In business, a takeover is the purchase of one company (the target ) by another (the acquirer or bidder ). In the UK , the term refers to the acquisition of a public company whose shares are publicly listed, in contrast to the acquisition of a private company .
67-401: Management of the target company may or may not agree with a proposed takeover, and this has resulted in the following takeover classifications: friendly, hostile, reverse or back-flip. Financing a takeover often involves loans or bond issues which may include junk bonds as well as a simple cash offers. It can also include shares in the new company. A friendly takeover is an acquisition which
134-551: A Public-Private Investment Partnership (PPIP) to buy toxic assets from banks' balance sheets. The major stock market indices in the United States rallied on the day of the announcement rising by over six percent with the shares of bank stocks leading the way. PPIP has two primary programs. The Legacy Loans Program will attempt to buy residential loans from banks' balance sheets. The Federal Deposit Insurance Corporation will provide non-recourse loan guarantees for up to 85 percent of
201-400: A corporate raid is the process of buying a large stake in a corporation and then using shareholder voting rights to require the company to undertake novel measures designed to increase the share value, generally in opposition to the desires and practices of the corporation's current management. The measures might include replacing top executives, downsizing operations, or liquidating
268-417: A simple majority , to replace the management with a new one which will approve the takeover. Another method involves quietly purchasing enough stock on the open market, known as a creeping tender offer or dawn raid , to effect a change in management. In all of these ways, management resists the acquisition, but it is carried out anyway. In the United States, a common defense tactic against hostile takeovers
335-412: A subsidiary of the purchased company. This type of takeover can occur when a larger but less well-known company purchases a struggling company with a very well-known brand. Examples include: Often a company acquiring another pays a specified amount for it. This money can be raised in a number of ways. Although the company may have sufficient funds available in its account, remitting payment entirely from
402-413: A bidder to take over a target company whose management is unwilling to agree to a merger or takeover. The party who initiates a hostile takeover bid approaches the shareholders directly, as opposed to seeking approval from officers or directors of the company. A takeover is considered hostile if the target company's board rejects the offer, and if the bidder continues to pursue it, or the bidder makes
469-635: A breach of the Code brought such reputational damage and the possibility of exclusion from city services run by those institutions, it was regarded as binding. In 2006, the Code was put onto a statutory footing as part of the UK's compliance with the European Takeover Directive (2004/25/EC). The Code requires that all shareholders in a company should be treated equally. It regulates when and what information companies must and cannot release publicly in relation to
536-417: A case, the acquiring company would only need to raise 20% of the purchase price. Cash offers for public companies often include a "loan note alternative" that allows shareholders to take a part or all of their consideration in loan notes rather than cash. This is done primarily to make the offer more attractive in terms of taxation . A conversion of shares into cash is counted as a disposal that triggers
603-417: A company an easier takeover target. When the company gets bought out (or taken private) – at a dramatically lower price – the takeover artist gains a windfall from the former top executive's actions to surreptitiously reduce the company's stock price. This can represent tens of billions of dollars (questionably) transferred from previous shareholders to the takeover artist. The former top executive
670-560: A corporation to influence its board of directors and put public pressure on its management. Corporate raids became a hallmark of investors in the 1970s and 1980s, particularly highlighted by the public suicide of Eli Black . Among the most notable corporate raiders of the 1970s and 1980s were Louis Wolfson , Carl Icahn , Victor Posner , Meshulam Riklis , Nelson Peltz , Robert M. Bass , T. Boone Pickens , Paul Bilzerian , Harold Clark Simmons , Kirk Kerkorian , Sir James Goldsmith , Saul Steinberg and Asher Edelman . These investors used
737-560: A distributor of licorice extract and chocolate, which Perelman's father had tried and failed to acquire 10 years earlier. Perelman would ultimately divest the company's core business and use MacAndrews & Forbes as a holding company investment vehicle for subsequent leveraged buyouts including Technicolor, Inc. , Pantry Pride and Revlon . Using the Pantry Pride subsidiary of his holding company, MacAndrews & Forbes Holdings , Perelman's overtures were rebuffed. Repeatedly rejected by
