What is a Takeover?
A takeover is the purchase of a company. A takeover is different from a merger, which occurs when the purchaser and the target both cease to exist and instead form a new, combined company.
How Does a Takeover Work?
Let's assume Company XYZ wants to acquire Company ABC. Company XYZ might just start buying ABC shares on the open , but once Company XYZ acquires 5% of ABC, it must formally (and publicly) declare how many shares it owns to the Securities and Exchange Commission. Company XYZ must also state whether it intends to create an ABC takeover or just hold its existing shares as an investment.
If Company XYZ indeed wants to proceed with the takeover, it make a tender offer to ABC's board of directors (followed by an announcement to the press). The tender offer indicate, among other things, how much Company XYZ is willing to pay for ABC and how long ABC shareholders have to accept the .
The most common methods of determining the target's value are to look at comparable companies in the industry and to conduct a discounted cash flow analysis, but evaluating other measures such as P/E ratios, price-to-sales ratios, or even replacement costs provides valuable insight. often have to pay a premium price of the target company's shares in order to get the shareholders to agree to the takeover.
Once the tender offer is made, ABC can accept the terms of the , negotiate a different price, use a "poison pill" or other defense to avert the deal, or find somebody else to sell to who pay as much or more as XYZ is . If ABC accepts the , regulatory bodies then review the transaction to ensure the combination does not create a monopoly or other anticompetitive circumstances within the industries involved. If the regulatory bodies approve the transaction, the parties exchange and the deal is closed.
Companies often conduct takeovers with , but they also use debt and their own as well, and there are often tax consequences associated with each form of currency.
Why Does a Takeover Matter?
Takeovers can create a bigger, more competitive, more cost-efficient entities. This synergy -- that is, the idea that the two companies together are more valuable to the shareholders than they are apart -- is elusive, but it is what justifies most takeovers. After all, always have the much harder of trying to "grow their own" by starting their own competitive ventures instead of buying someone else's. Targets often succumb to takeovers because at the end of the day, the price is right. And on both sides, a well-executed takeover can be the crowning jewel of a 's career.