What Is a Takeover? Meaning, Types, Examples & How It Works

What is Takeover?

A takeover definition refers to the process in which one company acquires or assumes control of another through purchasing a majority stake or the entire company. 

Takeovers are usually initiated by larger companies seeking to gain control of smaller ones, intending to achieve strategic goals such as expanding their market share or diversifying their business operations. It can be voluntary, where both companies have mutually agreed, or a hostile takeover, where the acquirer seeks to take over the target company without its knowledge or agreement.

In corporate finance, there are different ways to structure a takeover, such as acquiring a controlling interest in the company's outstanding shares, buying the entire company outright, merging with the acquired company to create new synergies, or acquiring the company as a subsidiary.

How Takeover Works?

In a takeover, the acquirer usually purchases a controlling stake, typically 51% or more of the shares in the target company. This gives them the authority to make critical business decisions, including appointing board members and determining the company's strategic direction.

Takeovers can be carried out in different ways, through mergers or acquisitions. They can involve the exchange of equity, a cash deal, or a combination of both. Before the agreement is finalised, the companies involved usually agree upon the terms.

After the takeover, the target company can operate independently or merge with the acquiring company. The acquiring company may work independently if the target company's brand name is well established.

Different Types of Takeovers

Three types of takeovers are commonly observed in the business spectrum. 

● Friendly Takeover

It occurs when both the acquiring and the acquired companies mutually agree to the terms of the acquisition. In such a situation, the acquiree company openly declares its intention to sell, and after discussions and negotiations, the takeover process is completed without any disputes.

● Hostile Takeover

This type of takeover occurs when the acquiree company does not consent to be acquired, and the company taking over purchases a majority of shares from the open market without the consent of the acquiree company. 

This may lead to disagreements between the board of directors of both companies. The board of directors of the acquired company may leave the new entity to show their disapproval of the hostile takeover.

● Reverse Takeover

It occurs when a private company that wants to go public buys a controlling interest in a publicly listed company. This allows the private company to save expenses related to raising capital through an IPO. In summary, takeovers can be either friendly or hostile, and a reverse takeover is another form that occurs when a privately held company wants to go public.

Reasons for a Takeover

Acquiring companies initiate takeovers for various reasons, including increasing market share, achieving economies of scale, reducing costs, and gaining synergies.

Opportunistic takeovers occur when an acquiring company believes the target company is undervalued and can benefit from the long-term value. The acquiring company could get the target company's resources and assets to increase its profits and market share.

Strategic takeovers enable the acquiring company to enter a new market without risking time, money, or resources. The acquisition could also eliminate competition, enabling the acquirer to increase market share and maximise profits.

An activist takeover occurs when a shareholder aims to obtain a controlling stake in a company to instigate change or gain significant voting power.

Some companies are more attractive takeover targets, such as small companies with viable products or services but insufficient financing, unique niches in a particular product or service, companies in close geographic proximity, and companies with good potential value but management challenges.

Funding Takeovers

Various options exist for financing takeovers, depending on the circumstances. If the target is a publicly-traded firm, the purchasing company can acquire shares from the secondary market. Alternatively, in a friendly takeover, the acquirer may present an offer for all the target’s outstanding shares. Such mergers or acquisitions are typically funded via cash, debt, or new stock issuance of the combined entity. 

In cases where the acquirer employs debt, the process is known as a leveraged buyout. This may involve obtaining debt capital through new funding lines or issuing fresh corporate bonds.

Example of a Takeover

Let us understand the takeover meaning with an example.

● Tata’s friendly takeover of 1Mg

In mid-2021, Tata Digital Services, a subsidiary of Tata Sons, moved to acquire a 60% controlling stake in 1Mg, an online pharmaceutical delivery startup, for $230 million. This strategic investment aligns with Tata's objective of creating a comprehensive digital ecosystem that caters to customers' needs across various domains. 

The acquisition of 1Mg enables Tata to establish its presence in the digital arena without creating a new entity. By acquiring 1Mg, Tata effectively eliminates the competition that would have arisen if they had launched a new enterprise.

● Larsen & Toubro’s hostile takeover of Mindtree

In 2019, India saw its first hostile takeover when Larsen & Toubro initiated a process of a hostile takeover of Mindtree Limited, an IT company. It started with the director of Mindtree and the founder of Coffee Day Enterprises, Siddhartha, wanting to sell his entire 20% stake in Mindtree to use the money for paying off CCD’s debt.

After making an open offer to L&T, the company bought the shares from Siddhartha, making the stake of L&T higher than 13% of the current promoters. Since it was against SEBI law, L&T offered to buy 31% of the stake, which was denied by the promoters. L&T then initiated a hostile takeover and purchased the rest of the shares from the open market, with its stake reaching as high as 28.9%.

Conclusion

Acquisitions can offer a strategic advantage to businesses that wish to avoid the challenges of establishing a new enterprise and competing with existing players for market share. Through acquisitions, companies can leverage their financial resources to purchase established firms, expand their customer base, eliminate competition, and capitalise on the reputation and growth prospects of the acquired entity. 

Nonetheless, due to the potential for hostile takeovers, companies must remain vigilant and safeguard against unethical business practices by other firms.