Science Fair Project Encyclopedia
Corporate takeovers occur readily in the United States and in the United Kingdom. They do not happen often in Germany because of the dual board structure, in Japan because companies have interlocking sets of ownerships known as keiretsu or in the People's Republic of China because the state majority-owns most publicly listed companies there.
Means of takeover
Forms of takeover
- A friendly takeover consists of a straight buyout of a company, and happens all the time. The shareholders receive cash or (more commonly) an agreed-upon number of shares of the acquiring company's stock.
- A hostile takeover occurs when a company attempts to buy out another whether they like it or not. A hostile takeover can usually occur only through publicly traded shares, as it requires the acquirer to bypass the board of directors and purchase the shares from other sources. This is difficult unless the shares of the target company are widely available and easily purchased (i.e., they have high liquidity). A hostile takeover may presage a corporate raid.
- A reverse takeover can occur in different forms:
- a smaller corporate entity takes over a larger one.
- a private company purchases a public one.
- a method of listing a private company while bypassing most securities regulations, whereby which a shell public company buys out a functioning private company whose management then controls the public company.
There are a variety of reasons that an acquiring company may wish to purchase another company. Some takeovers are opportunistic: the target company may simply be very reasonably priced, for one reason or another, and the acquiring company may decide that in the time period that's important to it, it will end up making money by purchasing the target company, because of its normal profitability. The massive holding company Berkshire Hathaway seems to have profited very well over time by purchasing many companies opportunistically in this way.
Other takeovers are strategic in that they are thought to have secondary effects beyond the simple effect of the profitability of the target company being added to the acquiring company's profitability. For example, an acquiring company may decide to purchase a company that is profitable on its own accord but also has good distribution capabilities in new areas which the acquiring company can utilize for its own products as well. A target company might be attractive because it allows the acquiring company to enter a new market with a running start, without having to take on the risk, time, and expense of starting a new division that would compete in this new market. An acquiring company could decide to take over a competitor not only because the competitor is profitable, but in order to eliminate competition in its field and make it easier, in the long term, to raise prices; or in the belief that the combined company can be more profitable than the two companies would be separately due to a reduction of redundant functions; or, if an acquiring company has a major competitor it wants to attack, it may purchase a target company which already competes with that major competitor in some other area or product line.
Critics often charge that very large companies execute takeovers in order to boost their reported revenue (sales to customers), without giving sufficient regard to profit, which generally takes a hit when a company is acquired because of all the costs involved, and because a premium is always paid if the target company is financially healthy and not already desperate to be taken over. The widespread belief in this criticism is demonstrated by the fact that a takeover announcement typically drives up the stock price of the target company, and forces down that of the acquiring company.
The target company has several methods to avoid a takeover, if it wishes. These include legal actions, as in the case of the Hewlett-Packard purchase of Compaq, or the use of a poison pill, as set up by Transmeta.
Most dot-com companies were created for the express purpose of being taken over with a consequent immediate profit for their owners, as opposed to the usual purpose of creating a business: to create profit for its owners over time by generating cash which is paid in dividends.
Tactics against hostile takeover
- Bon-voyage Bonus
- Crown Jewel Defense
- Gray Knight
- Jonestown Defense
- Killer Bees
- Leveraged Recapitalization
- Lobster Trap
- Lock-up Provision
- Lollipop Defense
- Macaroni Defense
- Nancy Reagan Defense
- Non-voting Stock
- Pac-Man Defense
- Pension Parachute
- People Pill
- Poison Pill
- Poison Put
- Porcupine Defense
- Relationship Shares
- Safe Harbor
- Scorched-earth Defense
- Selling the Crown Jewels
- Shark Repellent
- Staggered Board of Directors
- Standstill Agreement
- Suicide Pill
- Superpoison Put
- Targeted Repurchase
- Treasury Stock
- White Knight
- White Squire
- Mergers and acquisitions
- Proxy solicitation (How to Get Shareholders to Vote for Your Resolution)
- The Altman Group (a specialist in building support for hostile takeovers) (story mentioning Altman Group)
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