Takeovers, whether friendly or hostile, are a common source of misunderstanding in M&A. So how does one tell the two apart?

A takeover can be friendly or hostile, depending on the circumstances surrounding the transaction.

In a “friendly” takeover, the management and board of directors of the company being taken over agree to it and help make it happen.

A hostile takeover, on the other hand, happens when the management and board of directors of the company being taken over actively oppose the acquisition.

Depending on the nature of the takeover, acquisition strategies range from friendly to aggressive.

This is elaborated on further down.

To begin, we must learn the mechanics of takeovers as well as the factors that lead to their occurrence.

The definition and motivation for takeovers are not always clear.

A takeover is when one company (the acquirer or bidder) buys control of another company (the target) from another company. There will be a merger of the two companies following a takeover, regardless of whether the takeover is friendly or hostile.

There are several causes of a takeover, such as

 1. To take advantage of synergies and economies of scale in operations – By combining two businesses into one larger company, you can take advantage of operational efficiencies and economies of scale (if the businesses are in the same field or use similar resources).

2. To eliminate competition – Smaller companies that compete with the bidder can be taken over and put out of business. The bidder doesn’t have to compete with the target company to get a piece of the market. Instead, the bidder can just buy the target company to get the target’s market share and get rid of the competition.

3. To acquire a company in a unique niche market – A takeover can happen when the bidder wants to buy the target company’s proprietary technology. This could happen if the bidder doesn’t have a good research and development (R&D) team or doesn’t want to spend time and money making new technology.

4. Building an empire through management – Takeovers can happen when managers want to “build an empire.” This is the process of a company buying out other companies to grow in size, reach, and power. When a business reason for a takeover is “building an empire,” shareholders of the acquiring company usually don’t like it because it could mean that the management team is more concerned with controlling resources than with allocating them in the best way.

Methods of a Friendly Takeover – In a friendly takeover, the current leadership and board of directors of the target company support the purchase and try to get shareholders to back it. In a favourable takeover, the acquiring business can use tactics like:

1. Giving their own stock or funds –The acquiring company can offer x shares of its own stock for each share of the target company, or it can offer x dollars in cash for each share of the target company. You can also use a mix of shares of the acquiring company and cash.
2. Adding a premium to the share price – The company that wants to buy the other company can offer a percentage more than the last closing share price of the company it wants to buy (x% more than the closing share price).

Strategies for a hostile takeover – In a hostile takeover, the board of directors and management of the company being taken over are against the deal and ask shareholders to vote against it. In the event of a hostile takeover, the acquiring company could do any of the following:

1. Fighting by proxy – The acquiring company engages in a proxy fight when it tries to convince a majority of the target company’s shareholders to remove the board of directors and then vote in favour of the purchase.
2. An offer to buy – A tender offer is an offer made directly to stockholders to buy their shares at a price higher than the stock’s current market price.