Takeovers and Mergers

Once a company goes public, its shares can be bought and sold on by anyone. The company no longer has the protection of private status, where a small group of shareholders can decide who should be allowed to buy shares. Now, the highest bidder can buy the company’s shares and can therefore take control of the company – this is known as a takeover if the bidder buys more than 50 % of the company’s shares. Note that a takeover is not the same as a merger.

A merger is a notably different transaction from a takeover. A merger occurs when two (or more) firms agree to pool all their resources and join together to form a brand new company. The original companies disappear and their shareholders receive shares in the newly formed company according to conditions drawn up and agreed at general meetings of the merging companies.

There are different types of merger. Assuming Company A is a manufacturer of goods, in vertical forward integration, it mergers with another company that is higher up the production line and closer to the customer. Company B might be a retailer of Company A goods.

In vertical backward integration the reverse applies, and Company A mergers with a supplier of raw materials. Therefore, if Company A manufactures toys from plastic, it might merge with Company B which supplies the ingredients for the plastic.

Horizontal integration means that Company A mergers with another at the same level of production and in the same market. In this case, Company B would also be a manufacturer of toys.

Conglomerate integration would occur if Company A decides to enter a new market and merge with (or take over) Company B which manufactures lawnmowers.

Let us turn again to takeovers. How to buy a company?

Quite simply, the purchase of more than 50% of the company’s shares allows potential takeover bidder to gain control of a company. To buy those shares, a potential takeover bidder must make an offer to existing shareholders. The price it offers to pay for the shares is likely to be well above the current stock market value.

What happens after the initial offer?

At this point, it is important to introduce the role played by the board of directors of the target company. If the board issues a statement rejecting the offer, many shareholders may take this advice. The potential buyer may decide to make an increased offer to tempt more shareholders or withdraw.

If the directors decide to reject a takeover bid, it is then in the hands of the existing shareholders to decide on the attraction of the price being offered This is the point where the magic figure of over 50% of shares comes to the fore. Whether or not the directors of the target firm are in favor, a predator that can manage to accumulate more than half the target’s shares will have effective control. It may do this by stealthier means than an open bid. This is the territory of ‘dawn raids’ – when the predator, or its agents, start buying shares of the target company as soon as the market opens in the morning, in the hope that they can catch the market by surprise and accumulate enough shares quickly without anyone quite realizing that a takeover is in the offing.

To avoid a hostile takeover the target company may seek a ‘white knight’, another company with which it would prefer to merge.

A frequent motive behind many US and UK takeovers is to sell off the assets of the acquired company. If a company’s stock market value is assessed at less than its combined real assets – such as land and capital equipment – it may become vulnerable to hostile takeover bids which will result in the company’s demise, as it is closed down and its assets are sold off.

Ex. 1. Match up these words with the definitions below.

1. designing new products and bringing them to the market;

2. to unite, combine, integrate or join together;

3. buying another company’s shares on the stock exchange, hoping to persuade enough other shareholders to sell to take control of the company;

4. a public offer to a company’s shareholders to buy their shares, at a particular price during a particular period, so as to acquire a company;

5. to merge with or take over other firms producing the same type of goods or services;

6. joining with firms in other stages of the production or sale of a product;

7. a merger with or the acquisition of one’s suppliers;

8. a merger with or the acquisition of one’s marketing outlets.

Ex. 2. Answer the questions.

1. How can you define a merger? What are different types of merger

2. How do takeovers and mergers differ?

3. What are the roles played by the board of directors of the target company and the bidder in the process of takeover?

4. What is the role of predators during dawn raids?

5. What does the target company do to avoid a hostile takeover?