M&A: What Motivates a Company to Takeover Another Company
In business, especially in the modern markets, the usage and application of the term takeover is very common. It is used in reference to when one business assumes the control or the management of another business. There are different factors and reasons that motivate businesses to take over other businesses.
In this article, we will look at 1) what is a takeover, 2) why do businesses plan takeovers of other companies? 3) what are the phases of initiating and completing a takeover? and 4) pros and cons of takeovers.
WHAT IS A TAKEOVER?
Different definitions have been brought forward for the term Takeover. Therefore, to effectively define the term in this article, we will present three of the major definitions for the term and analyze them so as to come up with the most effective definition of what a Takeover is.
The Business Dictionary gives the definition of the term takeover as the assumption of control of a firm (usually smaller) by another firm (usually larger) that is attained through the purchase of 51% or more of its voting shares or stock.
Investopedia, a leading resource for reference of business terms and ideas, defines the term takeover as when a bidding company is allowed to acquire a target company. Upon the acquisition, the bidding company becomes responsible for all the operations of the target company.
The Financial Dictionary defines the term takeover as a general term usually referring to the transfer of control from one group of shareholders to another group of shareholders. It further defines it as a change in the control interests either through a friendly or hostile acquisition of a corporation.
The definitions provided above all point out to three major issues; assumption of control, a bidding company; a target company and acquisition of control. From these three issues, this article crafts the definition of the term takeover as:
A takeover is when a bidding company acquires a target company and as such, there is a change in controlling interests where shareholders of the bidding company assume the control and the management of the target company.
WHY DO BUSINESSES PLAN TAKEOVERS OF OTHER COMPANIES?
Takeovers are some of the most important decisions that a person or a management team can make in business practice. Therefore, there is need to exhaustively analyze trends in the market before deciding to acquire and take over the management of another business. It is important to consider how a takeover can help the ambitions of the business at hand before deciding to venture into one. There are a number of factors that motivate businesses to start off with takeovers of other businesses. These factors vary from one transaction to another depending on the ambitions behind each business in the market. The current article lists and explains most of the common of those factors.
Enhancing business abilities
Modern markets demand that operating businesses are well endowed with abilities to effectively outperform competing businesses. A successful business, at least from the perspective of the modern market, must be marked by efficient production, effective marketing and high sales and turnovers. However, it is quite challenging to ensure that a business has all these abilities without proper investment. Therefore, businesses usually opt to take over other businesses in order to facilitate the efficiency with which they produce, the effectiveness with which they market their products and services and to increase their sales and turnovers.
Logically, taking over another business comes with the opportunity of increasing the abilities of the business. Takeovers come with ready alternative measures that can be used to sort out some management or business issues that previously hampered the attainment of the maximum potential of the acquiring company. The additional abilities of the acquired business can be used to enhance those of the acquiring business. The additional departments and sections availed by the acquired firm should offer the acquiring firm some additional space to effectively manage and utilize management resources in order to enhance the abilities of the acquiring business.
Gaining a larger market share and competitive advantage
Modern markets are characterized by stiff competition among businesses. The quest to attain high sales becomes complicated given the fact that many businesses offering almost similar services and products in the same market exist. Therefore, it becomes very expensive trying to beat this competition and gain a larger market share with the existence of all the competing brands and businesses. It is very hard to increase sales of products and services with all businesses jostling for market space. The end result of this competition usually is reduced market shares which initiate low product and service sale rates.
Initiating a takeover of the competing firm can help a business gain a larger market share in the market and reduce the pressure of completion in the market. By assuming the control and management of the competing firm in the market, it becomes possible that all the products and services offered by the acquired firm are controlled by the acquiring firm and all sales and profits are attributed to the acquiring firm. Once a business has been taken over by another business, the competition that previously existed between the two firms dies off as the two businesses become a single entity in the market competing against other businesses in the market.
Diversifying products and services in the market
For businesses to be assured of ultimate success in the market, they must diversify products and services. Products and service diversification allows businesses to be assured of high sales at all times. However, it is not easy to effectively diversify products and services in a single business. It is very expensive and very time consuming for a single business to offer more than three to five types of products and services. Given this difficulty, it becomes necessary that the business in question takes over the operations of other businesses offering different types of products and services.
Taking over a business with an aim of diversifying products and services comes with a notion of profitability. Logically, a business dealing with many different types of products and services will most likely remain significantly profitable when compared with those that offer just a single product or service. However, legal statutes regulating the practice business in relation to takeovers try to discourage instances where takeovers may create monopolies. Therefore, before assuming the control of businesses that will see a company being in control of most of the products and services in a niche within the market, the business in question must fully meet all set procedures and guidelines.
