- A takeover occurs when one firm (acquiring) buys another firm (target). Takeovers can be classed as friendly or hostile.
- A successful takeover will lead to an effective merger and the new firm having a greater market share.
In a friendly takeover, the bidding firm approaches a firms managing board to make an offer for the target firm. If the board agrees the takeover represents could value for shareholders they will recommend shareholders take advantage of the takeover.
A hostile takeover occurs when the managing board of the target firm rejects the takeover bid, but, the acquiring firm pursues the takeover anyway. For example, they can appeal to the majority of shareholders to sell directly to them so that they can get control over the firm.
Sometimes, firms will buy increasing quantity of shares on the open market to gain more control of the firm by stealth.
When two firms at the same stage of production merge into one, e.g. Tesco buying out a smaller supermarket like the Co-op
When a firm buys another firm at a different stage of production, e.g. Tesco buying out a supplier of milk.
When a firm buys out another firm in another industry, e.g. Google buying out ITV new.
Benefits of Takeovers
- Enable dynamic firms to takeover inefficient firms and turn them into a more efficient and profitable firm.
- The new firm may benefit from economies of scale and share knowledge.
- Greater profit may enable more investment in research and development. For example, this is important for pharmaceutical firms which engage in much risky investment.
Costs of Takeovers
- Takeovers may be done to ‘cherry-pick’ a firm. i.e. strip off useful, valuable assets and then close down less attractive parts leading to job losses.
- The firm taken over may resent being bought out by a more powerful firm who doesn’t understand the culture of the existing firm.
- The takeover may create resentment and job losses which reduce morale in the new firm.
- Increased market share in oligopoly markets can lead to less choice and higher prices for consumers
- The new firm may not experience economies of scale, but diseconomies of scale.
Examples of Successful Takeovers
The takeover by Carlsberg PLC of Holsten. Carlsberg PLC
- 2006 AT&T bought BellSouth. The deal was worth $95.6 billion
- 2000 America Online (AOL) merged with Time Warner Inc – worth $112.1 billion
- 1999 Vodafone bought German internet and phone company Mannesmann – the deal was worth $172 billion
Firms which are trading at a low value compared to potential may be vulnerable to a takeover. If a firm is badly run with much potential, this may be reflected in the share price. This makes it more attractive to a takeover because another firm may feel they can turn it around.
Examples of Takeover Targets
- Liverpool F.C
- Sainsbury’s – rejected offer at 600p, but now trading below that.
- Fox News trying to buy Sky.
Acquisitions is another very similar term to describe a takeover. An aquisition involves gaining control over another firm, usually through the purchase of shares of the company or to buy assets of the business directly.
An acquisition may involve a takeover where one firm buys out another, often against the wishes of certain taxpayers. People may talk of an acquisition when there is a mutually agreed merger – in which two firms of equal standing decide to come together to form one firm.
In practise there is often a blurring of the distinction between merger and acquisition. Generally, an acquisition is a takeover of a firms assets, with some resistance from shareholders. A merger is a mutually agreed decision to make one firm.