What it is:
How it works/Example:
Let's assume Company XYZ has developed an exciting new widget. Several companies may be interested in purchasing Company XYZ to keep Company XYZ's technology proprietary, and so Company XYZ may become a takeover target.
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Why it matters:
It's not always easy to tell which companies are good takeover targets, but if a company is struggling, or if it has a large amount of cash on its balance sheet, it's likely that other companies consider the company as a takeover target.
Some potential acquirers will take the next step of purchasing shares. If the target is a public company, and if the potential acquirer purchases more than 5% of those shares, the buyer must report the purchase to the Securities and Exchange Commission (SEC). This often triggers a flurry of trading activity in the target's stock.