What is the Difference Between Takeover and Acquisition?
Shivani Jain | Updated: May 01, 2020 | Category: Change in Business, SEBI Advisory
One of the best ways to expand and grow a business is by way of merging with or acquiring or takeover of another business. The concept of mergers means when two consenting companies of the same size decide to combine and unite their efforts. Whereas on the other hand, the process of acquisition involves a larger company acquiring a smaller company or entity. While takeover is a special type of acquisition that happens whenever a company takes or acquires control of another company that, too, without the acquired firm’s agreement. Further, in this article, we will be dealing in detail with the concept of acquisition and takeover, along with the difference between the takeover and acquisition.
Two of the main difference between the Takeover and Acquisition is that firstly, the Process of Acquisition is usually an agreed-upon, a well-planned operation, whereas the process of Takeover is basically a Hostile Act. Further, the second difference between takeover and acquisition is that the process of acquisition involves the concept of ‘Mutual Decision’. However, the same is not included in the process of a Takeover.
What is the Meaning of the term Acquisition?
The process of acquisition is quite similar to that of a takeover. In the process of acquisition, one company will purchase or acquire the other. However, it is noteworthy that acquisition is usually made on a pre-planned and orderly basis in which both the parties strongly agree if helpful to both firms.
Further, in an acquisition, a company that acquires or purchases the target company will be entitled to all the assets, liabilities, properties, equipment, patents, offices, trademarks of the target company, etc. Furthermore, the acquirer company will either pay in cash in order to acquire the firm or will provide shares in the acquirer’s firm as compensation.
In most cases, once the process of acquisition is complete, the said target company will not exist, and as it will be absorbed up by the acquirer. Hence, the acquired company will act as an indistinguishable part of the larger acquirer company. Whereas, in some instances, the target company may also operate as a separate unit under the said larger firm.
What are the Types of Acquisition?
The following listed are the types of Acquisition:
- Friendly Acquisition: The term Friendly Takeover means the larger company offering a smaller company some kind of choice or control in the process of acquisition. Further, in the case of a friendly takeover, there is an agreement signed between the acquiring company and the target company. Lastly, this type of acquisition is normally done for the mutual benefit of both concerned companies.
- Hostile Takeover: The term Hostile Takeover means the larger company has not given any choice or control to the smaller ones in the matter. Further, unlike a friendly takeover, no agreement is signed between the acquiring company and the target company in a hostile takeover. Hence, the acquiring company clandestinely acquires the said target company.
Usually, in this type of takeover, there is absolutely no or minimal mutual benefit involved. Moreover, this type of takeover takes place whenever the target company does not approve or gives its consent for the acquisition. Lastly, the majority of the stake or ownership is taken covertly to force the acquisition.
Example of Acquisition
One of the most famous examples of an acquisition would be the Walt Disney Corporation. In 2006, the Pixar Animation Studios was bought by the Walt Disney Corporation. In this case, the acquisition was a friendly acquisition, as all the shareholders of the Pixar’s shareholders approved the decision to be acquired.
What is the Meaning of the term Takeover?
The term takeover is very similar and alike to an acquisition. In the process of takeover, one company will purchase or acquire another for an agreed amount in cash or the number of shares. However, it is noteworthy to note that, as the term suggests, a takeover will most possibly be an unfriendly and hostile action in which one company acquires or takes over enough shares of the another (normally more than 50 percent). This is done so that the acquirer company is able to take over the stake and operations of the target company.
What are the Types of Takeover?
The types of Takeover have been explained below:
- Reverse Takeover: Reverse takeovers are also termed as the Bail Out takeovers. This form of takeover is undertaken for the profit-earning concerns that bail out the financially feeble or a weak company by taking over them. However, it is pertinent to note that such a financially weak company is not at all a sick company. Further, a reverse takeover is basically an approach that is mostly opted by the Private Limited Companies that acquire or takeover a Public Company as it saves them from following the lengthy procedure of conversion to a public company by conventional IPOs.
- Friendly Takeover: Under this sort of takeovers, bidders generally informs the Board of Directors of the concerned company about the offer prior to making an offer to the outside Company. Normally, the board and shareholders are closely connected and associated, so the private acquisition is normally friendly.
- Hostile Takeover: A hostile takeover is a sort of forced takeover in which an acquirer company acquires or purchases the target company. Further, in this case, the management of the said Target Company is reluctant to agree for the merger or is unwilling to any merger for takeover. Furthermore, a takeover is recognised as a hostile takeover if the Board of the target company rejects or discards the offer, still, the bidder continues to pursue it.
Examples of Takeover
The only example of a successful hostile takeover in the Indian market occurred in February 1998. In this case, the India Cements Limited (“ICL“), bid for the Raasi Cements Limited (“RCL“), and also made an open proposal for 20 percent of the RCL’s shares at Rs 300 per share. This offer was made at that time when the share price of the RCL’s was at Rs. 100 on the recognized stock exchange.
Further, the financial Institutions also held a substantial stake in RCL, and so a prolonged battle resulted among the ICL, RCL, and the Financial Institutions. Throughout the period of the public offer, all the promoters of RCL reached a conclusion in which they decided to sell its 32 percent stake to the ICL. The price offered was lower than the open offer price. Afterwards, ICL also swallowed out the Financial Institutions in an open proposal and increased their stake holdings in the RCL to 85 percent.
What is the Difference Between Takeover and Acquisition?
The primary difference between takeover and acquisition is enumerated below:
|An acquisition is quite parallel to a takeover in that one company will acquire the other; however, usually on a pre-planned and orderly in the manner in which both parties strongly agree if beneficial to both firms.||A Takeover is generally a hostile act, where the acquirer will surpass the target company’s board of directors and will purchase more than 50 percent of the shares to obtain a controlling stake in the firm.|
|The Process of Acquisition in normally an agreed upon a well-planned operation||Whereas the process of takeover is basically a Hostile Act|
|Both the acquirer company and the acquired company mutually decides for the acquisition.||The concept of mutual decision is not included in the process of takeover.|
Both the Acquisitions and takeovers are quite similar and alike to each other, as in both the acquisitions and takeovers, the concerned acquirer firm purchases or acquires the target firm, and both the firms will operate as one larger entity. The only significant difference between the takeover and acquisition is that the Process of Acquisition in normally a well-planned operation where both the parties mutually agree on the terms and conditions. In contrast, the process of Takeover is basically a hostile act.
Also, Read: Due Diligence Process for Merger and Acquisition
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