Introduction: Definition Of Takeovers
Takeovers or corporate takeovers can be described as acquiring control or getting into the authoritative position in an organization or company through purchase of its stakes’ stock or through any other kind of exchange. These takeovers could be both friendly and hostile in nature depending upon the method adopted by the acquiring organization its intensity and speed of acquisition.
It is a pre informed takeover in which the bidder company informs the director of Target Company upfront and gets the approval of its board. All conditions of a acquisition are done with taking everyone concerned into confidence. Here the majority of board of target company thinks the bid as beneficial for the stakeholders and cooperate with bidder in acquiring the company. Read about Management Control Systems
In this kind of take over the board of target company is uninformed or unwilling to be acquired but the target company still pursues it by purchasing its shares through a tender offer. The target company offer a premium to the target company’s share holders to get hold of sufficient number of shares which enables them to acquire the company or at least provide them simple majority in board of directors which then take control of company’s administration and cooperate with bidding process. Acquiring company also uses proxy bidders or starts a proxy fight to get hold of shares of Target Company.( Mallette& Paul 1995)
Other kinds of takeovers are
- Reverse takeovers
- Back flip takeovers
- Financial takeovers
This is the kind of takeover when a privately listed company takeovers a publicly listed company. In these kinds of takeovers the private companies are usually very large corporations.
In this kind of takeovers the acquiring company turn itself into a subsidiary of the acquired company. They are very rare in nature.
This is the kind of takeovers when a acquiring company take help of various financial institutes ‘ banks or lending organizations to fund their takeovers through various instruments like bonds’ loans or may be shares of the acquiring corporation itself to finance the takeover. (Murray l widenbaum and Kenneth w Chilton’ eds. 1988)
Purpose Of Takeovers:-
There are various reasons an acquiring company might have in its mind when it bids for another company. The major reasons for a takeover are rapid expansion of capacity by acquiring companies of similar kind of business. There are overseas acquisitions to get entry into foreign market with less hassles or breaking into a foreign market with some leverage. There are opportunistic takeovers which are done by large corporations who acquire smaller firms who are doing exceptionally well in a particular area or industry. There are also takeovers done to strengthen a company’s own weaknesses. For ex a company who is not able to perform very well in distribution network might consider acquiring a firm who has a well developed and effective distribution network. Sometimes acquisitions are also done to temporarily lower a company’s profitability in balance sheets a company who have large amount of cash piled on for which they have to pay huge amount of taxes if left unused will consider acquiring another firm to use its cash reserve and lower the net earnings for itself and thus reduces the tax liability.
In certain countries and economies direct foreign investment is tightly controlled or its a very complex procedure to get into business directly. Acquisition of a local firm is also a way to establish a foothold and open a front for operations. (Georgeson and Jones Day 2000)
Reason For Increasing Number Of Takeovers:-
There are various reasons for increasing number of takeovers in corporate world in today’s economy. Earlier takeovers were few in number and only giant corporations were able to pull off a takeover. The earlier theory and belief was to grow a business by our own means and in our own way. The businesses were run mostly like family institutions and they were passed on to next generations as it is. There was less involvement of professionals in strategic and ownership level decisions and more in day to day activities.
In today’s era of business globalization and liberalization, there has been a sudden outburst of takeovers all over the world specially in developing economies. Conglomerates from developing economies are taking over companies in both under developed and developed economies. Recent examples could be takeover of JAGUAR and land rover by TATA group from India. Another example is also from India where power corporations like Reliance power and Adani power have takeover coal mines in undeveloped African countries like Zambia.
The increasing number of takeovers is considered to be a cumulative effect of these reasons.
- Rapid expansion of economy and high GDP growth in developing countries lead to a rapid succession of takeovers to create larger capacities as early as possible. All companies are trying to grab the opportunity offered by current growth pattern and takeovers are a easy way to increase the capacity.
- Technological development is very dynamic and all technologies are developing at a rapid pace. To catch up with this pace corporations who does not have the core competency of r & d are making up by takeover of the companies who are competent.