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#1732855603502804-586: A heavy debt load. Under Perelman's control, Revlon sold 4 divisions: two were sold for $ 1 billion, its vision care division was sold for $ 574 million, and its National Health Laboratories division was spun out to the public market in 1988. Revlon also made acquisitions including Max Factor in 1987 and Betrix in 1989, later selling them to Procter & Gamble in 1991. Perelman exited the bulk of his holdings in Revlon through an IPO in 1996 and subsequent sales of stock. As of December 31, 2007, Perelman still retains
871-751: A high-risk position. High leverage will lead to high profits if circumstances go well but can lead to catastrophic failure if they do not. This can create substantial negative externalities for governments, employees, suppliers and other stakeholders . Corporate takeovers occur frequently in the United States , Canada , United Kingdom , France and Spain . They happen only occasionally in Italy because larger shareholders (typically controlling families) often have special board voting privileges designed to keep them in control. They do not happen often in Germany because of
938-734: A major stake in DWG Corporation in 1966. Having gained control of the company, he used it as an investment vehicle that could execute takeovers of other companies. Posner and DWG are perhaps best known for the hostile takeover of Sharon Steel Corporation in 1969, one of the earliest such takeovers in the United States. Posner's investments were typically motivated by attractive valuations, balance sheets and cash flow characteristics. Because of its high debt load, Posner's DWG generated attractive but highly volatile returns and ultimately landed in financial difficulty. In 1987, Sharon Steel entered Chapter 11 bankruptcy protection. Carl Icahn developed
1005-426: A majority of the shares in, and so control of, the company making the bid. The company has managerial rights. If a takeover of a company consists of simply an offer of an amount of money per share (as opposed to all or part of the payment being in shares or loan notes), then this is an all-cash deal. The purchasing company can source the necessary cash in a variety of ways, including existing cash resources, loans, or
1072-458: A minority ownership interest in Revlon. The Revlon takeover, because of its well-known brand, was profiled widely by the media and brought new attention to the emerging boom in leveraged buyout activity. Litigation associated with the takeover has also become standard reading for introductory business organization classes in most law schools, introducing what have come to be known as "Revlon duties" for boards of companies that are up for auction. In
1139-401: A new market without having to take on the risk, time and expense of starting a new division. An acquiring company could decide to take over a competitor not only because the competitor is profitable, but in order to eliminate competition in its field and make it easier, in the long term, to raise prices. Also a takeover could fulfill the belief that the combined company can be more profitable than
1206-428: A number of the same tactics and targeted the same type of companies as more traditional leveraged buyouts and in many ways could be considered a forerunner of the later private equity firms. In fact it is Posner, one of the first "corporate raiders" who is often credited with coining the term " leveraged buyout " or "LBO". Victor Posner , who had made a fortune in real estate investments in the 1930s and 1940s, acquired
1273-430: A payment of capital gains tax , whereas if the shares are converted into other securities , such as loan notes, the tax is rolled over. A takeover, particularly a reverse takeover , may be financed by an all-share deal. The bidder does not pay money, but instead issues new shares in itself to the shareholders of the company being acquired. In a reverse takeover the shareholders of the company being acquired end up with
1340-472: A price rise and a profit for the corporate raider and the other shareholders. A well-known example of a reverse takeover in the United Kingdom was Darwen Group 's 2008 takeover of Optare plc . This was also an example of a back-flip takeover (see below) as Darwen was rebranded to the more well-known Optare name. A backflip takeover is any sort of takeover in which the acquiring company turns itself into
1407-468: A public perception that private entities are more efficiently run, reinforcing the political will to sell off public assets. Takeovers also tend to substitute debt for equity. In a sense, any government tax policy of allowing for deduction of interest expenses but not of dividends , has essentially provided a substantial subsidy to takeovers. It can punish more-conservative or prudent management that does not allow their companies to leverage themselves into
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#17328556035021474-480: A publicly held asset or non-profit organization undergoes privatization . Top executives often reap tremendous monetary benefits when a government owned or non-profit entity is sold to private hands. Just as in the example above, they can facilitate this process by making the entity appear to be in financial crisis. This perception can reduce the sale price (to the profit of the purchaser) and make non-profits and governments more likely to sell. It can also contribute to
