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What is a Takeover?

Takeover

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Takeover

A takeover refers to the acquisition of one company (the target) by another (the acquirer or bidder). The goal of a takeover is to seize control of the target company. Once an acquisition is completed, the target company either becomes a part of the acquiring company or operates as a subsidiary. Takeovers can be friendly or hostile:

  • Friendly Takeover: This happens when the management and board of directors of the target company agree to be acquired by the bidder. Typically, discussions take place between the two entities, a mutually agreeable price is determined, and then the acquisition proceeds with the cooperation of both parties.
  • Hostile Takeover: This type of takeover occurs against the wishes of the target company’s management and board of directors. The acquiring company might bypass the usual negotiations with the target company’s leadership and instead directly offer to buy the company’s shares from the shareholders or seek changes in the company’s management.

Takeovers can be executed in various ways, including:

  • Tender Offer: The acquiring company directly offers to buy shares from the target company’s shareholders at a premium to the current market price.
  • Purchase of Assets: Instead of purchasing shares, the acquiring company may opt to buy the assets of the target company.
  • Management Acquisition (MBO): The managers and/or executives of a company buy a controlling stake in a company, making the company private.
  • Bear Hug: An informal takeover bid where the acquiring company approaches the target’s board of directors with a friendly but unsolicited proposal.
  • Proxy Fight: This happens during a hostile takeover. The acquirer tries to persuade the shareholders to allow it to act as their proxy to vote for changes in management or the board of directors.

A takeover, whether friendly or hostile, can have various effects on a company’s stakeholders. Shareholders may benefit from a rise in share price during a takeover bid, while employees might face changes in their work environment, benefits, or even potential layoffs. Customers and suppliers might also experience changes in their relationship with the company. Due to these potential impacts, takeovers often attract attention from the media, regulators, and industry analysts.

Example of a Takeover

One of the most prominent takeovers in history is the acquisition of Time Warner by AOL in 2000. Let’s delve into the details:

AOL-Time Warner Merger (2000)

Background: AOL (America Online) was, during the late 1990s, one of the most dominant and recognized internet service providers. At its peak, AOL boasted millions of subscribers. On the other hand, Time Warner was a massive media conglomerate with a diverse portfolio that included television networks, music labels, and publishing outlets.

The Takeover:

  • In January 2000, AOL announced that it would be acquiring Time Warner in a stock-for-stock merger.
  • The deal was valued at approximately $165 billion, making it the largest merger in U.S. business history at the time.
  • This was touted as the perfect blend of old media (Time Warner) and new media (AOL). The idea was that AOL would gain access to Time Warner’s vast content library, and Time Warner would get exposure to AOL’s internet subscriber base.
  • It was a friendly merger, with both companies’ management teams in favor of the deal.

Outcome:

  • The merger did not go as smoothly as anticipated. The anticipated synergies between the two companies didn’t materialize as expected.
  • AOL’s subscriber base started to decline with the rise of broadband, and Time Warner’s content didn’t gain the expected traction on AOL’s platform.
  • In the subsequent years, the merged company faced significant financial losses, and the value of the merged entity plummeted.
  • In 2003, the company was renamed “Time Warner” and AOL was spun off as an independent company in 2009.
  • The merger is often cited in business schools and by industry analysts as a cautionary tale about the challenges of integrating two very different corporate cultures and the risks of large-scale mergers.

This example provides insights into the complexities and risks involved in major takeovers, even when they are friendly and strategically sound on paper.

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