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You are here: Home > Current Topics > Mind your Business > 01 March 2004 |
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In January 2004, companies around the globe made bids to takeover other companies to the value of $145 billion (£77.7 billion or €115.5 billion). Such sums of money are beyond most of our abilities to comprehend. To get some idea of how much money we are talking about, if you tried to count to 145 billion at one number per second, 24 hours per day, 365 days a year, it would take you 4,598 years! Who is trying to take over whom? In recent months, the following have been subject to various potential or actual takeover bids or rumours of possible bids being made:
There are a variety of reasons behind these potential or actual deals and each case tends to be individual. In Leeds United's case, the imperative to find someone who is willing to takeover the Club is due to its precarious financial position; in the case of Carlsberg, it may be to expand its operations in different countries. 
Looking at the case of Comcast's bid for Disney, the initial bid by Comcast, a cable TV company, was for $54 billion (£29 billion or €43 billion). The Disney Company inevitably felt that the offer was far too low and would have considered the implications of the takeover bid for the future of the business and its shareholders, who the Board are meant to represent. In the bid, Comcast would have explained why it felt the takeover would be good for its own business and also for Disney; it is likely that if it is serious about the bid, it will come back with another, probably higher bid, and the process will continue. Ultimately the shareholders of the two companies must decide; for Disney's shareholders, they would have to consider whether the money they are being offered for their shares by Comcast is worth it. They will be considering the short-term potential gains and, if they are keen to hold on to the shares, the long term implications. Image: Disney's most famous landmark - the Cinderella Castle in Disneyland, Florida. It is no coincidence that the takeover bid by Comcast comes at a time when Disney is 'vulnerable'. They have not grown as much as the shareholders would have liked, have been embroiled in inter-board feuds and slanging matches between the Chief Executive Officer (CEO), Michael Eisner, and other former members of the Board, there have been accusations of a bullying and intimidatory management style and to cap it all, the joint venture between the very successful Pixar animation studio and Disney recently collapsed. No wonder that analysts refer to takeover bids in terms that are evocative of the way animals behave in the wild - hostile, predatory, weak and vulnerable, etc. The image is conjured up of the Serengeti plains, the unfortunate wildebeest being stalked by the lion pack before being attacked over and over until its resistance gives up and it is consumed by the pack, the carcass being left to the scavengers! |
A Takeover is the acquisition of control of another company. This is normally done by buying a controlling interest (51%) in the shares of the company. Takeovers are referred to as hostile if the firm subject to the takeover bid does not welcome the bid. If the firm being taken over (we will refer to them as the 'victim') seeks to resist the takeover, it is referred to as a 'contested takeover'.
The mechanics of a takeover centres on the intention by a firm to tempt the shareholders of the 'victim' to sell their shares to the firm doing the bidding. If, for example, a company had ten million shares currently valued at 200p, the total value of the firm (its market capitalisation) would be £20 million. The bidding firm might therefore come in with an offer of £2.20 for each share, valuing the company at £2,200,000; each shareholder would get a 'premium' of 20 pence per share. Would this be enough to persuade them that the offer is worth accepting? If the Board advises its shareholders that this is an offer they feel undervalues the firm, then they would be likely to recommend rejecting the offer, in which case the bidding firm would have to decide whether to increase its offer. If the bidding firm is keen enough - and this would give some indication as to its view about the potential for the 'victim' following the takeover - then it will have to decide how much to increase its offer.
In some cases, the bidding firm will instruct its agents to buy a large amount of shares in the 'victim' company as soon as the market opens to signal its intention to launch its bid. Such a strategy is known as a 'dawn raid'. Such a strategy may be used as an alternative to announcing a formal takeover bid.
The process of a takeover involves a wide range of terminology that is linked to who is doing the taking over and what view the 'victim' has of the takeover. In the case of a hostile takeover, the firm making the bid can be referred to as a 'black knight'. In such cases, the 'victim' firm does not welcome the takeover attempt but it may well be that the 'black knight' is too strong and powerful for the 'victim' to do anything about it. A 'white knight' is a firm that may enter the fray as a 'friendly' bidder. It may be more acceptable to the 'victim' and offers a more palatable partner in negotiations.
Other protagonists to the bidding process may well enter. A 'grey knight' is a third firm that is not welcomed by the 'victim', seeking to exploit the situation to their own advantage and a 'yellow knight' is a firm who originally seeks to launch a hostile takeover bid but then moderates its stance and negotiates on the basis of a merger - the 'yellow' being used to imply some element of 'cowardice' in the behaviour of the bidding firm who may begin to appreciate that it will not be able to 'bully' its 'victim' into submission.
One final bit of terminology associated with takeovers involves the role of 'white squires'. Such a firm may not be big enough to be able to take control of another firm but may well seek to buy into the 'victim' firm to prevent the 'black knight' from being able to achieve its takeover plans.
Firms who are subject to takeover could become targets for a number of reasons:
The main reasons are as follows:
Image: The law of the jungle, firms biding their time until the right prospect for takeover comes along.
In choosing takeover targets, a firm may also consider its position in the stage of production. If a firm, for example, were involved in manufacturing, it might seek to acquire a supplier at the primary stage to help lower supply costs and secure reliable supplies. Such a move is referred to as 'vertical integration'. Vertical integration refers to amalgamation merger or takeover at different stages of the production process. 'Horizontal integration' refers to amalgamation, merger or takeover at the same stage of the production process - this would imply that the reasons are primarily for purposes of market dominance or diversification.
Choose one case study of a recent takeover news story. Consider the following questions:
Since the business world changes regularly, it is advisable to monitor what is happening through using a search engine like Google (http://news.google.com) and type in 'takeover activity' or similar - recent news items will be listed for further research.
Image: Disney's performance - making the company vulnerable to a takeover?
The answers to the questions set will depend on the case study you have chosen. What you are being encouraged to do is to use the information in the theory section and apply it to the case study concerned. Not every reason for takeovers given in that section for example, will apply to every takeover situation.