1541-615: A rapidly depreciating asset . Even those assets that might have gone up in value in the long-term depreciated rapidly, quickly becoming "toxic" for the banks that held them. Toxic assets , by increasing the variance of banks' assets, can turn otherwise healthy institutions into zombies . Potentially insolvent banks made too few good loans creating a debt overhang problem. Alternatively, potentially insolvent banks with toxic assets sought out very risky speculative loans to shift risk onto their depositors and other creditors. On March 23, 2009, U.S. Treasury Secretary Timothy Geithner announced
1608-437: A reputation as a ruthless "corporate raider" after his hostile takeover of TWA in 1985. The result of that takeover was Icahn systematically selling TWA's assets to repay the debt he used to purchase the company, which was described as " asset stripping ". Icahn also attempted the grand prize of U.S. Steel , launching a hostile takeover for 89% of the industrial giant for $ 7 billion ($ 19.5 billion today) in late 1986, which
1675-487: A reverse takeover is an acquisition or acquisitions in a twelve-month period which for an AIM company would: An individual or organization, sometimes known as a corporate raider , can purchase a large fraction of the company's stock and, in doing so, get enough votes to replace the board of directors and the CEO . With a new agreeable management team, the stock is, potentially, a much more attractive investment, which might result in
1742-489: A separate issue of company shares . Takeovers in the UK (meaning acquisitions of public companies only) are governed by the City Code on Takeovers and Mergers , also known as the 'City Code' or 'Takeover Code'. The rules for a takeover can be found in what is primarily known as 'The Blue Book'. The Code used to be a non-statutory set of rules that was controlled by city institutions on a theoretically voluntary basis. However, as
1809-452: A total value of US$ 28.86 billion had been announced. A reverse takeover is a type of takeover where a public company acquires a private company. This is usually done at the instigation of the private company, the purpose being for the private company to effectively float itself while avoiding some of the expense and time involved in a conventional IPO . However, in the UK under AIM rules,
1876-555: A variety of reasons why an acquiring company may wish to purchase another company. Some takeovers are opportunistic – the target company may simply be very reasonably priced for one reason or another and the acquiring company may decide that in the long run, it will end up making money by purchasing the target company. The large holding company Berkshire Hathaway has profited well over time by purchasing many companies opportunistically in this manner. Other takeovers are strategic in that they are thought to have secondary effects beyond
1943-426: Is a bond that is rated below investment grade by credit rating agencies . These bonds have a higher risk of default or other adverse credit events but offer higher yields than investment-grade bonds in order to compensate for the increased risk. As of 2024, high-yield bonds have a higher yield than U.S. Treasury securities . As indicated by their lower credit ratings , high-yield debt entails more risk to
2010-404: Is approved by the management of the target company. Before a bidder makes an offer for another company, it usually first informs the company's board of directors . Ideally, if the board feels that accepting the offer serves the shareholders better than rejecting it, it recommends the offer be accepted by the shareholders. In a private company, because the shareholders and the board are usually
2077-466: Is then rewarded with a golden handshake for presiding over the fire sale that can sometimes be in the hundreds of millions of dollars for one or two years of work. This is nevertheless an excellent bargain for the takeover artist, who will tend to benefit from developing a reputation of being very generous to parting top executives. This is just one example of a principal-agent problem, otherwise regarded as perverse incentive . Similar issues occur when
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2144-464: Is to use section 16 of the Clayton Act to seek an injunction, arguing that section 7 of the act, which prohibits acquisitions where the effect may be substantially to lessen competition or to tend to create a monopoly, would be violated if the offeror acquired the target's stock. The main consequence of a bid being considered hostile is practical rather than legal. If the board of the target cooperates,
2211-531: The Singer Corporation . All of his takeover bids were for all cash and for all shares and he refused any greenmail . Bilzerian was indicted for Schedule 13(d) disclosure violations and despite his claims of innocence he was convicted in 1989. After spending thirty years fighting the government in his attempt to overturn his conviction, he renounced his US citizenship in 2019. British raider Beazer also launched several successful hostile takeovers in
2278-535: The dual board structure, nor in Japan because companies have interlocking sets of ownerships known as keiretsu , nor in the People's Republic of China because many publicly listed companies are state owned . There are quite a few tactics or techniques which can be used to deter a hostile takeover. Junk bond In finance , a high-yield bond ( non-investment-grade bond , speculative-grade bond , or junk bond )
