In mergers and acquisitions (M&A) a Creeping Takeover, also known as Creeping Tender Offer, is the gradual purchase of the target company’s shares. The strategy of a creeping takeover is to gradually acquire shares of the target through the open market, with the goal of gaining a controlling interest.
Understanding Creeping Takeover
A creeping takeover involves purchasing shares of the target company on the open market. Through the creeping takeover method, the acquirer can obtain a portion of the shares at current market prices rather than needing to pay a premium price through a formal tender offer. The purpose of a creeping tender offer is to obtain a portion of the target company’s shares more cheaply than one can through an ordinary tender offer. In some countries, however, there are regulations governing this process that require the bidder to offer a formal bid upon holding a certain amount of shares.
Rationale Behind a Creeping Takeover
In the US, a creeping takeover is used to get around the provisions of the Williams Act.
Key provisions of the Williams Act:
In a tender offer, all shareholders must be offered the same price for their shares.
An investor or a group attempting to acquire a large block of shares must file all relevant details of their tender offer with the SEC.
Therefore, with a creeping tender offer, the bidder is able to circumvent all of these provisions and purchase shares from different shareholders on the open market. Usually, only when a substantial number of shares have already been acquired through a creeping takeover strategy will the bidder file the necessary documents and offer a formal bid.
Risks in a Creeping Takeover
A failure in the takeover of the target company will leave the acquirer with a large block of shares that it may need to liquidate, possibly at a loss, in the future. However, there are ways to minimize this risk. Pressure can be applied to the target company to force them to repurchase the shares at a high price.
Example of a Creeping Takeover
A famous creeping tender offer involves Porsche and Volkswagen. From 2005 to 2008, Porsche slowly bought shares of Volkswagen before finally revealing that it was planning to take control of Volkswagen. However, the financial crisis prevented a successful acquisition of Volkswagen Group by Porsche. In the end, Volkswagen Group bought 100% of the shares of Porsche and became its parent company in August 2012.
In mid-2005, Porsche began buying Volkswagen shares and announced that it had plans to acquire more than 20% of the Volkswagen Group.
By mid-2006, Porsche’s stake in Volkswagen reached over 25%. However, Porsche indicated that it was not attempting a takeover. Rather, Porsche wanted to protect the world’s biggest carmakers from corporate raiders. It was basically casting itself in the role of a white squire.
In October 2008, Porsche held a 43% stake in Volkswagen, with options to purchase another 32%. It was revealed that Porsche actually wanted to take control of Volkswagen.
However, in 2008, the financial crisis struck and banks were unwilling to lend Porsche more money to complete the takeover. In fact, Porsche was facing a liquidity crisis. Eventually, Porsche collapsed under pressure from creditors calling in their loans.
Volkswagen ended up buying Porsche and became Porsche’s parent company in August 2012.
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