Tuesday, May 09, 2006

Corporate Takeovers...

This stuff is important. Whether you are going public, are public, or even if you are private, the information here, from wikipedia, is heavy, yet simple to read and understand.

Forms of takeover

  • A friendly takeover consists of a straight buyout of a company, and happens frequently. The shareholders receive cash or (more commonly) an agreed-upon number of shares of the acquiring company's stock.
  • A hostile takeover occurs when a company attempts to buy out another whether the management of the target company likes it or not. A hostile takeover can usually occur only through publicly traded shares, as it requires the acquirer to bypass the board of directors and purchase the shares from other sources. This is difficult unless the shares of the target company are widely available and easily purchased (i.e., they have high liquidity). A hostile takeover may presage a corporate raid.
  • A reverse takeover can occur in different forms:
    • a smaller corporate entity takes over a larger one.
    • a private company purchases a public one.
    • a method of listing a private company while bypassing most securities regulations, in which a shell public company buys out a functioning private company whose management then controls the public company.


There are a variety of reasons that an acquiring company may wish to purchase another company. Some takeovers are opportunistic - the target company may simply be very reasonably priced for one reason or another and the acquiring company may decide that in the long run, it will end up making money by purchasing the target company. The large holding company Berkshire Hathaway has profited well over time by purchasing many companies opportunistically in this manner.

Other takeovers are strategic in that they are thought to have secondary effects beyond the simple effect of the profitability of the target company being added to the acquiring company's profitability. For example, an acquiring company may decide to purchase a company that is profitable and has good distribution capabilities in new areas which the acquiring company can utilize for its own products as well. A target company might be attractive because it allows the acquiring company to enter a new market without having to take on the risk, time and expense of starting a new division. An acquiring company could decide to take over a competitor not only because the competitor is profitable, but in order to eliminate competition in its field and make it easier, in the long term, to raise prices. Also a takeover could fulfill the belief that the combined company can be more profitable than the two companies would be separately due to a reduction of redundant functions.

Critics often charge that large companies initiate takeovers in order to boost their reported revenue (sales to customers) without giving sufficient regard to profit, which generally takes a hit when a company is acquired because of all the associated costs. Also a premium is always paid if the target company is financially healthy and not already desperate to be taken over.

The target company has several methods to avoid a takeover, if it wishes. These include legal actions, as in the case of the Hewlett-Packard purchase of Compaq, or the use of a poison pill, as set up by Transmeta.

Most dot-com companies were created for the express purpose of being taken over with a consequent immediate profit for their owners, as opposed to the usual purpose of creating a business: to create profit for its owners over time by generating cash which is paid in dividends.

Pros and cons of takeover

Pros and cons of a takeover differ from case to case but still there are a few worth mentioning.


  1. Increase in Sales / Revenues (e.g. Procter & Gamble takeover of Gillette)
  2. Venture into new businesses and markets
  3. Profitability of target company
  4. Increase market share


  1. Reduced competition and choice for consumers in oligopoly markets
  2. Likelihood of price increases and job cuts
  3. Cultural integration/conflict with new management
  4. Hidden liabilities of target entity.

Tactics against hostile takeover

See on wikipedia


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