What Is a Takeover?

Takeovers Explained

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A takeover occurs when one company acquires ownership and control of another company. Also known as acquisitions, takeovers can either be friendly or hostile, meaning with or without the support of the target company’s leadership.

Takeovers can have a considerable impact on the shareholders of both the target and acquiring company, but whether the impact is positive or negative depends on several factors. Keep reading to learn how takeovers work, the different types that exist, and how they affect you as an investor.

Definition and Examples of a Takeover

A takeover is a transaction wherein one company successfully acquires another. A takeover, also known as an acquisition, has two parties: the acquiring company and the target company.

In some cases, a friendly takeover occurs, where the target company’s board of directors consents to the deal, and the two companies negotiate terms they can both agree on. In other cases, a takeover is considered hostile, and the acquiring company goes directly to the shareholders to gain control.

There are plenty of examples of friendly acquisitions. Take the friendly takeover of Google acquiring fitness company Fitbit, for example. Negotiations for the acquisition began in late 2019, and the friendly takeover was finalized at the start of 2021.

In a press release announcing the acquisition, Fitbit co-founder and CEO James Park said the following: “Google is an ideal partner to advance our mission. With Google’s resources and global platform, Fitbit will be able to accelerate innovation in the wearables category, scale faster, and make health even more accessible to everyone. I could not be more excited for what lies ahead.”

There are also well-known examples of hostile takeovers. For example, in 2010, the biotech company Sanofi-Aventis made a tender offer to purchase another biotech company, Genzyme. Because Sanofi-Aventis was unsuccessful in making its case to the company’s executives, it took its offer directly to the shareholders, and the deal was completed less than a year later.

How a Takeover Works

The simple definition of a takeover is the process of one company successfully acquiring another. But there’s far more that goes into a takeover.

In most cases, an acquisition starts with a negotiation between the two companies. The acquiring company expresses interest in acquiring the other company. Then, the two go through a standard business valuation and due diligence processes to determine both what the soon-to-be-bought company is worth now and what its worth will be once the companies are combined.

Using that information, the companies can agree on a sale price and draft an acquisition agreement. The matter may go to a shareholder vote. If the majority of shareholders agree to the acquisition, then business ownership is transferred to the acquiring company and the target company ceases to exist.

After an acquisition, shareholders of the target company will either receive shares in the acquiring company or cash for the fair market value of their shares.

While the process above is how most friendly takeovers work, there are exceptions. In some acquisitions, an acquiring company may buy only the assets of the target company, rather than the entire company itself. In this case, shareholders of the target company receive cash from the sale, but rather than becoming a part of the acquiring company, the target company simply becomes an empty shell.

And in the case of hostile takeovers, the acquiring company bypasses the target company’s management and goes directly to the shareholders with a tender offer to purchase their outstanding shares.

Types of Takeovers

Takeovers can come in several different forms. The most common types are friendly takeovers and hostile takeovers.

Friendly Takeover

A friendly takeover, most often referred to as an acquisition, involves the cooperation of the management and board of directors of the target company. This type of takeover involves a collaborative process between the two companies to agree on a fair sale price and become a single company.

Hostile Takeover

Hostile takeovers are less common and occur when an acquiring company takes control of the target company without the consent of the target company’s leadership.

Hostile takeovers can happen in two primary ways:

  • Tender offer: The most common way hostile takeovers are achieved is through a tender offer. This occurs when the acquiring company offers to purchase outstanding shares in another company with the hope of gaining a controlling share. It’s up to the shareholders to ensure the takeover is successful.
  • Proxy contest: Through a proxy contest, the prospective buyer seeks to have board members elected who will support the sale, with the goal of eventually having enough support for a traditional acquisition.

What It Means for Individual Investors

As an investor, you may or may not notice the effects of a takeover. As a shareholder of the acquiring company, it’s likely that little will change for you. In some cases, a successful acquisition can provide positive outcomes for the company—and, therefore, for the shareholders. But there are also examples of acquisitions gone wrong, which ultimately harm shareholders in the long run.

As a shareholder of a target company, the impact will be more noticeable. In many cases, your shares in the target company will be replaced with shares in the acquiring company. But in other cases, you may simply receive cash for the fair market value of your shares.

No matter which side of the takeover you’re on—a shareholder of the acquiring company or the target company—you may experience some effects in your investment portfolio.

Unfortunately, there’s no way to know ahead of time whether the effect will be a positive or negative one, as this depends on the companies at hand. If a company that you’re invested in is going through a major transaction like a takeover, do your research to make the most educated decision about your investment.

Key Takeaways

  • A takeover, also known as an acquisition, occurs when one company successfully purchases another.
  • A friendly takeover occurs when the leadership of the target company agrees to the sale and the two companies negotiate to agree on a sale price.
  • A hostile takeover occurs when a company’s leadership doesn’t consent to the sale, so the prospective buyer takes its offer directly to the shareholders.
  • Takeovers can be either positive or negative for investors, but there’s no way to know ahead of time what the long-term impact will be.