Definition
A takeover refers to the purchase of a company where one company (the acquirer) acquires a controlling interest in another company’s (the target) stocks, assets, or operations. It can be friendly, where the target company’s management agrees to the acquisition, or hostile, where the target company’s management resists. This is typically done to expand operations, increase market share, or achieve greater economies of scale.
Key Takeaways
- A takeover refers to an acquisition where one company (the acquirer) purchases another company (the target). This results in the acquirer gaining control over the target company’s operations, assets, and decision-making processes.
- Takeovers can be friendly or hostile. In a friendly takeover, the target company’s management agrees to the acquisition. Conversely, in a hostile takeover, the acquirer pursues the acquisition despite resistance from the target company’s management.
- There can be various reasons for a takeover, such as to expand a company’s market share, diversify its operations, achieve economies of scale, or access valuable resources and capabilities. However, takeovers also carry risks such as potential cultural clashes, overpayment, hidden liabilities, or failure to achieve expected synergies.
Importance
A takeover is a critical concept in finance because it pertains to the change in control of a corporation, either through mutual agreement or hostile acquisition.
When one company takes over another, it implies that they now possess more than 50% of the acquired company’s shares, thus giving them decision-making power.
Takeovers are important as they can lead to significant growth opportunities, cost efficiency through synergies, and greater market dominance for the acquiring firm.
However, they also carry risks, such as financial strain and potential clashes in corporate culture or operational style between the acquiring and acquired institutions.
Hence, understanding the dynamics of a takeover is essential for both investors and industry players for strategic planning and forecasting.
Explanation
A takeover is fundamentally carried out with the purpose of gaining control over a company. It is a strategic move made by businesses seeking to amplify their market dominance, diversify their operations, or accelerate their growth. The process involves one company (the acquirer) buying most, if not all, of another company’s (the target) ownership stakes in order to assume control of the target company.
By doing this, the acquiring company can exploit synergies, gain access to new markets, or acquire new technologies and resources that the target company possesses, thus enhancing their own value or strategic positioning in the market. Takeovers are commonly used in the corporate world for various reasons. For instance, a firm might resort to a takeover to eliminate competition by buying out its competitors.
This not only gives the acquiring company a larger market share but also increases its bargaining power, hence creating a more favorable competitive environment for the acquirer. In addition, takeovers can also be driven by the desire for growth; instead of growing organically, a company can take over another company that is already profitable, thereby expediting the growth process. Ultimately, the goal of a takeover is to create a situation that benefits the acquiring company, be it through cost savings, increased revenues, or overall strategic advantages.
Examples of Takeover
Disney and 21st Century Fox: In March 2019, Disney completed a $3 billion acquisition of 21st Century Fox’s film and television assets. This takeover gave Disney control over more TV shows and movies to stream exclusively.
Microsoft and LinkedIn: In 2016, Microsoft acquired LinkedIn for $2 billion, which brought the software giant a social network for professional and business contacts. This change of ownership meant LinkedIn could get new features and resources from its parent company.
AT&T and Time Warner: In 2018, AT&T took over Time Warner in an $4 billion deal. This takeover allowed AT&T to control Time Warner’s valuable assets like Warner Bros. Entertainment, HBO, and Turner Broadcasting System, thus assisting in expanding their media and entertainment sector.
FAQs on Takeover
What is a Takeover?
A takeover refers to a transaction or series of transactions where an acquiring company purchases a majority stake in a target company. Once the assurance of majority control has been obtained, the acquiring company can make decisions about the company’s direction without the approval of the target company’s other shareholders.
What are the types of Takeover?
There are two main types of takeovers: friendly and hostile. A friendly takeover occurs when the target company’s management agrees to the acquisition proposal by the acquiring company. A hostile takeover is when the acquiring company proceeds to acquire the target company even when the latter’s management and board have rejected the acquisition proposal.
What can trigger a Takeover?
A variety of factors can trigger a takeover. It can take place when a company is undervalued, or when a competitor seeks strategic advantage, or when a company is struggling financially and looks for a company with a stronger financial base to take it over.
What is the process of a Takeover?
The process of a takeover often involves the following steps: Identification of a potential target, approach to the target by the acquirer, valuation of the target, negotiation for a price, due diligence, and finally the legal process to complete the takeover.
What are the effects of a Takeover?
A takeover can have both positive and negative effects. On the positive side, it can provide the target company with the much-needed capital and managerial expertise. It can also result in improved market presence and competitiveness. On the negative side, a takeover can lead to a loss of jobs, change in the company’s strategic direction, and potential regulatory issues.
Related Entrepreneurship Terms
- Mergers and Acquisitions
- Hostile Takeover
- Friendly Takeover
- Leveraged Buyout
- Bidder
Sources for More Information
- Investopedia: Offers comprehensive knowledge about takeovers and other financial terms.
- The Balance: Offers a variety of insights on financial topics such as takeovers.
- CNBC: Provides the latest news, including topics on takeovers and finance.
- The Economist: Offers in-depth analysis and discussions on topics like corporate takeovers.
