What is a takeover bid ?

Takeover bids have recently been in the news. The purchase of EDF and Tweeter have been mentioned several times in the last few days and have caused a considerable number of headlines. However, for readers unfamiliar with the world of finance, the term "takeover bid" may appear unclear. Let's see how to define and understand this financial operation.

See more: Will Elon Musk buy Twitter? & Why is the state going to nationalize EDF ?

Definition of a takeover bid

A takeover bid is the public announcement, usually in the media, of a financial player's intention to buy a significant part or all of the shares of a listed company.

To ensure that all shareholders of the target company sell their shares, the buying company offers a price per share higher than the stock market price. Generally, at least two times the market price. This offer to buy above the value of the share drives the shareholders to sell. They see this as an opportunity to realize a profit. The offer is announced publicly in order to ensure that as many shareholders as possible are reached in order to acquire the most shares in the minimum time possible.

A takeover bid is limited in time. The value per share offered by the buyer is only available for a defined period. This encourages shareholders to sell their shares during this limited period, as they may not be able to take advantage of the offer outside the period offered by the buyer. The establishment of a time limit allows the buyer to limit the timing of its acquisition and thus to better control its financial flows.

A takeover bid is successful when the buyer manages to acquire the number of shares he wanted to buy. It is a failure if the buyer is not able to acquire the number of shares he wanted to buy. A failure almost always implies an abandonment of the takeover bid.

Friendly takeover bid and hostile takeover bid

The term Takeover bid includes two situations that can be very different. It is important to make a distinction between friendly and hostile bids.

friendly takeover bid

A friendly takeover bid is a takeover bid that takes place with the consent of the shareholders of the target company. This means that the shareholders of the acquired company agree to sell their shares to the acquiring company. In some cases, a company may solicit another company to be acquired. This is often the case in friendly takeovers, even if it is not systematic. A company may agree to be acquired by a company which was not solicited by the targeted company itself, and thus conclude a friendly takeover without contacting the acquiring company.

Hostile takeover bid

A hostile takeover is the opposite of a friendly takeover. A hostile takeover is a takeover that takes place without the consent of all the shareholders of the target company. This means that not all shareholders of the target company are willing to sell their shares to the acquiring company.

If a company refuses to be bought, the buying company can try to increase its offer. It can also try to convince the shareholders by other means than financial ones. In particular by highlighting the strategic benefits of the purchase. It is also possible to extend the timeframe for the purchase of shares, and to enter into a long-term buyout.

However, the purchasing company is in a complex situation. The solutions mentioned above imply a higher expenditure of money and major disruptions in the time schedule.

It is also important to note that in a hostile takeover the acquired company is rarely passive. The latter can implement defensive strategies to fight against the takeover attempt. This makes the hostile takeover even more complex for the acquiring company.

Defensives strategies against hostile takeover bid

There are many strategies for defending against hostile takeovers. The strategies listed below are the simplest to understand among the most used.

The white knight defense

In this strategy, the purchased company contacts another company to make a separate offer from the hostile bidder. This allows the purchased company to avoid being the victim of a hostile takeover, by using a friendly takeover with a third company.

The crown jewel defense

In this strategy, the acquired company, which is the victim of the hostile takeover, gives up all its strategic assets in order to make the company lose value. This leads the acquiring company to acquire a company that has little or no value.

The Pac-Man defense

This defensive tactic consists of trying to discourage the buying company by making the stock purchase as expensive as possible by increasing the value of the purchased company. Most often this is done by absorbing several companies and/or increasing the share capital.

The separation of capital ownership and decision-making power

The objective of this method is to change the legal status of the company. The aim is to ensure that the holding of capital is no longer synonymous with decision-making capacity. Thus, owning the shares of a company does not allow to manage the company. Hence, the takeover bid is deprived of interest.

A takeover bid is therefore a word that can correspond to two very different realities. A friendly takeover, the most common, is often profitable for the acquired company. It is sometimes even desired by the target company. The hostile takeover is carried out under more complex conditions because the target company does not wish to be taken over. In order to avoid this takeover, the purchased company can rely on various strategies to dissuade the purchasing company.