Understanding Takeover Bids: Definition, Types, and Real-World Examples

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What Is a Takeover Bid?

A takeover bid is a strategic corporate move where one company offers to acquire another company, usually by proposing payment in cash, shares, or a blend of both. The company initiating the offer is called the acquirer, while the company targeted for acquisition is known as the target.

Key Points to Remember

• A takeover bid involves one company proposing to buy another.
• Payments can be made via cash, stock, or a combination.
• Reasons for takeover bids often include synergy creation, tax advantages, or diversification.
• Offers typically require approval from the target’s board and shareholders.
• There are four main types: friendly, hostile, reverse, and backflip takeover bids.

Delving Deeper into Takeover Bids

Corporate actions are significant events that impact stakeholders such as shareholders and creditors. Takeover bids fall under this category and usually require board approval and sometimes shareholder consent. These actions range widely from mergers and acquisitions to bankruptcy proceedings.

Acquirers pursue takeover bids for various strategic reasons. For example, acquiring a company with complementary products or services can eliminate competition or open new markets. The offer is presented to the target’s board of directors, who decide whether to approve or reject it. If approved, shareholders vote on the proposal, followed by regulatory reviews to ensure compliance with antitrust laws.

Studies indicate that shareholders of target companies often benefit from takeover bids, primarily due to premium offers. Contrary to popular belief, most mergers start on friendly terms. Hostile takeovers, though dramatized in media, are costly and frequently unsuccessful.

334

The number of merger and acquisition deals exceeding $1 billion completed in 2024.

Types of Takeover Bids

Takeover bids generally fall into four categories: friendly, hostile, reverse, and backflip.

Friendly Takeover

In a friendly takeover, both companies collaborate to negotiate terms. The target’s board endorses the deal and recommends shareholders approve it. For instance, CVS’s acquisition of Aetna for $69 billion in cash and stock was a friendly takeover completed between 2017 and 2018.

Hostile Takeover

Hostile takeovers bypass the target’s board and appeal directly to shareholders with a tender offer, often at a premium. The target company may resist using defense tactics like poison pills or golden parachutes to deter the acquisition.

Reverse Takeover

A reverse takeover occurs when a private company acquires a public company, allowing the private firm to become publicly listed without undergoing an initial public offering (IPO).

Backflip Takeover

Rare in practice, backflip takeovers involve the acquirer becoming a subsidiary of the target company post-merger. This approach is typically used when the target has stronger brand recognition.

Takeover Bid Example

In July 2011, activist investor Carl Icahn proposed buying Clorox at $76.50 per share to take it private. Despite holding a 9% stake, the board rejected his unsolicited offer. Icahn increased his bid to $80 per share, valuing Clorox at $10.7 billion, but it was also declined. After attempts to influence the board failed, Icahn ended his efforts in September that year.

Duration of Takeover Bids

The timeline for completing a takeover bid varies from six months to several years, influenced by deal complexity. Key steps include due diligence, audits, and securing approvals from regulators and shareholders.

Impact of Takeovers on Stock Prices

Typically, the target company’s stock price rises due to acquisition premiums, while the acquiring company’s stock may dip because of increased debt and acquisition costs.

Defenses Against Hostile Takeovers

Companies employ strategies like poison pills and voting rights plans to prevent hostile takeovers. These legal measures limit the acquirer’s ability to gain board control. Other tactics include buying back shares or seeking a more favorable buyer.

Conclusion

A takeover bid is a corporate strategy where one company aims to acquire control of another by purchasing a majority of its voting shares. While beneficial for target shareholders through premiums, takeovers can spark controversy, especially if they reduce market competition.

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