Corporate Takeovers: Overview & Regulations
Takeover has become a very commonly used term in the business world. Many companies are acquiring another company or investing in the companies which might or might not shares the similar business models.
Takeover is usually considered when a company buys a majority of stake in another company. The company who purchases the stake is called acquirer and the other one is called target company.
Why these takeovers take place? What is the purpose?
Takeovers are always done with a purpose from the acquirer’s end. Following might be the purpose for acquiring any entity:
Takeovers can help the acquiring entity to grow their market share without doing any major heavy lifting.
By combining or merging the entities, the overall efficiency increases and costs tend to decrease due to the fact that companies use each other’s strength to mitigate overall business process leakages.
The takeovers are many times done with the purpose of reducing or eliminating the competition from the market. It also benefits the companies to acquire raw material at lower market price and sell the products at higher prices.
Strong Supply Chain
The company by buying out its suppliers or distributors can eliminate a lot of supply chain cost. The company can then sell its products at lower costs and thereby increase the overall market share.
Rules & Regulations for the Takeover?
Companies Act, 2013:
- A member of the company shall make an application for arrangement, for the purpose of takeover offer in terms of sub-section (11) of section 230, when such member along with any other member holds not less than three-fourths of the shares in the company, and such application has been filed for acquiring any part of the remaining shares of the company.
- As per section 230(12),Application in cases of takeover offer of companies which are not listed.
- As per section 260(1), The company administrator shall prepare or cause to be prepared a scheme of revival and rehabilitation of the sick company for takeover after considering the draft scheme filed along with the application under section 254.
SEBI (Substantial Acquisition of Shares & Takeover) Regulation, 2011:
1. The takeover of the listed company shall be governed by the provisions of SEBI along with companies act, 2013.
Types of Takeovers?
A friendly takeover happens when the board of director of both the companies sit and negotiate the buying terms. The board of target company then approve the terms and after the shareholder’s consent, the buyout will be done.
A hostile takeover is the one in which the board of the target company has no desire to sell the stake. The acquirer may use strategies such as to buy the shares at premium from the shareholders and persuade the shareholders to vote out the management.
A reverse takeover happens when a private company buys a public company. It is usually done to achieve the listing without having to go through IPO. The private company becomes the public company by acquiring already listed company.
Backflip takeover happens when an acquirer company becomes the subsidiary of target company. It is usually done to take advantage of target’sbrand presence and marketplace edge.
How does a takeover happen? What is the Process?
General process performed before acquiring a target company:
- Analyze the market and opportunities lying within it.
- Identify the companies which can be targeted to acquire.
- Evaluate the financial conditions of the target companies identified.
- Prepare an evaluation report of the target companies.
- Make a decision based on the evaluation report.
- Evaluate the market and financial value of the target company.
- Make an offer to the target company.
- Once accepted, perform the due diligence.
- Implement the takeover.