Takeover

Takeover, in economics, when one company obtains a controlling interest in another. Takeovers of public companies are governed by rules and often by non-statutory codes of conduct as well. In the United Kingdom, companies whose shares are traded on the Stock Exchange are governed by the City Code on Takeovers and Mergers, which is administered by the City Panel. It is a form of voluntary self-regulation that is reinforced by sanctions that the Stock Exchange can impose upon those judged to have breached the Code. The company making a takeover bid must inform all shareholders of the company that is subject to the bid of the terms of the offer and must set a deadline by which they must accept or decline the offer. The Code sets out ten general principles concerned with the provision of adequate and timely information to shareholders so that all of them are treated equally. The boards of both the offeror (the company making the takeover bid) and the offeree (the company for which the bid is being made) are required to act in the best interest of their shareholders. Shareholders must be given all the facts necessary for them to make an informed judgement of the merits of the offer, and they must be given sufficient time to assess that information. Any behaviour that might result in a false market in shares being created is a breach of the Code; rumours and speculation can drastically affect the quoted price of securities. The Code also contains about 40 rules governing takeovers. These include: how and when bids must be announced; a ban on anyone other than the offeror who is privy to confidential price-sensitive information dealing in the offeree’s shares; limits on first-day (of the offer) dealings in the offeree’s shares by the offeror; and the disclosure in the offer documents sent to shareholders of details of the offeree directors’ service contracts. There are also provisions that allow a company that has obtained 90 per cent of another company to be able to purchase compulsorily the shares of the other 10 per cent.

The takeover offer may be in the form of cash or, more usually, a combination of cash and shares in the offeror. The true value of the offer, therefore, depends on the price of the offeror’s shares, which often goes down after the offer is made. Takeovers may be agreed or hostile. An agreed takeover is one where the board of the offeree company has agreed to the takeover. A hostile one is a takeover the board of the offeree company has sought to resist. It has become common for companies that fear the possibility of a hostile takeover to set up defences referred to as “poison pills” that make them less attractive to potential predators. Firms subject to hostile takeover bids sometimes also look for a “white knight”, a friendly company that can be persuaded to take a substantial stake in the firm in order to thwart the unwelcome takeover.

Some companies buy a sizeable shareholding in another company with the aim of getting the “targeted” company to buy the shares back at a higher price in order to avoid a hostile takeover. The practice is known as greenmail and has been discouraged in the United States by legislation that imposes especially high taxes on profits made by greenmailers.

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