Takeover

In business, a takeover is the purchase of one company (the target) by another (the
acquirer, or bidder). In the UK, the term refers to the acquisition of a public
company whose shares are listed on a stock exchange, in contrast to the acquisition
of a private company.

Friendly takeovers

Before a bidder makes an offer for another company, it usually first informs that
company's board of directors. If the board feels that accepting the offer serves
shareholders better than rejecting it, it recommends the offer be accepted by the
shareholders.

In a private company, because the shareholders and the board are usually the same
people or closely connected with one another, private acquisitions are usually
friendly. If the shareholders agree to sell the company, then the board is usually of
the same mind or sufficiently under the orders of the shareholders to cooperate
with the bidder. This point is not relevant to the UK concept of takeovers, which
always involve the acquisition of a public company.

Hostile takeovers

A hostile takeover allows a suitor to bypass a target company's management

unwilling to agree to a merger or takeover. A takeover is considered "hostile" if the
target company's board rejects the offer, but the bidder continues to pursue it, or
the bidder makes the offer without informing the target company's board
beforehand.

A hostile takeover can be conducted in several ways. A tender offer can be made
where the acquiring company makes a public offer at a fixed price above the
current market price. Tender offers in the USA are regulated with the Williams Act.
An acquiring company can also engage in a proxy fight, whereby it tries to persuade
enough shareholders, usually a simple majority, to replace the management with a
new one which will approve the takeover. Another method involves quietly
purchasing enough stock on the open market, known as a creeping tender offer, to
effect a change in management. In all of these ways, management resists the
acquisition but it is carried out anyway.

The main consequence of a bid being considered hostile is practical rather than
legal. If the board of the target cooperates, the bidder can conduct extensive due
diligence into the affairs of the target company. It can find out exactly what it is
taking on before it makes a commitment. But a hostile bidder knows about the
target only the information that is publicly available, and so takes a greater risk.
Also, banks are less willing to back hostile bids with the loans that are usually
needed to finance the takeover.[citation needed]
Reverse takeovers

A reverse takeover is a type of takeover where a private company acquires a public

company. This is usually done at the instigation of the larger, private company, the
purpose being for the private company to effectively float itself while avoiding some
of the expense and time involved in a conventional IPO. However, under AIM rules, a
reverse take-over is an acquisition or acquisitions in a twelve month period which
for an AIM company would:

* exceed 100% in any of the class tests; or

* result in a fundamental change in its business, board or voting control; or

* in the case of an investing company, depart substantially from the investing

strategy stated in its admission document or, where no admission document was
produced on admission, depart substantially from the investing strategy stated in
its pre-admission announcement or, depart substantially from the investing strategy

Financing a takeover

Funding

Often a company acquiring another pays a specified amount for it. This money can
be raised in a number of ways. Although the company may have sufficient funds
available in its account, this is unusual. More often, it will be borrowed from a bank,
or raised by an issue of bonds. Acquisitions financed through debt are known as
leveraged buyouts, and the debt will often be moved down onto the balance sheet
of the acquired company. The acquired company then has to pay back the debt.
This is a technique often used by private equity companies. The debt ratio of
financing can go as high as 80% in some cases. In such a case, the acquiring
company would only need to raise 20% of the purchase price.

Loan note alternatives

Cash offers for public companies often include a "loan note alternative" that allows
shareholders to take part or all of their consideration in loan notes rather than cash.
This is done primarily to make the offer more attractive in terms of taxation. A
conversion of shares into cash is counted a disposal that triggers a payment of
capital gains tax, whereas if the shares are converted into other securities, such as
loan notes, the tax is rolled over.

All share deals

A takeover, particularly a reverse takeover, may be financed by an all share deal.

The bidder does not pay money, but instead issues new shares in itself to the
shareholders of the company being acquired. In a reverse takeover the
shareholders of the company being acquired end up with a majority of the shares in,
and so control of, the company making the bid. The company has managemental
rights.

