What is a takeover:  Know its meaning, types, reasons and examples 

Takeover is a common term in the business world where one company acquires another to expand its operations and reach. It happens by buying a major stake in the company by providing a profit to the stakeholders. Mergers and acquisitions are beneficial for all companies as a means of growth which makes it a common phenomenon. In this article, we will look at what is a takeover, its types and reasons to understand it in-depth. 

What is a takeover?

A takeover is a process where one company acquires another company by buying a majority stake in the company or acquiring the entire company. Takeovers are usually initiated by large companies who take over smaller companies to enlarge their market share or diversify their business operations. 

Takeovers can be voluntary where it happens with the consent of the company or involuntary where the acquirer takes over the target company without its knowledge or agreement. 

There are different ways to acquire a company including acquiring a controlling interest in the outstanding shares of the target company, merging with the company, buying the entire company at once, or making the target company a subsidiary. 

The acquirer usually acquires a majority stake in the target company, 51% or higher. With the majority, they can make decisions regarding the company’s strategies as well as their board of directors. The takeovers can be executed through mergers or acquisitions done in the form of exchanging equity, cash, or even both. 

After the acquisition takes place, the target company can either work independently or as a merger with the acquiring company. In case the target company is a well-established brand, the acquiring company can work independently. 

Types of takeovers

With a basic understanding of what is a takeover and how it works, let us now look at the different types of takeovers. These can broadly categorised into three categories namely: 

1. Friendly takeover

A friendly takeover, as the name suggests, is where both the acquirer and the target company enter into a voluntary takeover with a mutual decision. In this case, the acquiree company makes its intention to sell to the public. After negotiations and discussion, the deal is executed in a friendly manner. 

2. Hostile takeover

A hostile takeover is where the target company is reluctant to sell. In this case, the acquirer buys a majority of its shares from the open market without the consent or knowledge of the acquiree. This forceful acquisition might cause disagreements between the two companies and the board of directors of the acquired company might leave to show their disapproval. 

3. Reverse takeover

The last takeover type is a reverse takeover in which a private company desiring to become public takes over a public company by buying a controlling share. Takeover in IPO proves beneficial for companies that do not want to undergo the process of raising capital through IPO. 

Reasons for a takeover

Finally, let us understand the different reasons behind a takeover for different businesses. The core reasons why businesses choose to walk down this road include increasing their market share, gaining synergies, reducing costs, and achieving economies of scale. 

• Several times there are opportunistic turnovers in which the acquiring company feels that the acquiree company is undervalued and can benefit from the takeover with long-term value. Meanwhile, the acquiring company is also targeting the resources of the acquiree and looking to increase its market share through the takeover process. 

• Strategic takeovers are where the acquiring company desires to enter a new market without putting at stake its time or resources. Not only this but this acquisition also lets them reduce competition by increasing their market size as well as profits. 

• Lastly, another reason for a takeover is when the acquiring company desires to achieve voting power in the target company. An activist takeover involves taking over to control or change the business with a majority control power. 

Examples of a takeover 

One commonly known example of a takeover is Tata’s takeover of 1Mg. In 2021, a subsidiary of Tata Sons, Tata Digital Services acquired a 60% stake in 1Mg, an online pharmaceutical company at a value of $230 million. It was a strategic takeover where Tata intended to enter the digital arena without utilising its resources, time or energy. By merging with 1Mg, it also became successful in reducing the competition that would have come up in case of the launch of a new brand. 

While this was a strategic takeover, what is a hostile takeover example? The Adani group takeover of NDTV was a hostile takeover where its subsidiary RRPR Holdings acquired 1.76 crore additional shares of NDTV at a cost of ₹602 crore from two promoters to get the majority stake. 

Conclusion 

Takeovers are beneficial for companies that can use their financial resources to acquire companies and increase their market share, diversify into new markets and eliminate competition. It adds to the reputation and growth of both the companies involved in most cases. 

However, due to the possibility of hostile takeovers, businesses must stay aware of unethical business practices and guard themselves against them. To learn more about such terms, subscribe to StockGro blogs. 

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