2345-410: The 1980s, the largest being that of Koppers in early 1988 for $ 1.81 billion ($ 4.9 billion today). Many of the corporate raiders of the 1980s were onetime clients of Michael Milken , whose investment banking firm, Drexel Burnham Lambert helped raise blind pools of capital which corporate raiders could use to make legitimate attempts to take over companies and provide high-yield debt financing of
2412-801: The U.S. Treasury's Troubled Asset Relief Program monies, private investors, and from loans from the Federal Reserve's Term Asset Lending Facility (TALF). The initial size of the Public Private Investment Partnership is projected to be $ 500 billion. Nobel Prize–winning economist Paul Krugman has been very critical of this program arguing the non-recourse loans lead to a hidden subsidy that will be split by asset managers, banks' shareholders and creditors. Banking analyst Meredith Whitney argues that banks will not sell bad assets at fair market values because they are reluctant to take asset write downs. Removing toxic assets would also reduce
2479-583: The US Treasury to seek congressional appropriations to buy those assets in September 2008 to prevent a systemic crisis of the banks. Such assets represent a serious problem for purchasers because of their complexity. Having been repackaged perhaps several times, it is difficult and time-consuming for auditors and accountants to determine their true value. As the recession of 2008–09 hit, their value decreased further as more debtors defaulted, so they represented
2546-473: The acquiring company's cash on hand is unusual. More often, it will be borrowed from a bank , or raised by an issue of bonds . Acquisitions financed through debt are known as leveraged buyouts , and the debt will often be moved down onto the balance sheet of the acquired company. The acquired company then has to pay back the debt. This is a technique often used by private equity companies. The debt ratio of financing can go as high as 80% in some cases. In such
2613-534: The bid, sets timetables for certain aspects of the bid, and sets minimum bid levels following a previous purchase of shares. In particular: The Rules Governing the Substantial Acquisition of Shares, which used to accompany the Code and which regulated the announcement of certain levels of shareholdings, have now been abolished, though similar provisions still exist in the Companies Act 1985 . There are
2680-464: The bidder can conduct extensive due diligence into the affairs of the target company, providing the bidder with a comprehensive analysis of the target company's finances. In contrast, a hostile bidder will only have more limited, publicly available information about the target company available, rendering the bidder vulnerable to hidden risks regarding the target company's finances. Since takeovers often require loans provided by banks in order to service
2747-446: The buyouts. Drexel Burnham raised a $ 100 million blind pool in 1984 for Nelson Peltz and his holding company Triangle Industries (later Triarc ) to give credibility for takeovers, representing the first major blind pool raised for this purpose. Two years later, in 1986, Wickes Companies, a holding company run by Sanford Sigoloff, would raise a $ 1.2 billion blind pool. In later years, Milken and Drexel would shy away from certain of
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2814-474: The company's board and management, Perelman continued to press forward with a hostile takeover , raising his offer from an initial bid of $ 47.50 per share until it reached $ 53.00 per share. After Revlon received a higher offer from a white knight , private equity firm Forstmann Little & Company , Perelman's Pantry Pride finally was able to make a successful bid for Revlon , valuing the company at $ 2.7 billion. The buyout would prove troubling, burdened by
2881-580: The company's profitability appear temporarily poorer, or simply promote and report severely conservative (i.e. pessimistic) estimates of future earnings. Such seemingly adverse earnings news will be likely to (at least temporarily) reduce the company's stock price. (This is again due to information asymmetries since it is more common for top executives to do everything they can to window dress their company's earnings forecasts.) There are typically very few legal risks to being 'too conservative' in one's accounting and earnings estimates. A reduced share price makes
2948-530: The company. Corporate raids were particularly common between the 1970s and the 1990s in the United States. By the end of the 1980s, management of many large publicly traded corporations had adopted legal countermeasures designed to thwart potential hostile takeovers and corporate raids, including poison pills , golden parachutes , and increases in debt levels on the company's balance sheet . In later years, some corporate raiding practices have been used by " activist shareholders ", who purchase equity stakes in
