CS Professional Corporate Restructuring Types of Takeovers
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While preparing for CS Preparation, you must have studied in details about Corporate Restructuring. In this article, we will discuss “Takeover”.
Meaning of Takeover
According to Companies Act, 1956, no particular definition is for Takeover.
But, in general terms, Takeover means the acquisition of one company by another company.
Type of Takeovers
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Hostile Takeover
Big Companies attacking the small companies….. “It’s like sharks eating the small fishes or at times a small fish attacking the big fish”, results in a sudden increase in the market price of the share of the targeted company. Promoters of the target company fight back to retain the control and ownership of their company in their own hands. As Acquirer Company offers a high price as to acquire the target company, hence shareholders of the target company gets excited to sell the shares to the acquirer company at a much higher price than the market price of the shares of the target company.
For example Mittal Steel takeover Arcelor in Europe.
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Friendly Takeover
Promoters of the target company gift away the control and ownership of their company to the acquirer at an attractive price i.e. promoters of the target company sell off their shares to the acquirer company VOLUNTARILY. And hence Acquirer Company makes an offer to the shareholders of the target company to sell their shares to the acquirer at a price higher than the market price of the target company. For example- Idea did a friendly takeover of Spice.
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Reasons for Hostile Takeover
- If the Intrinsic Value of the shares of the target company (as per its balance sheet) is substantially higher than the market price per share, then the target company becomes ATTRACTIVE for the hostile takeover.
Note: Intrinsic Value = Net Assets of the company / Total number of Equity shares
Where, Net Assets = Total Assets – Outside Liabilities
- Acquirer wants to EXPAND the business.
- Acquiring an existing business entity is a shortcut to expansion/diversification instead of putting efforts in establishing a new business entity.
The major benefit of takeover is that the Return on Investment (ROI) start coming immediately whereas in establishing a business ROI takes time.
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Reverse Takeover
Normally a bigger company acquires the smaller company. But, when a smaller company acquires the bigger company, it is considered s Reverse Takeover. As per SEBI TAKEOVER CODE, 2011 it’s a regular takeover.
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