Cutting business operation costs
Business operation, especially in the modern market, is very expensive. Costs are often incurred from almost every sphere of operation. For a business to attain profitability, it must effectively cater for production costs, management costs, and other miscellaneous costs. Taking over another business provides a window of reprieve from where it is possible to control business management costs. The fact that the two businesses become merged, there is availed an ample opportunity through which the acquiring business expands without incurring huge costs that are involved during the expansion of a single business.
Taking over another business enables efficient production of goods and services given the increased manpower. The reduction of costs is even maximized if the merging businesses deal with the production of the same product. In this case, the total costs of production and management will be lowered while production yield will be increased. Through this kind of merging, businesses combine locations, integrate and streamline support functions which in turn help greatly in reduction of costs, a precursor to profitability. A takeover is generally viewed as an important tool in the economies of scale business strategy. In this strategy, it is theorized that when production costs are lowered as production volumes increase, the involved businesses are guaranteed of maximized profits.
Changing the leadership of a business
There comes a time when a business needs to change its leadership. However, leadership changes in business are often complicated. In most cases, they are intertwined with a haven of legal and procedural issues that demand strict adherence to. This strict adherence to such procedural and legal requirements often becomes a challenge that is likely to hinder maximum business performance. Therefore, the best way to bypass the issue of business leadership incase of a crisis is to initiate a takeover.
The business that takes over the operations of the other becomes legible to bring in new leaders and/or new procedures regarding the management and running of the involved business. Since taking over another business is the only window which allows easy manipulation of business procedures, the management team of the business taking over the business in question can effectively initiate the hiring of new leaders whom they believe that can provide effective leadership for the acquired business. However, leadership change in business is a very critical issue that demands strict adherence to business ethics and legal frameworks in order for success to be attained. Therefore, the acquiring firm ought to ensure all procedures involved in leadership change are exhaustively adhered to avoid a scenario where the business fails due to ineffective leadership.
WHAT ARE THE PHASES OF INITIATING AND COMPLETING A TAKEOVER?
There are four main phases that ought to be followed during the initiation and completion of a takeover. These four phases make up the cyclical process of conducting takeovers in that they are repetitive for all takeover transactions. These phases are:
This is the first phase during a takeover process. It involves identifying an ideal business that is worthy being taken over in a bid to streamline operations in the market of the acquiring business. During this phase, the acquiring firm learns of a business that is up for sale. This can be attained either by contacting the management of the target business or by reviewing adverts and identifying those listed for sale, mergers or acquisition. It is important that during this phase, all the contact information of the target information is obtained, and if necessary, a tour to the business site be conducted. It is in this phase that the acquiring firm will have the opportunity of determining whether the target business is worthy taking over.
During the business identification phase, it is important that preliminary valuation of the target business is done. However, conducting preliminary valuation may at times demand express permission from the management of the targeted business. The preliminary valuation will involve reviewing the target business’ market share, the value of its products and services in the market and its approximate market value. It is critical that extensive research on the identified market is done so as to understand fully whether the company will be of significant positive impact to the acquiring business upon a takeover.
Takeover negotiation is the second phase in the takeover process. In this phase, the acquiring business negotiates with the management of the target business regarding a possible takeover. This can be conducted in sub-phases depending on the complexity of the business involved. In this phase, the acquiring business will need to hire the services of experienced takeover negotiators so as to ensure that all the negotiations work fairly to all those involved. During this phase, all critical issues regarding the business to be taken over ought to be fully reviewed and analyzed before concluding on a takeover deal.
It is in this phase that the negotiators of the acquiring business will discuss and agree on the amount that should be paid to acquire the targeted business. Some of the topics that should feature in this phase include:
- The liquidation value of the target business
- The enterprise value of the target business
- The book value of the target business
The liquidation value refers to the target business’ worth once all its assets and liabilities have been calculated. The enterprise value refers to the value that the target business will be worth if the acquiring business was to buy all its shares on the open market, pay off all the debts associated with target business and hold all the remaining cash on the target business’ balance sheet. The book value refers to the amount the company is worthy after the sale of all its assets, settling all liabilities and selling currently held stock.
Once all this three issues have been concluded, the negotiators can then be able to determine a realistic amount that should be paid for the takeover to be completed.
Closing the deal
In this phase, the acquiring company and the target company have agreed on the terms and conditions of the takeover. All that was negotiated and agreed in the previous phase ought to be formalized in this phase. Formalization will usually include the signing of agreements and establishing procedures that will govern the takeover. In this phase, the target business will agree in writing that they are willing and ready to accept compensation to let the acquiring business assume the running and management of their business. Similarly, the acquiring business will agree in writing of its willingness to pay and formally assume the management of all the agreed issues regarding that business to be acquired.
