What are the Strategies and Practice of Company Takeover
Monisha Chaudhary | Updated: Oct 01, 2019 | Category: RBI Advisory
In an age of ever-growing competition & changing fast-paced technologies, the existing business houses face several challenges that question their mere existence. Corporates need to undergo structural modification to save their decay and old outlook.
Corporates, therefore, rely on different growth strategies for pursuing new opportunities, to increase competitiveness or for expansion and diversification that enable them to strengthen their market position and financial performance.
Various growth-oriented strategies are used by corporates such as entering into new markets, expanding their existing market base, entering into a joint venture agreement or going international via means of merger, takeover, amalgamation, etc.
Company Takeover is one of the most popular practices for growth in today’s business world. Takeover involves the acquisition of control usually by purchasing the majority stake of the company that is already registered.
The purchaser of the company is known as the bidder or acquirer, and the company which is being taken over is referred to as the Target Company.
Regulation of Takeover
A takeover administers the following provisions:
- Section 230(11) of the Companies Act 2013 governs all forms of compromise, arrangement, and takeover.
- Section 250(3) of the Companies Act 2013 regulates the takeover of the assets & management of the Company as per the orders of the Tribunal
- Section 261 of Companies Act, 2013 regulates the preparation of scheme of revival & rehabilitation. It also governs the takeover of the sick company by a solvent company
- SEBI (Substantial Acquisition of Shares & Takeover) Regulation, 2011: to govern the takeover of Listed Entity.
Company Takeover Strategies
Following are the different types of strategies that can be followed by the acquirer company for smooth & successful implementation of Takeover:
- Casual Pass: Under this strategy bidders usually contact the Target Company through an intermediary or formal inquiry. In case the Target’s management rejects the bidder’s initial offer, the bidder can adopt a friendly approach and walks away, or it can adopt more aggressive tactics of taking over the Target Company.
- Bear Hug: As per this tactic, the Acquirer Company offers to buy the shares of the Target Company at a price higher than prevailing in the market. This offer is made in case the target company is willing to get sold.
- Tenders Offer: It’s a corporate form of takeover in which bidder makes the tender offer to the public in the form of an open letter or invitation by announcing the same in advertisement or newspaper to the stockholders of publicly traded companies to sell their shares at a specified time & price.
- Proxy Fights: In this, the shareholders of target companies are persuaded by the Acquirer to join the force and gather sufficient proxies to win the corporate vote. A per this method, shareholders of the company vote out the management for making it easier for takeover.
Target Companies devise the following defense strategies in response to hostile takeover:
- Stock Repurchase: Stock repurchase is also known as a self-tender offer in which the target company repurchases its shares from its shareholders. It is one of the effective Anti-Takeover Strategies.
- Poison Pill: It is also known as the Shareholder’s Rights Plan. Under this strategy, shareholders of the target company assign the right to purchase shares of the target or that of the merging company at a reduced price. Three types of pills that can be utilized as an anti-takeover tactic:
- Staggered board of directors: This strategy prevents the takeover process by preventing the entire board from being replaced at the same time, i.e. only certain numbers of directors are reelected annually or say in every 4 years. Thus Target Company doesn’t wait too long for the board to turn over.
- Shark Repellents: This form of strategy is employed by the target company to avoid a hostile takeover. This can be periodic measure or continuous effort of target management who makes amendments to its bylaws. This strategy prevents the takeover by making the target company less attractive to the shareholders of acquiring firms.
- Golden Parachutes: There is a contract with the key-executives of the target management by giving the number of substantial benefits such as cash bonuses, stock options or generous pay to executives in case they are taken over by another firm.
- Greenmail: Target Company’s management purchases its shares from a hostile acquirer company at a premium or a price higher than that prevails in a market. However, certain factors such as taxation and statute approval for the repurchase of shares at a premium area considerable obstacle to this strategy.
✔ Flip-In Poison Pill: As per this strategy, the current shareholders purchase more stock at a heavy discount during an attempt of the takeover. A shareholder becomes less powerful in terms of voting due to the additional flow of shares in the current pool of shares that reduces the worth of the shares.
✔ Dead-Hand Pill: Shareholding of the bidder is diluted by the shares that are issued to shareholders. This strategy is also known as Dead-hand Poison Pill.
✔ No-Hand Pill: This strategy prohibits the redemption of the pill for a certain period.
Procedure for Takeover of the company
Following are the steps to Takeover a company in India:
a) Profile specification: suitable candidates for the successful takeover are identified based on research, analysis, consultation, who meets the needs of acquirer company in terms of meeting the strategic and financial growth objectives of the acquirer
b) Approach the candidates: selected candidates are shortlisted & approached by the acquirer company.
c) Analysis of financial position: Financial & credit position of the target Company is evaluated based on the financial forecast, previous balance sheets, projected balance sheets, cash flow, etc. so that suitable value of the target company can be quoted by the acquirer company.
d) Negotiation: Terms & conditions of the takeover are negotiated between the party for further clarity by forming a letter of intent to leave no room for doubt.
e) Due-Diligence: Acquirer Company undertakes the thorough and detailed procedure of due-diligence after all the evaluation, analysis and negations are done to get a clear picture of the target company.
f) Financing: obtain a suitable source of finance and approach the banks, financial institutions, etc for funding the entire takeover procedure.
g) Implementing Takeover: Takeover is implemented by completing the shares & property transfer between Acquirer & Target Company. Implementing the deal along with the ongoing monitoring of performance is necessary for the successful takeover.
Frequently Asked Questions
What is the consideration paid for taking over any company?
Consideration means the amount paid for acquiring any company to the shareholders of Target Company. Following are the different form of consideration paid by an acquiring company to the target company:
- The consideration paid in the form of Cash
- The consideration paid in the form of Shares
- Acquiring by the formation of a New Company
- Consideration in the form of Acquiring Minority Shares
What is the motive behind takeover?
The takeover is usually practiced by the entity for pursuing the following objectives:
- To achieve the growth by product development, market enhancement & innovative technologies of the target company.
- To diversify the existing market & product line by entering the new market
- To improve the profitability and productivity through joint efforts of technical, personnel and other synergies.
What are the types of takeover?
Four types of takeover strategies are:
- Hostile takeover
- Bail-out takeover
- Reverse takeover
- Friendly takeover
Also, Read: 7 Steps to Takeover a Company In India.
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