What is a Friendly Takeover?
In M&A transactions, a friendly takeover is referred to as the acquisition of a target company by a bidder with the consent of the management and board of directors of the target company.
A friendly takeover is the opposite of a hostile takeover. The latter is a type of acquisition in which a bidder acquires a target company without the consent of the management and/or shareholders of the target.
Components of a Friendly Takeover
1. Public offer of cash or stock
Generally, a friendly takeover is a public offer of cash or stock made by a bidding company that is given to the board of directors of the target company for approval.
2. Premium per share
The per share stock price paid by the acquirer to the shareholders of the target company is a key determinant of the success of the deal. In most cases, the acquirer must pay a significant premium per share to secure the approval of the target company’s shareholders.
3. Shareholders’ approval
When an offer is received by the target company’s board of directors, shareholders with voting rights vote for the approval of the transaction. Typically, the approval requires the majority of the votes (i.e., more than 50%).
However, some companies include supermajority provisions in their corporate charters that require a larger percentage of shareholders approving the transaction (the number may vary between 70% to 90%).
4. Regulatory approval
Even if the shareholders of the target company approve the acquisition, the deal is still subject to the approval of a regulatory body (e.g., Department of Justice). The government regulator may disapprove a friendly takeover if the deal violates competition (also known as antitrust or anti-monopoly) laws.
Other buyout terms also play a crucial role since the offer is a comprehensive legal document that includes several provisions and clauses. For example, the buyout terms may include provisions regarding the brand and operations of the target company, as well as the inclusion of key shareholders of the target company in the board of directors of the acquirer.
Advantages of a Friendly Takeover
Generally, friendly takeover deals deliver substantial advantages to both bidders and target companies relative to the hostile takeover. Some of the advantages include the following:
- The involvement of both parties (bidder and target company) ensures the better design of the deal and value delivery to the participating parties.
- The target company does not incur costs due to the agency problem and/or does not erase its value due to the employed defense mechanisms to prevent a hostile takeover.
- The bidder incurs reasonable costs to acquire a target company. The per share premium is primarily based on the growth prospects of the target company and potential synergies created as a result of a deal.
Example of a Friendly Takeover
In 2014, Facebook Inc. announced the acquisition of mobile messaging company WhatsApp. According to the statement issued by Facebook, the deal was intended to “support Facebook and WhatsApp’s shared mission to bring more connectivity and utility to the world by delivering core services efficiently and affordably.”
The acquisition was executed in the form of a friendly takeover. Facebook acquired all outstanding shares and options of WhatsApp for $4 billion in cash and 183 million of Facebook Class A common shares. Additionally, Facebook assigned more than 45 million restricted shares to WhatsApp’s employees. The total value of a deal was valued at around $19 billion.
Following the acquisition, WhatsApp retained its brand and continued operating as the company’s operations remained independent from the operations of Facebook. Also, WhatsApp’s co-founder and CEO Jan Koum obtained a seat on the board of Facebook.
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