3015-578: The economic and social consequences of transforming firms through the aggressive use of financial leverage. In 2005, over 80% of the principal amount of high-yield debt issued by U.S. companies went toward corporate purposes rather than acquisitions or buyouts. In emerging markets, such as China and Vietnam, bonds have become increasingly important as short term financing options, since access to traditional bank credits has always been proved to be limited, especially if borrowers are non-state corporates. The corporate bond market has been developing in line with
3082-485: The end of the 1990s, the corporate raider moniker was used less frequently as private equity firms pursued different tactics than their predecessors. In later years, many of the corporate raiders would be re-characterized as " activist shareholders ", such as Carl Icahn during his 2008 profile on CBS's 60 Minutes . Although private equity rarely received a thorough treatment in popular culture, several films did feature stereotypical "corporate raiders" prominently. Among
3149-461: The first quarter of 2022 are estimated to be about $ 1.8 trillion, comprising about 16% of the U.S. corporate bond market, which totals $ 10.7 trillion. New issuances amounted to $ 435 billion (~$ 505 billion in 2023) in 2020. Indices for the high-yield market include: Some investors, preferring to dedicate themselves to higher-rated and less-risky investments, use an index that only includes BB-rated and B-rated securities. Other investors focus on
3216-409: The general trend of capital market, and equity market in particular. High-yield bonds can also be repackaged into collateralized debt obligations (CDO), thereby raising the credit rating of the senior tranches above the rating of the original debt. The senior tranches of high-yield CDOs can thus meet the minimum credit rating requirements of pension funds and other institutional investors despite
3283-430: The investor compared to investment grade bonds. Investors require a greater yield to compensate them for investing in the riskier securities. In the case of high-yield bonds, the risk is largely that of default: the possibility that the issuer will be unable to make scheduled interest and principal payments in a timely manner. The default rate in the high-yield sector of the U.S. bond market has averaged about 5% over
3350-418: The largest purchasers of high-yield debt. Individual investors participate in the high-yield sector mainly through mutual funds. Some institutional investors have by-laws that prohibit investing in bonds which have ratings below a particular level. As a result, the lower-rated securities may have a different institutional investor base than investment-grade bonds. . U.S. high-yield bonds outstanding as of
3417-419: The late 1980s several famous corporate raiders suffered from bad investments financed by large amounts of leverage , ultimately losing money for their investors. Additionally, with the fall of Michael Milken and the subsequent collapse of Drexel Burnham Lambert , the credit lines for these investors dried up. By the end of the decade, management of many large publicly traded corporations reacted negatively to
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#17328556035023484-469: The long term. During the liquidity crisis of 1989–90, the default rate was in the 5.6% to 7% range. During the COVID-19 pandemic , default rates rose to just under 9%. A recession and accompanying weakening of business conditions tends to increase the possibility of default in the high-yield bond sector. Institutional investors (such as pension funds , mutual funds , banks and insurance companies ) are
3551-620: The lowest quality debt rated CCC or distressed securities , commonly defined as those yielding 1,000 basis points over equivalent government bonds. The original speculative grade bonds were bonds that once had been investment grade at time of issue, but where the credit rating of the issuer had slipped and the possibility of default increased significantly. These bonds are called "fallen angels". The investment banker Michael Milken realized that fallen angels had regularly been valued less than what they were worth. His experience with speculative grade bonds started with his investment in these. In
3618-643: The mid-1980s, Milken and other investment bankers at Drexel Burnham Lambert created a new type of high-yield debt: bonds that were speculative grade from the start, and were used as a financing tool in leveraged buyouts (LBOs) and hostile takeovers . In a LBO, an acquirer would issue speculative grade bonds to help pay for an acquisition and then use the target's cash flow to help pay the debt over time. Companies acquired in this manner were commonly saddled with very high debt loads, hampering their financial flexibility. Debt-to-equity ratios of at least 6 to 1 were common in such transactions. This led to controversy as to
3685-488: The more "notorious" corporate raiders as the firm and the private equity industry attempted to move upscale. In 1985, Milken raised $ 750 million for a similar blind pool for Ronald Perelman , which would ultimately prove instrumental in acquiring his biggest target: The Revlon Corporation . In 1980, Ronald Perelman , the son of a wealthy Philadelphia businessman, and future "corporate raider", having made several small but successful buyouts, acquired MacAndrews & Forbes ,
