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Takeover Bid

The purchase of a company (the target) by another company (the acquirer)

What is a Takeover Bid?

A takeover bid refers to the purchase of a company (the target) by another company (the acquirer). With a takeover bid, the acquirer typically offers cash, stock, or a mix of both, “bidding” a specific price to purchase the target company for.

 

Takeover Bid

 

Types of Takeover Bids

The four different types of takeover bids include:

 

1. Friendly Takeover

A friendly takeover bid occurs when the board of directors from both companies (the target and acquirer) negotiate and approve the bid. The board from the target company will approve the buyout terms and shareholders will get the opportunity to vote in favor of, or against, the takeover.

 

Example: Aetna and CVS Health Corporation

An example of a friendly takeover bid is the takeover of Aetna by CVS Health Corp. in December 2017. The resulting company benefited from significant synergies, as noted by Chief Executive Officer Larry Merlo in a press release: “By delivering the combined capabilities of our two leading organizations, we will transform the consumer health experience and build healthier communities through a new innovative health care model that is local, easier to use, less expensive, and puts consumers at the center of their care.”

 

2. Hostile Takeover

A hostile takeover bid occurs when an acquiring company seeks to acquire another company – the target company – but the board of directors from the target company has no desire to be acquired by, or merged with, another company – or they find the bid price offered unacceptable. The target company may reject a bid if it believes that the offer undermines the company’s prospects and potential. The two most common strategies used by acquirers in a hostile takeover are a tender offer or a proxy vote.

  • Tender offer: Offering to purchase shares of the target company at a premium to the market price.
  • Proxy vote: Persuading shareholders of the target company to vote out the existing management.

 

Example: Aphria and Green Growth Brands

An example of a hostile takeover bid was Green Growth Brands’ takeover attempt of Aphria in December 2018. Green Growth Brands submitted an all-stock offer for Aphia, valuing the company at $2.35 billion. However, Aphria’s board and shareholders rejected the offer, citing that the offer significantly undervalued the company.

 

3. Reverse Takeover Bid

A reverse takeover bid occurs when a private company purchases a public company. The main rationale behind reverse takeovers is to achieve listing status without going through an initial public offering (IPO). In other words, in a reverse takeover offer, the private acquiring company becomes a public company by taking over an already-listed company.

The acquirer can choose to conduct a reverse takeover bid if it concludes that is a better option than applying for an IPO. The process of being listed requires large amounts of paperwork and is a tedious and costly process.

 

J. Michaels and Muriel Siebert

An example of a reverse takeover bid is the reverse takeover of J. Michaels (a furniture company) by Muriel Siebert’s brokerage firm in 1996, to form Siebert Financial Corp. Today, Siebert Financial Corp is a holding company for Muriel Siebert & Co. and is one of the largest discount brokerage firms in the United States.

 

4. Backflip Takeover Bid

A backflip takeover bid occurs when the acquirer becomes the subsidiary of the target company. The takeover is termed a “backflip” due to the fact that the target company is the surviving entity and the acquiring company becomes the subsidiary of the merged company. A common motive behind a backflip takeover offer is for the acquiring company to take advantage of the target’s stronger brand recognition or some other significant marketplace edge.

 

Example: AT&T and SBC

An example of a backflip takeover bid is the takeover of AT&T by SBC in 2005. In the transaction, SBC purchased AT&T for $16 billion and named the merged company AT&T because of AT&T’s stronger brand image.

 

More Resources

CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below:

  • Asset Purchase vs. Stock Purchase
  • Creeping Takeover
  • Mixed Offering
  • Tender Offer

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