Introduction to Takeovers:
You may have heard about a company merging or taking over another company by
simply making a move on the share market. The company which acquires another
company is known as the acquirer. On the other hand, the company which is being
acquired is known as the acquire.
When the acquirer makes moves on the share market with the objective of getting
the highest percentage of shares and therefore getting the voting rights of the
target company. This process is known as Takeover.
Some examples of takeovers in the year 2020 are as follows:
- Infosys and Kaleidoscope Innovation
- Reliance Retail and Future Group's Retail Business
- Zomato and Uber Eats
- LIC and IDBI bank
- Disney and 21st Century Fox
As of August 2022, the largest ever acquisition was the 1999 takeover of
Mannesmann by Vodafone Airtouch plc at $183 billion ($297.7 billion adjusted for
Types of Takeovers:
Basically there are 4 types of takeovers in the mergers & acquisition of
- Friendly takeovers:
These types of takeovers are done only by the prior approval of the target
company. In simple words, it means that if the target company agrees with
the takeover, the board of directors approval is needed in case of friendly
- Hostile takeovers:
If the takeover is unfriendly in nature or no consent of the board of
directors of the target company is taken, it is known as hostile takeover.
In the case of hostile takeover, the management disagrees with the merger or
acquisition but they don't have any other option left. Forceful takeovers
are also termed as Hostile takeovers.
- Reverse takeovers:
When a private corporation buys a publicly traded company, it is called a
reverse takeover. The primary goal of reverse takeovers is to get listing
status without conducting an IPO (IPO). In a reverse takeover offer, the
private purchasing business effectively acquires an existing publicly traded
company in order to go public.
If the acquirer decides that conducting a reverse takeover offer is
preferable to registering for an IPO, it may do so. Being listed is a
time-consuming, expensive procedure that involves a lot of documentation. To
avoid loss of time, expenses and documentation, the private listed company
goes for reverse takeovers.
- Backflip takeover:
When the buyer becomes a subsidiary of the target business, a backflip
takeover offer takes place. The target firm survives the acquisition, and
the acquiring business becomes a subsidiary of the combined company, earning
the term "backflip" for the takeover. A backflip takeover offer frequently
has the goal of allowing the acquiring business to benefit from the target's
superior market position or higher brand awareness.
What Are The Defense Strategies For Hostile Takeovers:
Every company fears that at any given point of weakness, their company can be
taken over by a large syndicate of industry. To safeguard themselves, the target
companies hire professionals to seek advice on how to avoid these hostile
takeover. Only a skilled and clever professional can tackle such situations.
There are certain defensive moves which the company can make to avoid the
takeover by big companies.
In the event that the target's senior management is fired as a result of a
successful hostile takeover, golden parachutes are further compensation. This
defense lowers the price the acquirer is ready to pay for the target's shares
since these compensations lessen the target's assets. Thus, this defense might
hurt investors. But it successfully thwarts aggressive takeovers. Senior
management gives themselves hefty exit packages to hurt the attackers and weaken
As implied by the name, this defensive tactic is inspired by the Pac-Man video
game. Instead of letting themselves be purchased, the target business attempts
to seize control and acquire the bidder. The target business requires a "war
fund" to carry out this plan. This is a sizable sum of cash and other assets
that the firm keeps on hand to deal with unforeseen events like a hostile
The money is placed in highly liquid assets like treasury bills so that it is
not kept sitting in the company's coffers. They are instantly convertible into
cash. High liquidity assets are regarded as cash equivalents and occasionally
referred to as merely cash.
Blackmail ransom payment and greenmail defense are extremely similar. A hostile
takeover is threatened if a bidder purchases a sizable quantity of target firm
shares. The target firm feels threatened and is compelled to pay a hefty price
to acquire back the shares. Greenmail is the sum of money that the target gives
to the bidder to stop the hostile behavior.
It serves as a safeguard against a hostile takeover of the business. The extra
cash or premium the target pays to repurchase its shares is referred to as
"greenmail." After receiving this ransom or money, the bidder or acquirer
withdraws and abandons the takeover effort.
Films and television programmes frequently depict this defensive tactic. The
target corporation chooses to sell its most valuable assets or business
divisions under this approach. The acquirer no longer finds the target as
desirable as before. Usually, the target will use this tactic as a last resort
to protect oneself against an invading force.
The situation has led to the corporation purposefully destroying its operations.
The most precious and financially successful branches/assets make up a company's
crown jewels. Not only do they provide money for the firm, but they also
significantly increase its asset value and have promising futures. Between
sectors and businesses, the crown jewels might vary.
The factories and manufacturing processes are typically regarded as the gems of
the manufacturing sector. Typically, the target business sells its prized
possessions to a trusted third party. The White Knight is another name for this
third business. When the hostile takeover is abandoned by the acquirer, the
target buys back the crown gem at a set price. Until the gem is recovered, the
firm is temporarily destroyed by the crown jewel defense.
It alludes to the poison pills that spies once carried around in case they were
discovered by their enemy. They would take the poison pill if they were captured
to avoid being interrogated and tortured by their adversaries. The poison pill
defense also functions similarly in the corporate realm. A discounted right to
buy shares of the target firm has been distributed by the shareholders of the
These rights are transferred to the other shareholders if the acquirer's stake
in the business reaches a particular level. The acquirer's ownership of the firm
is significantly reduced by this defensive tactic. This renders the acquisition
unfavorable for the acquirer. The management will remain in charge thanks to
this method, and the corporation will safeguard the interests of the minority
I believe that formations and dissolution of firms is like life and death of an
individual but from a legal perspective. Whereas, mergers and demergers are like
marriage and divorce of legal entities. Every firm must go through every legal
aspect involved in mergers & acquisitions. Smart business operators save
themselves a hassle to go through such legal documentations.
Huge MNC's with huge turnovers hire legal and financial advisors to look into
such matters to avoid any mishappenings. A good legal counsel should have an eye
for detail as well as good decision making power. Although hostile takeover
attempts are extremely unusual, the target firm nevertheless has a number of
defense mechanisms at its disposal. Companies may use different tactics to
eliminate the bidder all at once.
The crown jewel defense is one of the more severe methods, while the golden
parachute is one of the more subtle ones. Most businesses have preparations in
place in case there are unforeseen events, like a hostile takeover.
Written By: Shivam Narwal
( Law Student) - BBA LLB (Hons)