- Freeing of economy and increased percentage of direct foreign investment (FDI) even up to 100% in various sectors by earlier tightly raped economies gave the multinational players a lucrative chance to increase their business in these economies . This also led to a sudden increase in number of takeovers. (. J. Fred Weston’ 1988)
- Setting up a new plant specially in a foreign country is getting very complex and difficult due to different laws with respect to land acquisition’ environmental clearance’ human resource development’ legal and bureaucratic clearances. Taking over a already established company even at a premium is actually costing less to acquiring companies in longer run.
- With global market opening up and manufacturers like China being able to sell their products all over the world opened up an all new era. In this era China is able to sell at a very low prices because of the economies of scale they have and cheap labour available to them. This directly or indirectly forced other competitors to either go for economies of scale at a larger level or open up a shop in countries like China or India to get benefit from cheap raw material and human resources available there.
All these reason including many other minor reasons like unutilized cash’ less return on investments in developed economies and lesser rate of interest etc created a cumulative effect to increase the number of takeovers. (Donaldson & Gordon 1994)
Why Corporate Takeovers Should Be Encouraged Legally
Arguments In Favour:-
There are various arguments given by different economist. Corporate leaders’ Management gurus on the benefits and ill effects of takeovers on acquiring company’ acquired company’ share holders of both companies’ other stake holders’ government and economy and public at large.
Let’s first discuss what the possible benefits of a takeover are and how they can be used in an argument that takeovers should be encouraged legally.
Firstly takeovers provides a way to open new markets for companies and in that way provide great opportunity for generation of revenues’ jobs’ profits for oneself and increased taxation for the governments. It also creates long term sustainability for a business and generates a lot of ancillary and supportive industries and vendors. Takeovers especially cross border takeovers act as a stimulant to economy and market in general and give a moral as well as financial boast to both related and nonrelated industries.
Another benefit of takeover is creating synergies. In certain areas companies lack the needed expertise and technological knowhow to achieve the required competitiveness and strength to stay in market in a sustainable way. Takeovers give them an opportunity to hone their strengths and skills. For example an organization that does not have an effective customer care services and wants to immediately improve upon it. One way to achieve that is acquiring a service provider company who have expertise in the said area and gives the responsibility of customer care to that company’s management. (Magda Ibrahim’ 2011)
Cost saving is another very important benefit for an organization as well as country itself by acquiring the supplier or vendor companies (saves valuable foreign exchange in case suppliers are overseas organization) acquisition of a related company increases the economies of scale for an organization and acquiring of a supplier company decreases the cost of raw material and also ensures the long term supplies of the raw material. This saves any organization a lot of cost. Companies also save money in operations’ streamlining of processes and development and training of human resources by acquiring a company which have the requisite strengths
Sometimes acquisition helps a lot in timely or rapid completion of a product as well as a portfolio. Technology transfer has become rapid and easier by acquisitions. Leading to a control over delays in delivery’ technology transfer and handling of materials. This could lead to a immense reduction in time required for development of a new product for example in pharmaceutical industry developing a new product takes a lot of gestation period if they acquire a clinical research company and an activated pharmaceutical ingredient producing company it can lead to a reduction of months in time to develop that particular product. This provides them first mover’s advantage and gives them upper edge in market at both national and global level. (Yago’ 1990)
Takeovers and acquisitions are very helpful in completing a portfolio of products for an organization. A company planning to introduce an entire range of products in a market will definitely have an upper edge over its competitors but all companies don’t have the capability to manufacture an entire range of products especially if product requirements are too varied and complex. These companies can full fill their requirements rapidly by acquiring or taking over other organizations which help them in completing their product portfolio.
Another argument put forward by people who favours takeovers is that takeover attempts even if unsuccessful open the eyes of a target company and make them do the required changes in the systems and business structure. Sometimes tempt them to join hands for a friendly merger’ joint ventures and partnerships. In this way a looming threat of takeover keeps the organization on their toes and increases their efficiency. Employees and management of a company gets too complacent and self assured if they taste the success regularly without any threats that become less competent and make a self-serving community of a closely knit corporate aristocracy. Critics accuses that this kind of behaviour leads to make an example for upcoming members and create an army of non productive workers, they become too assured about their jobs and start taking things carelessly, thinking more of their benefit rather than that of share holders, managing only for near future and immediate gain without considering the long term consequences, trying to avoid any kind of risk even if taking that risk is justified and reasonable. In short not able to respond to changing competitive climate. . (Walker & M. Mark 2000)
The takeover was seen as a tool for eliminating these alleged wasteful activities. Proponents of takeovers argue that these events are merely actions of the free market concept of maximizing shareholder wealth.