3752-447: The offer directly after having announced its firm intention to make an offer. Development of the hostile takeover is attributed to Louis Wolfson . A hostile takeover can be conducted in several ways. A tender offer can be made where the acquiring company makes a public offer at a fixed price above the current market price . An acquiring company can also engage in a proxy fight , whereby it tries to persuade enough shareholders, usually
3819-426: The offer, banks are often less willing to back a hostile bidder because of the relative lack of target information which is available to them. Under Delaware law, boards must engage in defensive actions that are proportional to the hostile bidder's threat to the target company. A well-known example of an extremely hostile takeover was Oracle's bid to acquire PeopleSoft . As of 2018, about 1,788 hostile takeovers with
3886-510: The ongoing deleveraging process within the European banking system, many European CFOs are still issuing high-yield bonds. As a result, by the end of September 2012, the total amount of annual primary bond issuances stood at € 50 billion . It is assumed that high-yield bonds are still attractive for companies with a stable funding base, although the ratings have declined continuously for most of those bonds. Corporate raider In business,
3953-423: The purchase price of legacy loans. Private sector asset managers and the U.S. Treasury will provide the remaining assets. The second program is called the legacy securities program which will buy mortgage backed securities (RMBS) that were originally rated AAA and commercial mortgage-backed securities (CMBS) and asset-backed securities (ABS) which are rated AAA. The funds will come in many instances in equal parts from
4020-424: The same people or closely connected with one another, private acquisitions are usually friendly. If the shareholders agree to sell the company, then the board is usually of the same mind or sufficiently under the orders of the equity shareholders to cooperate with the bidder. This point is not relevant to the UK concept of takeovers, which always involve the acquisition of a public company. A hostile takeover allows
4087-441: The significant risk in the original high-yield debt. When such CDOs are backed by assets of dubious value, such as subprime mortgage loans, and lose market liquidity , the bonds and their derivatives become what is referred to as "toxic debt". Holding such "toxic" assets led to the demise of several investment banks such as Lehman Brothers and other financial institutions during the subprime mortgage crisis of 2007–09 and led
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#17328556035024154-407: The simple effect of the profitability of the target company being added to the acquiring company's profitability. For example, an acquiring company may decide to purchase a company that is profitable and has good distribution capabilities in new areas which the acquiring company can use for its own products as well. A target company might be attractive because it allows the acquiring company to enter
4221-467: The threat of potential hostile takeover or corporate raid and pursued drastic defensive measures including poison pills , golden parachutes and increasing debt levels on the company's balance sheet . Finally, in the 1990s the overall price of the American stock market increased, which reduced the number of situations in which a company's share price was low with respect to the assets that it controlled. By
4288-466: The two companies would be separately due to a reduction of redundant functions. Takeovers may also benefit from a principal-agent problem associated with top executive compensation. For example, it is fairly easy for a top executive to reduce the price of their company's stock due to information asymmetry . The executive can accelerate accounting of expected expenses, delay accounting of expected revenue, engage in off-balance-sheet transactions to make
4355-675: The volatility of banks' stock prices. Because stock is akin to a call option on a firm's assets, this lost volatility will hurt the stock price of distressed banks. Therefore, such banks will only sell toxic assets at above market prices. On 27 April 2010, the Greek debt rating was decreased to "junk" status by Standard & Poor's amidst fears of default by the Greek Government . They also cut Portugal 's credit ratings by two notches to A, over concerns about its state debt and public finances on 28 April. On 5 July 2011, Portugal's rating
4422-427: Was decreased to "junk" status by Moody's (by four notches from Baa1 to Ba2) saying there was a growing risk the country would need a second bail-out before it was ready to borrow money from financial markets again, and private lenders might have to contribute. On 13 July 2012, Moody's cut Italy's credit rating two notches, to Baa2 (leaving it just above junk). Moody's warned the country it could be cut further. With
4489-460: Was rebuffed finally by CEO David Roderick on January 8, 1987. T. Boone Pickens ' hostile takeover bid of Gulf Oil in 1984 led to shock that such a large company could be raided. Gulf eventually sold out to Chevron for a then-record $ 13.3 billion ($ 39 billion today) "white knight" buyout. Paul Bilzerian launched a number of takeover bids including Cluett Peabody & Company , Hammermill Paper Company , Pay n Pack Stores, Allied Stores and
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