Why takeovers happen

Lets assume that Company A has an intention of acquiring Company B. To achieve this, Company A can begin to purchase B s shares through the open market. Also, Company A must state whether it has intentions of creating Company B takeover or it just wants to invest in it through the shares they hold.

If Company A wants to create a takeover, it will make a tender offer to Company B s top management board of directors where an announcement to the press is made. The tender offer usually indicates things such as:. After making the tender offer, Company B can then accept the offer, negotiate a different price offer or make use of other defense to change the pact or find another interested party to sell the company to.

It must be a party with better terms than that being offered by Company A. This means it is willing to pay a price which is higher than being offered by Company A and sell to him or her. However, if the terms being offered are accepted by Company B, then the regulatory bodies will do a review of the business deal to ensure that the procedure does not bring about monopoly.

The deal is closed after the regulatory bodies approve the transaction and the two companies exchange funds. Generally, a takeover is usually conducted with cash. However, they can also use debt as well as their stock. It is important to note that a takeover can be voluntary and at the same time unwelcome.

It all depends on the circumstances surrounding the takeover process. Voluntary takeover here means that there is a mutual agreement between the two companies. On the other hand, unwelcome takeover refers to cases where the takeover process is not a shared idea, meaning that the acquiring company acts without the consent or knowledge of the target company. This, therefore, means that the target companys management may or may not be in an agreement with the takeover.

This situation may then lead to the creation of different takeover classifications types as discussed below. A friendly takeover which is also known as a welcome takeover refers to a takeover where both of the companys board of directors is in mutual agreement about the takeover.

This means that the management of the target company is informed by the acquiring company about their intention to purchase the company, and the management approves the set purchasing terms. Select personalised content. Create a personalised content profile.

Measure ad performance. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. Your Money. Personal Finance. Your Practice. Popular Courses.

Part Of. Reverse Mergers. Table of Contents Expand. What Is Hostile Takeover? Understanding Hostile Takeovers. Hostile Takeover Defenses. Hostile Takeover Examples. How Is a Hostile Takeover Done? Preempting a Hostile Takeover. What Is a Poison Pill? Defenses to a Hostile Takeover. Key Takeaways A hostile takeover occurs when an acquiring company attempts to take over a target company against the wishes of the target company's management.

An acquiring company can achieve a hostile takeover by going directly to the target company's shareholders or fighting to replace its management. Hostile takeovers may take place if a company believes a target is undervalued or when activist shareholders want changes in a company. A tender offer and a proxy fight are two methods in achieving a hostile takeover. Target companies can use certain defenses, such as the poison pill or a golden parachute, to ward off hostile takeovers.

Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. List of Partners vendors. A takeover occurs when one company makes a successful bid to assume control of or acquire another.

Takeovers can be done by purchasing a majority stake in the target firm. Takeovers are also commonly done through the merger and acquisition process. In a takeover, the company making the bid is the acquirer and the company it wishes to take control of is called the target. Takeovers are typically initiated by a larger company seeking to take over a smaller one. They can be voluntary, meaning they are the result of a mutual decision between the two companies.

In other cases, they may be unwelcome, in which case the acquirer goes after the target without its knowledge or some times without its full agreement.

In corporate finance, there can be a variety of ways for structuring a takeover. Takeovers are fairly common in the business world. However, they may be structured in a multitude of ways. Whether both parties are in agreement or not, will often influence the structuring of a takeover. Controlling interest requires a company to account for the owned company as a subsidiary in its financial reporting, and this requires consolidated financial statements.

Takeovers can take many different forms. A welcome or friendly takeover will usually be structured as a merger or acquisition. These generally go smoothly because the boards of directors for both companies usually consider it a positive situation. Voting must still take place in a friendly takeover. However, when the board of directors and key shareholders are in favor of the takeover, takeover voting can more easily be achieved.

Usually, in these cases of mergers or acquisitions, shares will be combined under one symbol. An unwelcome or hostile takeover can be quite aggressive as one party is not a willing participant. The acquiring firm can use unfavorable tactics such as a dawn raid , where it buys a substantial stake in the target company as soon as the markets open, causing the target to lose control before it realizes what is happening.

A reverse takeover happens when a private company takes over a public one. The acquiring company must have enough capital to fund the takeover. Reverse takeovers provide a way for a private company to go public without having to take on the risk or added expense of going through an initial public offering IPO. A creeping takeover occurs when one company slowly increases its share ownership in another. Creeping takeovers may also involve activists who increasingly buy shares of a company with the intent of creating value through management changes.

An activist takeover would likely happen gradually over time. There are many reasons why companies may initiate a takeover. An acquiring company may pursue an opportunistic takeover, where it believes the target is well priced. By buying the target, the acquirer may feel there is long-term value. With these takeovers, the acquiring company usually increases its market share , achieves economies of scale, reduces costs, and increases profits through synergies.

Some companies may opt for a strategic takeover. This allows the acquirer to enter a new market without taking on any extra time, money, or risk.