixed price above the current market price. Another method of hostile takeover is acquiring a majority interest in the stock of the company on the open market.

What does it mean when one company acquires another?

Each has certain implications for the companies involved and for investors: Purchase Mergers - As the name suggests, this kind of merger occurs when one company purchases another. Acquiring companies often prefer this type of merger because it can provide them with a tax benefit.

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