Takeovers

  • 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.

Friendly takeovers

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.

Hostile 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.

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.
  • 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

Takeover Targets

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.

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