Takeover Bids: What They Are, How to Navigate, and Real-life Cases
BP
Summary:
Takeover bids, a vital aspect of corporate actions, involve a company’s proposal to acquire another, typically through cash, stock, or a combination. This article delves into the intricacies of takeover bids, exploring types such as friendly, hostile, reverse, and backflip. Reasons behind these bids, the process involved, and real-life examples, like Carl Icahn’s attempt with Clorox, are analyzed. The complexities of post-merger analysis, the impact on shareholders, and the rarity of certain takeover bid types are discussed in a factual and professional tone.
Understanding takeover bids
Takeover bids are a fundamental aspect of corporate actions, representing a company’s proposal to acquire another, with implications for stakeholders like shareholders and creditors. Corporate actions, subject to board approval and stakeholder consensus, encompass a broad spectrum, ranging from mergers to acquisitions.
Acquiring companies, led by their managers, often pursue takeover bids with strategic considerations such as synergy, tax benefits, or diversification. The alignment of products or services between the acquirer and the target may eliminate competition or open new markets. The proposed bid, typically in cash, stock, or a combination, undergoes scrutiny by the target’s board, initiating a process that involves shareholder approval and regulatory compliance.
Empirical studies on post-merger analysis reveal mixed outcomes. However, historical data indicates that target company shareholders often benefit, primarily from premiums paid by acquirers. Contrary to cinematic portrayals, most takeovers commence amicably, as hostile bids are costly and prone to failure.
Types of takeover bids
Friendly
In a friendly takeover bid, both the acquiring and target companies collaborate to negotiate terms. The target’s board approves the deal, and shareholders are encouraged to support the bid. A notable example is CVS’s acquisition of Aetna for $69 billion in cash and stock.
Hostile
Hostile takeover bids deviate from the traditional route by bypassing the target’s board and directly approaching shareholders. A tender offer allows shareholders to sell stock at a premium within a specified timeframe. The target, resistant to the merger, may employ defensive tactics like poison pills or golden parachutes.
Reverse
Reverse takeover bids involve a private company bidding for a public corporation. This strategic move aids the private firm in becoming publicly listed without navigating the complexities of an initial public offering (IPO).
Backflip
Backflip takeover bids, though rare, present a scenario where the acquirer aims to become a subsidiary of the target. Following the merger, the acquirer retains control, often adopting the target’s name. This approach is typically employed when the acquirer lacks the brand recognition of the target.
Example of takeover bids
In July 2011, activist investor Carl Icahn proposed paying Clorox shareholders $76.50 per share to take the company private. Despite being the largest shareholder, his unsolicited bid faced rejection by the board of directors. Icahn raised the offer to $80 per share, valuing Clorox at $10.7 billion, but the board remained steadfast in refusal. Subsequently, Icahn attempted a board takeover, encountering significant resistance from the company and shareholders, leading to the abandonment of his efforts in September of that year.
Frequently asked questions
What regulatory processes are involved in a takeover bid?
Takeover bids undergo regulatory scrutiny, including examination by the Department of Justice to ensure compliance with antitrust laws.
How does a reverse takeover bid benefit a private company?
A reverse takeover bid allows a private company to acquire a public corporation, facilitating the private firm’s listing without the complexities of an initial public offering (IPO).
Why are backflip takeover bids considered rare?
Backflip takeover bids are uncommon as they involve the acquirer becoming a subsidiary of the target, retaining control post-merger, typically employed when the acquirer lacks the brand recognition of the target.
Do all takeover bids involve monetary offers?
Not necessarily. Takeover bids can include offers in cash, stock, or a combination of both, depending on the strategic considerations of the acquiring company.
Key takeaways
- Takeover bids involve one company acquiring another through cash, stock, or a combination.
- Types include friendly, hostile, reverse, and backflip, each with unique characteristics.
- Reasons for takeover bids may include synergy, tax benefits, or diversification.
- Post-merger analysis often shows benefits for target company shareholders.
- Hostile bids are less common due to their costliness and higher risk of failure.
- Regulatory scrutiny and compliance complexities are integral aspects of takeover bids.
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