Takeovers can provide excellent trading opportunities, and so an understanding of takeovers and how they work is necessary if one is to benefit from the investment potential that they offer.
A takeover occurs when one company attempts to buy another company in order to expand. This may be a hostile bid, which is unwelcome by the target company or a welcome bid, which has already been agreed to by the respective boards of directors. When two companies decide to join together, it is often called a merger, but basically it is the same as a friendly takeover bid.
Why lauch a takeover for another company?
There are a few reasons why one company would want to take another company over. The bottom line for most of them is growth. Companies aim to grow sales, earnings, dividends, etc., all to increase the value of the shares and, therefore, the return to shareholders. Most bids are launched in order to grow a company the quickest and easiest way possible.
Complementary products and/or services
A company may make a takeover bid for another company if the target company, for example, manufactures products that are complementary to the bidding company, or if it provides services that complement the bidder’s services.
This can take two forms.
1. A company may bid for another that is in a similar business.
2. A business may choose to buy a business in the same industry that operates at a different point in the supply chain.
Types of bids
Before discussing the different types of takeover bids, it is important to understand that a buyer is prohibited from acquiring more than 20% of a public company without making an official takeover bid. This is why you often see entities holding 19.9% of a given company.
There are some small exceptions to this, but basically a company must make a takeover bid if it wishes to buy more than 20% of a company.
There are two basic types of takeovers in the Australian stock market. The first is an off-market bid.
An off-market bid occurs when a company announces its offer to buy shares in the target company. The bidding company (making the takeover) will lodge a Bidder’s Statement with ASIC (the Australian Securities and Investments Commission), then send it to all shareholders of the target company. This document sets out the terms and conditions of the offer and how shareholders should go about accepting it.
The target company then sends a Target Statement to all its share-holders, recommending acceptance or rejection of the offer. The Target Statement is designed to contain all of the information known by the target directors that is material to the bid.
If the bid is hostile, the target company will often include an independent expert’s report, which will include a recommendation as to whether or not the bid is fair and reasonable, together with a valuation for the target’s shares.
An off-market bid usually has conditions attached to it. These conditions allow the bidder to withdraw its bid if it does not get exactly what it wants. One of the most common conditions is for 90% shareholder acceptance. This guarantees the bidder the option to withdraw its bid unless it is able to buy the entire company and consolidate it into its existing operations.
The other kind of takeover bid is a market bid. This is where the acquiring company stands in the market and buys shares in the target company at a certain price, free of conditions. The company sets an expiry date on the bid and buys in the market until that date.
The bidding company prepares a Bidder’s Statement and lodges it with ASIC, but no approval process is required. The Bidder’s Statement is then sent to shareholders of the target company. If shareholders wish to accept this type of bid, they sell through a broker and pay brokerage and GST.
The target company issues a Target Statement in response to the Bidder’s Statement, which outlines the directors’ opinion about acceptance or rejection of the offer.
Apart from ASIC and the ASX, there are other regulatory bodies that monitor takeover activity.
1. FIRB The Foreign Investment and Review Board, via the Treasurer, must authorise any takeover of an Australian company by a foreign party. A purchase of more than 15% of a company by a foreign party requires approval. A high profile example of the FIRB’s involvement in a takeover bid was when the Federal Treasurer rejected Shell’s takeover bid for Woodside Petroleum (WPL) in April 2001.
2. ACCC The Australian Competition and Consumer Commission has the job of policing issues such as unfair trading practices, monopolies etc. The ACCC has broad powers and can prohibit a takeover bid based on the fact that it would reduce competition and not be in the best interests of Australia and its citizens. The ACCC generally investigates most major takeover bids in Australia, but has only prohibited a few.