Takeover

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Understanding Corporate Takeovers

A takeover is when one company (the acquirer) gains control of another company (the target), typically by acquiring a majority of its outstanding shares. Takeovers are a common element of mergers and acquisitions (M&A) strategies and can be structured in many ways depending on whether the target cooperates.

Key points

  • A takeover transfers control of a target company to an acquirer, often by buying a majority stake.
  • Takeovers can be friendly (consensual) or hostile (opposed by the target).
  • Common motivations include increasing market share, achieving synergies, entering new markets, refinancing debt, or replacing management.
  • Financing typically comes from cash, debt (including leveraged buyouts), stock issuance, or a combination.
  • Ownership thresholds matter: generally, 20–50% is accounted for using the equity method; over 50% usually requires consolidated financial statements.

How takeovers work

Takeovers can be structured in several ways:
* Purchase of a controlling interest in outstanding shares.
Acquisition of the entire company (buyout).
 Merger that combines the companies into one entity.
* Acquisition as a subsidiary, keeping the target as a distinct legal entity.

For public targets, acquirers may buy shares on the open market or make a formal offer for all outstanding shares. In friendly deals, parties negotiate terms and shareholders vote to approve the transaction. In hostile scenarios, the acquirer may circumvent management by making a direct offer to shareholders.

Types of takeovers

  • Friendly takeover: Both boards and key shareholders support the transaction. Often structured as a negotiated merger or share exchange.
  • Hostile takeover: Management and the board oppose the bid. Tactics can include aggressive share purchases and public offers directly to shareholders.
  • Dawn raid: Rapid purchase of a large stake at market open to gain control before defenses activate.
  • Reverse takeover: A private company acquires a public company to gain a public listing without an IPO.
  • Creeping takeover: The acquirer gradually accumulates shares over time until control is achieved.
  • Activist takeover: Activist investors build a stake to influence strategy or replace management.

Common defensive measures by target companies

  • Poison pill (shareholder rights plan): Dilutes an acquirer’s holdings by allowing existing shareholders to buy discounted shares.
  • White knight: Finding a friendly company to acquire the target instead.
  • Staggered board, shareholder rights, litigation, share buybacks and other tactics to make a takeover more difficult or expensive.

Why companies pursue takeovers

  • Increase market share and scale.
  • Capture cost savings and revenue synergies.
  • Enter new geographic or product markets quickly.
  • Eliminate or reduce competition.
  • Refinance expensive debt of the target using the acquirer’s stronger credit.
  • Replace underperforming management or unlock undervalued assets.

How takeovers are funded

  • Cash: Direct cash offers paid to shareholders.
  • Debt: Borrowing to finance the purchase; when debt funds the buyout it’s called a leveraged buyout (LBO). Debt can come from loans, lines of credit, or bond issuance.
  • Stock: Issuing new shares of the combined entity or offering stock in exchange for target shares.
  • Combinations of the above are common (cash + stock, cash + debt).

Case example: ConAgra and Ralcorp

ConAgra pursued Ralcorp beginning in 2011. Initial friendly offers were rebuffed, prompting ConAgra to consider a hostile approach. Ralcorp adopted a poison pill defense. ConAgra raised its offer to $94 per share (well above the $65 trading price) and after negotiations — and after Ralcorp spun off its Post cereal division — the companies completed a friendly acquisition at about $90 per share.

Bottom line

Takeovers are strategic tools for growth, market entry, and consolidation. They range from amicable mergers to aggressive hostile bids and require careful structuring, financing, and defensive planning. Ownership thresholds and accounting treatments (equity method vs. consolidation) influence how companies report acquired interests, while funding choice (cash, debt, stock) shapes the deal’s financial impact.