It is in this phase that payments for the takeover will be initiated and completed as will have been agreed during the takeover negotiation phase. Payments will be issued to the target business as per to terms and schedules that will be agreed during the takeover negotiation. During this phase, the involved parties will agree on how to conduct the business in question before the acquiring firm fully takes charge and assumes the management of the target business. Once every detail is agreed and signed and all payments made, it will be up to the involved parties to set a period after which all the responsibilities of managing the business will be transferred to the acquiring business.
Assumption of control and management
Once all the issues regarding the payments for the takeover have been finalized and closed, it is now up to the target business to transfer the powers to control and management of the business to the acquiring business. There should be an integration procedure that will allow adjustments for all the agreed terms to be effectively rolled out between the two parties. The selling firm should be allowed time to complete its post-sale procedures maybe of notifying its clients of the change of management. Similarly, the acquiring firm should have some time to advertise the business as effectively as it will need regarding the new management.
During this phase, the acquiring firm will need to analyze and come up with some important decisions regarding the newly acquired business. It will be necessary for the acquiring firm to decide whether to integrate the new company to the company or let it operate by itself or integrate their mother company to this new company like in the case of back-flip takeovers. It is important to analyze human resource needs once the takeover is complete so as to avoid instances of overstaffing or understaffing. This is a critical phase as it will determine the success of the takeover once full management of the acquired business is initiated.
PROS AND CONS OF TAKEOVERS
Takeovers come with a host of advantages and disadvantages regardless of the perspective one views them from. Although these advantages and disadvantages tend to vary from one case to the next, there are some that tend to reoccur in almost all cases. These will be listed below starting with the advantages then the disadvantages:
Advantages (Pros) of Takeovers
- They often come with a positive impact on sales/revenues. Takeovers often see an increase in sales/revenue of the acquiring company. The main reason behind this may be due to the increased yields of products and services and improved marketing abilities that come with the acquired firm.
- They enable a business to venture into new markets without necessarily having to face all the procedural issues involved. This is made possible due to the fact that acquiring a business operating in a different market will avail the opportunity of conducting business in that new market easily than when starting a new business in that market.
- Takeovers have the ability to reduce business competition in the market. Regardless of the market share of the acquired business, every new takeover ensures that there is less competition. Takeovers guarantee an increased market share for the acquiring business which in turn translates to reduced competition and improved market performance.
- Takeovers bring about an increased brand portfolio. In addition to the brand portfolio of the acquiring business, the business being taken over will bring with it its brand portfolio which will increase the brand portfolio of the new business after the takeover. Increased brand portfolio will encourage sales as there is a high probability of attracting new buyers to the new business.
- Takeovers offer a window to improve business efficiency and improve business abilities in the market. With acquisition of the new business, it is possible to easily eliminate synergies and redundancies from the business. Takeovers bring about an easy way to eliminate jobs and posts with overlapping responsibilities and duties. This is attained during the restructuring and adjustment period when operations are streamlined and integrated after the takeover.
Disadvantages (Cons) of Takeovers
- Upon takeovers, there is a likelihood that employee productivity will reduce. There are two main explanations for this incidence. First, the culture clashes of the two merging companies may work to negate the results of employee productivity. Secondly, issues pertaining to job insecurity will most likely affect the productivity of employees towards negative levels.
- There is always an undeniable and unavoidable conflict between the management of the acquiring firm and the management of the acquired firm. This often results into hostile takeovers which often delay success of the acquired firm in the market. It calls for quite a significant chunk of investment to effectively avoid such a conflict and guarantee timely success in the market after the takeover.
- Takeovers bring about a notion of a single firm controlling a large section of the products in the market, a precedent to a monopoly. The reduced competition brought about by a firm taking over other firms leads to a situation where consumers are deprived of choices of products to choose from due to the in-existence of competition in the market.
In conclusion, takeovers, given their essence in business, demand prioritized efforts if success if to be realized out of them. All management issues relating to takeovers ought to be effectively ironed out before they harbor negative effects on the takeover. All those involved with the takeover ought to work with a positive spirit if success is to be attained from a takeover. Therefore, it is important that the acquiring firm prioritizes the effective streamlining and integration of the acquired business in the market. All human resource issues ought to be effectively addressed if success of the acquired business is to be maintained in the long term. In the long run, all that will matter is the success of the takeover and it calls for utmost dedication from all those involved in the takeover for that success to be attained in the market of the acquired business.
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