Takeover

Definitions

Definition 1

One company buying another

Definition 2

The process of seizing control over a target company by buying shares (with voting rights) or by offering existing shareholders to exchange their shares (for shares of the bidding company). In most jurisdictions, 51% of the shares and the voting rights would be sufficient to assume control.

Definition 3

The act of taking or assuming power

Types of Takeovers

If an offer by an acquiring company is being endorsed by the management of the target company it is called a friendly takeover. This means that the board of directors of the target company agree to the merger or acquisition by the bidding company and they publicly advise their shareholders to agree with the terms of the offer (including the offer price) made by the bidding company.

A takeover that is not supported by the Board of Directors of the target Company. It is the opposite of a friendly takeover. It could be that the Board of Directors thinks the price is too low or that there is no good reason for the takeover. Political reasons may also be behind the reservations.

The act of a private company buying a publicly listed company.

Takeover Rules

Takeover Rules are defined per country and are anchored in national legislation. Each country will have their own institutional bodies who define the takeover rules for their own country.

Rules with regards to takeovers for Limited Liability Companies can be found on the official website of the European Union. They also refer to Takeovers for large companies. An added dimension in the EU is that it regulates Takeovers of companies based in different countries

In the UK Takeovers are being supervised and regulated by the PANEL ON TAKEOVERS AND MERGERS. The Panel on Takeovers and Mergers (the “Panel”) is an independent body, established in 1968, whose main functions are to issue and administer the City Code on Takeovers and Mergers (the “Code”) and to supervise and regulate takeovers and other matters to which the Code applies. Its central objective is to ensure fair treatment for all shareholders in takeover bids. A Code of Conduct (the Code) has been developed since 1968 to reflect the collective opinion of those professionally involved in the field of takeovers as to appropriate business standards and as to how fairness to shareholders and an orderly framework for takeovers can be achieved. Their legislative basis is the Companies Act 2006 which confirms the rules in the code.

About the code:

The Code is based upon a number of General Principles, which are essentially statements of standards of commercial behaviour.

In addition to the General Principles, the Code contains a series of rules.

Two of the most important rules:

  • When a person or group acquires interests in shares carrying 30% or more of the voting rights of a company, they must make a cash offer to all other shareholders at the highest price paid in the 12 months before the offer was announced
  • Favourable deals for selected shareholders are banned.
  • There are several other rules. The Code can be downloaded on the website of the Panel on Takeovers and Mergers and makes good bedtime reading.

The panel itself consists of up to 35 members that are being nominated by major financial institutions and businesses.

Although the SEC has a general regulatory oversight of the rules applicable to tender offers, it is said that it has historically regulated tender offers with a fairly light hand.

Process of a Takeover

Note that this is a simplified description of the Takeover process.

1 Bidding company to form strategy of expansion by mergers and acquisitions (usually being advised by management consultants, accountants and industry experts).

2 Bidding company to secure funding for any potential future takeovers. Funding can be secured in several ways. Most common are: issuing a rights issue, issuing bonds or borrowing it from a bank. Another way to pay is by calling an exchange offer, whereby instead of money, shareholders are being offered shares of the bidding company as consideration for their shares in the target company.

3 Bidding company to inform the board of the target company about its intentions

4 Board of the target company to value the terms of the offer and to make a recommendation to its own shareholders either to accept or reject the offer. The valuation often has to be carried out by independent experts.

5 Bidding Company to appoint a paying Agent

6 Paying agent to publish and distribute the prospectus. Usually the Takeover is executed by means of a Tender Offer.

7 All other parties in the market to distribute the information to their clients who hold securities of the target company

8 Beneficial owners to evaluate the offer and send elections back on whether they accept or reject the offer. In most countries, employees of both the offeror and the offeree must be informed about an offer.

9 Paying agent to collate all responses from shareholders

10 Offer being declared unconditional

11 Paying agent to calculate the result and to announce the results

12 Often a second offer period is called, to give the shareholders who initially rejected the bid a chance to reconsider their options, now that the offer has been declared successful

13 Paying agent to receive all the shares in their account and to pay the cash proceeds to all the shareholders who accepted accordingly.

14 Shareholders to deal with tax consequences

15 Bidding company to integrate acquired company in their business (often meaning that the target company will be delisted)

Example of a Takeover

The takeover of Cadbury by Kraft foods can be found in more detail here: 

http://news.bbc.co.uk/1/hi/8467007.stm

 The Cadbury board has advised its shareholders to accept a new offer of 840 pence a share – valuing the company at £11.5bn ($18.9bn).

 This was a friendly takeover as can be seen from the following;

 “We believe the offer represents good value for Cadbury shareholders… and will now work with the Kraft Foods’ management to ensure the continued success and growth of the business,” said Cadbury’s chairman Roger Carr.

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