Takeovers and Mergers
What is a company takeover?
The business definition of a takeover is where a stock-market quoted company is bought by another company.
Sometimes the company doing the buying will also be a listed company itself but perhaps be listed on another stock market (e.g. in the US). Or it could be a private company doing the buying, in which case you may see the phrase “being taken private” used in reference to the company being bought.
The basic process is the same whoever is doing the buying. A formal offer is made to the shareholders of the target company that’s being bought and these shareholders get to vote whether to accept or not. If a sufficient number of shareholders agree, then the purchase goes ahead.
When the target business is significant in relation to the size of the purchaser, then the shareholders of the purchasing company may also be asked to vote to approve the deal.
Understanding company takeovers
Takeovers of UK-listed companies are subject to a very long and detailed document called The Takeover Code that runs to over 400 pages. It is designed to ensure that shareholders are treated fairly, not denied an opportunity to decide on the merits of a takeover, and afforded equivalent treatment.
There is also an organisation called The Takeover Panel that ensures that The Takeover Code is followed by all parties involved.
However, it is important to understand that neither The Takeover Panel nor Code are designed to decide on whether a fair price is being offered or if the deal makes sense for the businesses concerned. That is for the shareholders to decide for themselves.
They also don’t rule on whether the purchase is in the broader national interest as that is the remit of the government.
Are acquisitions good for shareholders is a question that’s often asked. The research done on this seems to indicate takeovers are usually better for the shareholders of the target company rather than those of the purchaser. Individual cases will depend on the price paid and how good a fit the two companies are, both of which are quite difficult to judge before any transaction takes place.
How a company takeover may play out
There are a number of ways a takeover deal may unfold but let’s cover a common situation.
First, there could be a press rumour that one company wants to buy another. The shares of the target company may rise as a result of this.
If the rumour is true, the target company may confirm that it has had discussions with one or more parties but that no formal offer has yet been made. It’s usually at this point that the rules in The Takeover Code start to apply, such as an increased level of disclosure for larger share transactions.
Assuming discussions continue, a formal offer may then be announced. Sometimes the company buying will offer its own shares as payment or sometimes it will offer an all-cash deal. It could also offer a mixture of cash and shares. If shares are offered as part of the deal, then the value of the offer will move up and down over time in accordance with the purchaser’s share price.
The amount offered over the current share price varies a lot from takeover to takeover. A typical bid is made at a premium of 20-30% but significantly higher or lower amounts are not unheard of. It could be that the target company’s share price has already increased in recent weeks or months on the expectation that a takeover could be announced even though nothing has been said through official channels.
A timetable will be set out for the formal vote and a detailed offer document is sent to shareholders so that they have plenty of information on which to base their decision.
The purchaser will normally set a minimum level of acceptances for the deal to proceed. In the UK, this is typically 90% as company law dictates that once this level of shareholders have agreed to the deal, the remaining shares can be compulsorily purchased on the same terms. This means the purchaser gets to own the whole company and isn’t left with a handful of minority holders to deal with.
It’s often useful to watch what happens to the share price of the target company once an offer has been formally announced. If the share price remains some way below the offer price, that indicates the market has some doubt that the deal will be approved. If it is noticeably above the offer price that may indicate that the market is expecting other bidders to come along or that the purchaser may have to increase the price to get the deal voted through. So it can pay to wait a little while to see what happens before accepting any takeover offer.
Types of company takeovers
A company takeover is often recommended by the directors of the target company, if they think it is in the shareholders’ best interest.
However, the purchaser may make what is called a hostile takeover if they can’t secure the board’s recommendation.
Recommended offers tend to go through fairly smoothly although sometimes they flush out another offer from another party. In this case, the board can withdraw their recommendation.
Hostile takeovers can get quite bitter, especially if the firms concerned are long-standing rivals and they generally have a lower success rate.
Reasons for a company takeover
There are lots of reasons why one company might want to buy another. It may want to increase its market share or perhaps to expand into a new line of business or to acquire a new product or technology. A company may also look to expand geographically by buying a similar company in another country or region of the world..
Cost savings, also known as synergies, are often cited in takeovers where companies feel making their operations bigger will make them more efficient.
Sometimes a company takeover could be defensive, making a business larger so that it’s less likely to become a takeover target itself.
And the ego and pay packets of company directors no doubt play a role as well. Some people want to preside over ever-bigger operations or feel a larger company will provide a good reason for their salary to increase.
Unfortunately, some companies also buy businesses in order to disguise the fact that their core business isn’t growing that quickly or is not that profitable. It’s harder to see underlying trends in the financial statements when a company regularly buys new businesses.
Funding company takeovers
In many cases, the target company could be quite small compared to the purchaser and can be bought from the purchaser’s existing cash reserves. Sometimes, a purchaser will fund an acquisition by taking on more debt.
With larger deals, or where the purchaser’s shares trade on a high valuation, it may issue new shares to swap for those of the target company. This means there is no upfront cash outlay but a higher level of dividends will need to be paid out in future due to the increased number of shares.
What happens when companies take over another company?
At its most simple level, the company doing the buying will make an offer to purchase another company. Sometimes there may be competing purchase offers from other firms. Each proposal is put to a vote by the shareholders of the target company and if a certain percentage (usually 90% in the UK) approve the deal it will go ahead. A company may offer cash or its own shares as payment for the deal. Sometimes there is a mixture of the two or the shareholders of the company being acquired get to choose what they prefer.
What is a takeover (with an example)?
A company takeover is when one listed business takes over another. The largest ever takeover was Vodafone’s $200bn purchase of Mannesmann, a German industrial conglomerate, back in 1999. More recently, on a far smaller scale, UK-listed Melrose Industries bought its larger engineering rival GKN for £8bn in 2018.
What is the difference between takeover and acquisition?
Takeovers and acquisitions are essentially the same thing in that they both involve one company buying another. A company takeover is the business definition frequently used when a company buys another company that is listed on the stock market. Acquisition is a term usually associated with a listed company buying an unlisted (i.e. private) business.
Are acquisitions good for shareholders?
Lots of research has been carried out on this subject over the years and the general consensus seems to be that many company takeovers do not add much value for the company that is doing the buying. There are various reasons for this. For example, the company being bought may be difficult to integrate with its existing business, perhaps due to different corporate styles or ways of operation. Often a company may overpay to buy a business in order to outbid other interested parties.