Corporate takeovers are also beneficial for those organizations that are continuously undervalued in the market and not able to give the returns to its share holders which they actually are entitled. Sometimes conditions like market environments’ overall economic scenario’ govt regulations create a negative impact on a company which undervalues the company and there is nothing which a company can do about it. In these conditions takeovers at correct or premium prices help the company to reach its true value in market.
Arguments Opposing the Legal Encouragement of Takeovers:-
There are various arguments cited by the opponents of takeovers to argue that takeovers are hostile in nature for all intents and purposes and instead of benefiting the companies’ people and government they actually harm them in longer run.
The first argument the opponents give is takeovers are short sighted in nature and only look for immediate benefits and stops the acquiring company to invest in research and development and does not create actual long term sustainability for any companies. According to this view if any company wants to succeed in longer term should create its own capabilities rather than depending upon takeovers to own them. According to this view takeovers create a sense of false security and in reality increases the dependency of one organization on another for its sustainability and existence. This also creates a rat race or bigger fish eating smaller fish scenario in market. Today’s acquiring company could be tomorrow’s target company and in the end all long terms plans get affected by this kind of development.
One more argument is the threat of monopolistic market for any particular industry or product because of takeovers. Though this view might be a rare scenario but once it happen it could be a nightmare for government and public at large. For example if all the power producing companies in a country or pharmaceuticals are taken over by one big conglomerate it will have the leveraged hold on the market and government. Then it can change the market policies’ pricing and profit margins of that particular product at its will and people will not have any option but to comply with it. This is why all countries have laws and governing bodies in place to take care of any possible situation leading to monopoly in market and if laws were loosened and takeover are encouraged we are pushing the market towards a monopolistic situation. (. Rock, Milton L., Robert H. Rock, et.al 1994)
Another view is that the takeover threat has been forcing managers to adopt a short-term stock price orientation that is inconsistent with future growth and development of business Competitiveness. Institutional investors, whose ownership in U.S. corporations has grown from 12 percent of common stock in 1949 is over 50 percent in many industries today, are increasingly criticized for the role they play in forcing this short-term orientation (Graves and Waddock, 1990). This view also states that because of takeover threats market generally overvalue the short term gains and undervalues the long term investments and as stated earlier long term investments are required for a healthy market and government. In many countries there are legislative measure to protect companies from hostile takeovers which allows managers of these company a higher decisive power and authority. It also increases there risk taking capacity and encourages them to get involved and invest in long term projects, this is viewed as beneficial for the long-term health of the company, the economy, and the nation. (. Alexandra Reed Lajoux and J. Fred Weston 1999)
One more argument opposing the takeovers is regarding the strategies observed by the target companies to avoid any possible takeover threat. These kind of shark repellent schemes are successful but at a heavy cost on shareholder’s value. For example strategies like poison pills’ evoking of voting rights’ increasing the debt’ using a white knight or a greenmail. All these strategies though can deter a possible takeover they often cause huge financial losses on the shareholders value. Adding a poison pill clause reduces the share value immensely. A well known example is of YAHOO whose share lost a mighty 94% of its value after they added the poison pill clause in there company charter. In year 2000 the share value dropped from $118.75 to $ 6.78 after the poison pill clause (NASDAQ YAHO 2000) so in effect the company avoided a takeover while causing an immense loss to its shareholders. Other strategies like voting rights evoking also leads to loss in share value and so does the increasing debt by the company. Increasing debt may make company unattractive for bidder but it also reduces the share value because of huge debt in its balance sheets.
In case of having white knights as a strategic investor or partner have other possible problems. Adding a white knight is usually done on an ad hoc basis with fewer thoughts given to long term benefits of this investor or its strategic fit with the company.
