A Takeover refers to a type of corporate action under which one company (the acquirer) acquires or takes control of another (the target). Such a takeover takes place through the process of merger and acquisition, and can affect the structure of the company in various ways. The acquirer could simply buy the company, take over a controlling interest in it, acquire it as a subsidiary or merge with the target company.

Interestingly, takeovers can be both voluntary and involuntary. If both companies mutually agree to the takeover, it is voluntary. However, sometimes the acquirer may seek to control the target company without its agreement or knowledge in an unwelcome, or hostile takeover.

Why companies carry out takeovers

Companies, especially acquirers, go for a takeover if the target company has a long-term value. They view it as an investment and an opportunity to reduce costs by achieving economies of scale, and increase profits and market share. Here’s a look at some of the reasons why takeovers are carried out—

–  A company may acquire a supplier, and as a result, save the costs as it no longer has to pay for the supplier’s margins. If it takes over a distributor, the company can save the costs of shipping its products.

Takeovers could help a company get rid of future competition, while also acquiring a larger market share. Acquirers may have to pay a higher price for such companies since they are usually unwilling to let go of the business for cheap. 

In a strategic takeover of companies, the acquirer seeks to enter a new market without spending additional money and time, or taking on more risk.

–  With a new acquisition, a company can also acquire new skills and talent, along with its tangible and intangible assets such as patents and trademarks. Risks can also be diminished by diversifying after a company has been acquired.

In case of an activist takeover, shareholders may look to acquire a controlling interest ownership or voting rights in order to create a change in the functioning of a company.

When should an investor participate in this corporate action?

Shareholders of a company are notified in advance about an upcoming takeover, giving them ample time to assess their options before they decide to hold on to their shares or sell them. If you have shares in a company that is about to be taken over, it is likely that the value of your shares will rise, making for a good opportunity to sell.

However, selling your shares at such a time would mean sacrificing your long-term gains. So, shareholders should sell these shares at this juncture only if they can find a better investment for their money instead.

Sometimes, companies go for an all-share offer. In this situation, shareholders are offered shares in the acquiring company instead. Shareholders must participate in such a corporate action only after analysing the new company’s management, financial records and growth prospects.

What are the benefits of participating in a takeover?

There are many benefits to participating in a takeover. The value of a company’s shares goes up when it is being taken over, allowing the shareholders to potentially make a profit on their sales.  If you are a long-term investor, especially, you may stand to benefit despite the change in majority ownership of the company. 

– Acquirers often take over a company with the intent of increasing its value for selling it again in the future. 

– This gives the shareholders an opportunity where a bigger company invests large amounts of money to aid the growth of a company whose operations you understand.

– When the second sale is made, the company has larger operations, and is better run as a result of the growth that takes place under new ownership. 

– If you choose to sell your shares during the second sale, you are likely to make a potentially bigger profit.

What are the disadvantages of participating in a takeover?

While there may be some benefits of takeovers, such a corporate action could also pose several disadvantages for shareholders. Here’s a look at some of them –

There could be complications in the valuation of the company and the costs of the takeover could be very high.

–  Eventually, it could become difficult for suppliers, customers, and employees to integrate the changes in operations and management.

–  The supplier may not be equipped to service an additional acquisition, resulting in problems of production.

–  If the acquired and target businesses are not in sync, plenty of challenges can come up. This can hinder the growth of the company.

–  The type of stocks held by you may change with a change in management. The changes made could ensure that you get common stock while the management holds preferred stocks. In such a situation, when liquidation takes place, the management would be paid before the shareholders.

Conclusion

Acquiring a business or taking over a smaller company is a good strategy to ensure growth over a short time period. Moreover, the method is not as risky, and more effective in accelerating growth than making efforts in sales and marketing. 

Takeovers do not always ensure the smooth transition of ownership and can sometimes fail as well. This happens if the acquirer and target companies are incompatible in terms of their corporate culture, or if their objectives do not match or there are changes in the organisational structure that negatively affect employees.

Naturally, it is important that all benefits and drawbacks are assessed closely before an investor chooses to participate in such a corporate action. Shareholders should develop a good understanding of the details of the takeover, and weigh all their options before they make a decision.