What is a company takeover?

What is a takeover?

The simple definition of a takeover is one company gaining control over the other. Sometimes the two brands and other business aspects come together as a single entity. Sometimes they continue to operate separately. 

A company’s management team can use mergers and acquisitions (M&A) to grow. They might want to reduce competition (Sainsbury’s buying Argos), enter a new market (Burberry buying its Chinese franchises) or get their hands on another company’s valuable patents or intellectual property (Microsoft buying Activision Blizzard for franchises like Call of Duty and Candy Crush).

But there are also purely financially-motivated takeovers. In the same way investors look for cheap stocks to snap up, there's been a trend of US private equity companies finding value in public UK companies and using takeovers to gain control of them. This has plenty to do with historically low valuations in UK markets. Some think UK corporate culture is to blame. Others put it down to Brexit and political uncertainty.

M&A deals can be funded with cash, loans, shares or a mix of all three. Cash and loans are pretty much self-explanatory, but if a company acquires another in a share deal, that means shareholders in the target company are offered shares of the merged business as payment. 

In order to complete a takeover deal, there are a few hurdles to clear. 

1. Board approval – because it helps massively to get the shareholder vote if the board officially recommends the offer received.
2. A shareholder vote – with a threshold of typically around 75% in the UK or a simple majority in the US.
3. A regulator decision – to check the deal is fair to the customer (not reducing choice or forcing up prices). In the UK, the Panel on Takeovers and Mergers (PTM) ensures fair treatment for shareholders during mergers and acquisitions.
4. A possible government decision – if there are any national security concerns.

How does a takeover affect a share price?

Once the world gets to hear about a deal, the target company’s share price will usually move towards the offer price. There is then a discount applied for the risk that the deal won’t actually go through. That could happen if it fails the shareholder vote or regulatory review, or if funding falls through. If any of this happens, the deal might need to be changed to be saved, or the stock will fall back to where it was before – what’s known as the ‘break price’. When Covid-19 hit, there were big discounts because of the pandemic forcing companies to pull out from takeover deals. If the deals still went through, investors could profit from buying the stocks at these discounts. This investment strategy still goes by the name ‘merger arbitrage.’ 

In some cases, an offer looks too low on paper and there might be other interested buyers circling. In this situation, a bidding war might be on the cards, which can see the share price trade at a premium to the first offer price, even before any improved offers are tabled. We saw a love triangle earlier this year as Paramount won a bidding war with Netflix for Warner Bros. And we’re seeing it now with EasyJet. Their story is one of frustration among sections of the shareholder base: frustration with how the company has been run; a sense that it could be doing more. Two US private equity firms, Clearlake Capital and Apollo, have had more room to make unsolicited approaches because some shareholders appear open to a change. 

And in terms of the acquirer’s share price, don’t be too surprised if there’s a drop after making a takeover bid. If the market is optimistic about a deal, strategically and financially, shares can indeed rise. But in theory, a drop in share price makes sense because investors need to price in the risk of “safe” cash being swapped for ownership of a business, which may prove to be wise or unwise. 

How do hostile takeovers work?

In a nutshell, hostile takeovers refer to bids for companies without support of the target company’s board of directors. 

Usually, you would expect there to be talks. You would expect an interested buyer to scope things out. Take a close look at the books. Performance figures. And get a clear picture of the business. But hostile takeovers either skip this step or take place after earlier advances have been rejected. The acquirer effectively goes around the board to appeal directly to shareholders with an offer. And while the directors of the target company can argue why they should continue to be in control and why the offer “undervalues” their company, at the end of the day, they’re legally compelled to allow shareholders to vote.

When does it happen?

To know if a hostile takeover is possible, you need to look at the shareholder register. If multiple insiders are in cahoots with no intention of giving up their company, then together they may have a large enough stake and voting power to fend off any hostile takeover attempt.

But if this is not the case and the shareholder register is more fragmented, a hostile takeover becomes quite plausible. And there’s almost always a story to go along with it…

X (formerly Twitter) being taken over by Elon Musk is one example. Musk came a cropper by not going through the due diligence process into Twitter’s user metrics. It was a bit like ignoring property checks when buying a house. He complained that too much of the user base was bots, but it was too late and he was eventually forced by a judge to go through with his first takeover offer.

Kraft Heinz also once went for Unilever, the consumer goods giant behind brands like Dove, Marmite, Hellmann’s and Ben & Jerry’s. This would have been a mega merger. The offer could have created one of the largest consumer goods groups in the world. But Unilever’s board were successful in winning shareholder loyalty, Kraft Heinz knew they were beat and retreated.

Charles Stanley Direct Chief Analyst, Rob Morgan, has penned a sector review of Japan, where one of the key themes is shareholder governance and companies engaging more with shareholders who have a more “activist” mindset. It used to be the case that Japanese companies hoarded cash, depriving shareholders of value. But now, behave like that and your place on the Nikkei index is gone. 

Read further into the Japanese sector review here: https://www.charles-stanley.co.uk/insights/commentary/japan-sector-investment-review

When activism unlocks value 

Hostile takeovers fall under “activist” investment strategies. That means not just buying shares and sitting back, but taking matters into your own hands to influence what the company does.

This brings a fascinating new meaning to DIY investing. It could mean pushing for higher dividends, a new management team, or an outright sale (usually coded as calling for a “strategic review”). At the extreme end, a single shareholder can acquire mammoth volumes of shares such that they have huge voting power. 

But the activist still needs a plan. And they typically still need support from the rest of the shareholder community to win votes on appointing new board members. Some of these votes might come from ISS, which is a proxy adviser voting on issues on behalf of certain institutional holders, such as those who only own the stock as part of their pension fund.

What you can do to follow activism 

You may wonder what you can do if you haven’t got the funds to take over an entire public enterprise. And that’s fair. Most activist investors didn’t set out with this approach but rather graduated to it when their resources had grown enough. Warren Buffett’s Berkshire Hathaway, for example, doesn’t just invest in businesses anymore; it often buys them outright (in a non-hostile manner).

If you want to join in, ride the coattails of investors with the same attitude. The beauty is that activists usually make their campaigns public to try and attract support. Some campaigns are sensible. Some appear more opportunistic. But if you share investment principles with an activist and agree on their strategy and objectives, you might consider joining in. After all, every vote counts.

If you want to get into the action, Charles Stanley Direct gives you a way to research, choose and manage your own investments. As always, the value of investments can fall as well as rise, and you may get back less than you invest.