One more argument against takeover is its effect on employees’ work culture ‘ethical integrity and values of an organization. During takeovers there is a lot of mixing of different cultures and values followed by different organizations and it becomes a really difficult situation for employees’ vendors and suppliers to adapt with these changes also there are lot of clashes in process’ systems and values followed by companies merging and it leads to decrease in efficiency sometimes very drastically instead of increasing it. (Mark Anderson’ 2010)
Also the value system of companies and employees are greatly impacted by takeovers and companies who are known for their ethical integrity and values may not follow the same after takeovers but still believed by share holders and public because of past reputation. This can create huge financial and reputational losses to shareholders as well as employees of acquired company. Sometimes takeovers also create an impact on work life balance of employees’ their families because of new working hours’ work pressure ‘transfers and newer responsibilities. These things are also to be considered as an adverse impact of takeovers on society at large.
Many business leaders and some academic commentators have dissented sharply from this view, arguing that takeovers create private value by capturing rents but create little or no social value. Their argument is that shareholder purchase gains come from the exploitation of financial market misevaluations, output from the use of tax benefits, and from rent expropriation from workers, suppliers, and other corporate stakeholders. The dissenters suggest In that the disruption costs of at least some hostile takeovers may well exceed their social benefit.
There is also discrepancy in earnings of shareholders of target as well as acquiring company’s shareholders. Target company’s shareholder may earn premium up to 30% on their share value but these comes out from shareholder’s profit of acquiring company who may end up earning nothing on their investments. This has a huge impact on short term average investors. So in reality there is wealth redistribution among shareholder’s of both companies against their will. There are also effects on debt holders of acquiring company because for any takeover the acquiring company may raise more debt and in effect dilute the stake of earlier debt holders on company’s assets in case of bankruptcy.
The government also looses on tax revenues in case of takeovers because of the reduced earnings in acquiring company’s balance sheets because of the liabilities of Target Company. This results in discounts in tax liability of acquiring company and companies end up paying very less amount of taxes to authorities. This creates an extra burden on other taxpayers or individual tax payers and society at large. (Fischel& Daniel, 1995)
One more argument against takeovers is the hostility it creates which can lead to corporate espionage. Crimes’ Tax frauds ‘and unusual rivalry among companies. Proxy fights can easily involve cheatings’ misguidance and bribery to other company’s share holders’ employees’ government officials etc. So in essence unnecessary creating an environment which is very volatile and threatening to all parties.
After thoroughly studying the different aspects of a takeover we can fairly conclude that it has its own benefits and contain tremendous potential in driving the market and economies but we cannot ignore the negativities associated with it. Considering today’s globalized economy where all major economies are entangled and dependent on each other for mutual growth it is very difficult to avoid takeovers completely. There are many countries who are tax heaven and can route fund to any place with their industry friendly laws and more autonomy to financial service firms. (Chew & Donald H., 1997)
So in view of the problems attached with the hostile as well as friendly takeovers and there adverse effects on share holders’ employees’ governments’ economies and society at large the probable solutions could be taking extreme caution and making laws friendly for industry but protective as well towards the interest of an average investor or share holder. Current laws covering the takeover situations are outdated and have some loopholes which give access to unethical companies to make their way around them. We need to find these loopholes and cover the gap with more effective and relevant clauses which makes fraud and cheating very difficult. Also there could be higher penalties and punishments for defaulters to deter them from any kind of wrong doing. In essence we can say that takeovers are a necessary evil in today’s scenario and we need to improve our laws and jurisdiction system to cope with changing scenario and protect all concerned stake holders from potential harm and losses. (Gray, S. J., and M. C. McDermott, 1989)
- Fred Weston, 1998 Study Guide to Takeovers, Restructuring, and Corporate Governance, Upper Saddle River, NJ: Prentice Hall,. (SG)
- Alexandra Reed Lajoux and J. Fred Weston, 1999 The Art of M&A Financing and Refinancing:Sources and Instruments for Growth, New York: McGraw-Hill,. (LW)
- Bruce Wasserstein, 1998. Big Deal, New York: Warner Books,
- Philippe C. Haspeslagh and David B. Jemison, Managing Acquisitions: Creating Value Through Corporate Renewal, New York: The Free Press,
- Alexandra Reed Lajoux, 1997 The Art of M&A Integration: A Guide to Merging Resources, Processes, and Responsibilities, New York: McGraw-Hill,.
- Fischel, Daniel, 1995. Payback, New York: Harper Business,
- Yago, 1991. Glenn, Junk Bonds: How High Yield Securities Restructured Corporate America, NewYork: Oxford University Press,