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Takeover

Reviewed by Annapoorna | Updated on Oct 05, 2020

Catalogue

What is Takeover?

A takeover usually occurs when one company makes a bid to take control of or acquire another, often by buying a majority stake in the target company. The company making the bid is called acquirer in the acquisition process. In contrast, the company that it wishes to take ownership of is called the aim.

A larger corporation usually conducts takeovers for a smaller one. They could be voluntary by a joint agreement between the two companies. In other situations, they can be rejected, in which case, without indicating, the larger organisation goes after the target.

An acquisition, which merges two firms into one, will bring major organisational advantages and performance improvements for shareholders.

Takeover Explained

In the business world, takeovers are relatively common. They are similar to mergers because both processes combine two firms into one. Where they differ, a merger involves two equal companies. In contrast, an acquisition generally involves inequalities—a larger company targeting a smaller one.

There are several reasons why companies could initiate a takeover. An acquiring company will attempt an opportunistic takeover where it thinks the target is priced well.

Some firms may opt for a strategic takeover. It helps the acquirer to reach a new market without any additional time, resources, or risk-taking. The acquirer may also be able to reduce rivalry by going through a strategic takeover. As the acquisition occurs, the purchasing corporation is responsible for all the assets, property, and debt of the target business.

Different Types of Takeover

In general, a welcome or friendly takeover, such as an acquisition, goes smoothly because both parties find it a good situation. In such instances, the target firm's management endorses the deal. An unwelcome or hostile takeover is where one party is not a willing participant and can be quite aggressive.

The acquiring firm can take advantage of unfavourable tactics, such as a dawn attack. As soon as the markets open, it buys a large stake in the target company, causing the target to lose control before it knows what is happening. Management and board of directors of the target firm can strongly resist attempts at takeover through the implementation of tactics, such as a poison pill.

It allows shareholders of the target to buy more shares at a discount to dilute the holdings of the acquirer and make a takeover costlier. When a private limited company takes over a public limited one, a reverse takeover occurs. The acquiring company must have ample resources to finance the acquisition.

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