Mechanics

In the United Kingdom

Takeovers in the UK (meaning acquisitions of public companies only) are governed

by the City Code on Takeovers and Mergers, also known as the "City Code" or
"Takeover Code". The rules for a takeover, can be found what is primarily known as
'The Blue Book'. The Code used to be a non-statutory set of rules that was
controlled by City institutions on a theoretically voluntary basis. However, as a
breach of the Code brought such reputational damage and the possibility of
exclusion from City services run by those institutions, it was regarded as binding. In
2006 the Code was put onto a statutory footing as part of the UK's compliance with
the European Directive on Takeovers (2004/25/EC).

The Code requires that all shareholders in a company should be treated equally. It
regulates when and what information companies must and cannot release publicly
in relation to the bid, sets timetables for certain aspects of the bid, and sets
minimum bid levels following a previous purchase of shares.

In particular:

* a shareholder must make an offer when its shareholding, including that of

parties acting in concert (a "concert party"), reaches 30% of the target;

* information relating to the bid must not be released except by announcements

regulated by the Code;

* the bidder must make an announcement if rumour or speculation have affected

a company's share price;

* the level of the offer must not be less than any price paid by the bidder in the
three months before the announcement of a firm intention to make an offer;

* if shares are bought during the offer period at a price higher than the offer
price, the offer must be increased to that price;

The Rules Governing the Substantial Acquisition of Shares, which used to

accompany the Code and which regulated the announcement of certain levels of
shareholdings, have now been abolished, though similar provisions still exist in the
Companies Act 1985.

Strategies

There are a variety of reasons why 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 use 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.

Takeovers may also benefit from principal-agent problems associated with top
executive compensation. For example, it is fairly easy for a top executive to reduce
the price of his/her company's stock - due to information asymmetry. The executive
can accelerate accounting of expected expenses, delay accounting of expected
revenue, engage in off balance sheet transactions to make the company's
profitability appear temporarily poorer, or simply promote and report severely
conservative (eg. pessimistic) estimates of future earnings. Such seemingly adverse
earnings news will be likely to (at least temporarily) reduce share price. (This is
again due to information asymmetries since it is more common for top executives
to do everything they can to window dress their company's earnings forecasts).
There are typically very few legal risks to being 'too conservative' in one's
accounting and earnings estimates.

A reduced share price makes a company an easier takeover target. When the
company gets bought out (or taken private) - at a dramatically lower price - the
takeover artist gains a windfall from the former top executive's actions to
surreptitiously reduce share price. This can represent 10s of billions of dollars
(questionably) transferred from previous shareholders to the takeover artist. The
former top executive is then rewarded with a golden handshake for presiding over
the firesale that can sometimes be in the 100s of millions of dollars for one or two
years of work. (This is nevertheless an excellent bargain for the takeover artist, who
will tend to benefit from developing a reputation of being very generous to parting
top executives). This is just one example of some of the principal-agent / perverse
incentive issues involved with takeovers.
Similar issues occur when a publicly held asset or non-profit organization undergoes
privatization. Top executives often reap tremendous monetary benefits when a
government owned or non-profit entity is sold to private hands. Just as in the
example above, they can facilitate this process by making the entity appear to be in
financial crisis - this reduces the sale price (to the profit of the purchaser), and
makes non-profits and governments more likely to sell. Ironically, it can also
contribute to a public perception that private entities are more efficiently run
reinforcing the political will to sell of public assets. Again, due to asymmetric
information, policy makers and the general public see a government owned firm
that was a financial 'disaster' - miraculously turned around by the private sector
(and typically resold) within a few years.

Occurrence

Corporate takeovers occur frequently in the United States, Canada, United Kingdom,
France and Spain. They happen only occasionally in Italy because larger
shareholders (typically controlling families) often have special board voting
privileges designed to keep them in control. They do not happen often in Germany
because of the dual board structure, nor in Japan because companies have
interlocking sets of ownerships known as keiretsu, nor in the People's Republic of
China because the state majority owns most publicly-listed companies.[citation
needed]

A number of western government officials are expressing concern over the

commercial information for corporate acquisitions, hostile or otherwise, being
sourced by sovereign governments & state enterprises.