What is Takeover?

Last Updated: 5 Jul 2022

Every company begins with a little capital and immense hard work and passion. The main driving force behind these startups is the capital they raise, which is in crores, making them capable of expanding at a fast pace. The main idea behind the expansion is to have an added customer base quickly, market share, and new territory to further try out new products and services. Since these startups have the potential to raise the bar of competition, the old company may be forced to quickly change its business model to ensure sustainability.

But then, what are such companies doing to ensure sustainability? The clear answer is expansion through a takeover. For companies that already have a high cash flow, a takeover is one of the most effective methods of tackling competition and ensuring long-term sustainability. This blog will infuse knowledge about everything you need to know about a takeover and how companies are using it at a time when India has become the second-largest startup ecosystem.

What is a Takeover?

A takeover is a business phenomenon where a company successfully bids to take control of another company. Generally, takeovers are executed by buying a majority stake in a company that is willing to sell the stake for a predetermined price. One company takes over another company through acquisitions or mergers. In the process of a takeover, the company that makes the bid to buy is called an acquirer, and the company that is being acquired/bought is called the acquiree.

Typically, big companies take over small companies that are struggling to sustain themselves because of the competition. The acquirer company analyses and reviews the acquiree company and initiates a takeover after believing that it can boost their business and make them more profitable.

Understanding Takeovers

In the business world, where a particular sector has numerous companies with an established market share, a takeover is a very common and effective method. Takeovers include the steps used in mergers as both include combining one or more companies and establishing a single business entity. The main idea behind a company taking a controlling stake in another company is the expansion and ensuring that the acquirer company increases its customer base and, thus, sales and profitability.

Under a takeover, it is not compulsory to buy 100% of the stake in the acquiree company. A controlling stake is defined as the acquirer company purchasing a minimum of 51% of the shares of the acquiree company, leaving it with only 49%. Since the majority of the stake then lies with the acquirer company, it gets legal freedom to make the final business-related decisions.

Generally, companies buy other companies by offering equity as compensation. However, a takeover can also move forward as a cash deal or a mix of cash and equity. The factors of the takeover deal are mutually agreed upon by the two companies beforehand.

After the takeover, it depends on the agreed-upon terms whether the acquiree company will be merged with the acquirer company’s name or will operate independently. Notably, if the acquirer company thinks the brand name of the acquiree company is well established, they may leave it to be independent even after taking over the business.

Types of Takeovers

There are three types of takeovers that happen in the business spectrum:

• Friendly Takeover: This is the situation where both the companies mutually agree on every term of the takeover contract. In this situation, the acquiree company generally initiates the takeover process by openly announcing that it wants to sell the company. After another company shows interest, the board of directors of both parties discuss and agree on the takeover terms and complete the takeover process without any disputes.
• Hostile Takeover: Hostile takeover is when the acquiree company does not agree to being bought or on the terms of the takeover agreement. In this situation, as the acquirer company does not have the consent of the acquiree company, it buys the majority of shares of the company from the open market after the opening of the stock exchanges. After the takeover, the board of directors may leave the newly formed entity to show their opposition to the hostile takeover.
• Reverse Takeover: A reverse takeover is when the acquiree company is privately listed and buys a majority stake in a publicly listed company. The method is chosen when the private company wants to go public but does not want to sell its privately held shares to the public through an Initial Public Offering. It allows the acquirer company to cut expenses in the process of raising capital through the IPO.

Examples of Takeover

Here are some well-known examples of takeovers that happened in India and other countries.

Byju’s friendly takeover of Akash Educational Service

In January 2021, India’s biggest online education startup Byju’s signed a friendly takeover deal with Aakash Educational Services to take over its entire business for $1 billion. The deal is said to be the biggest educational takeover deal in India, making Byju’s the biggest ed-tech startup in the world.

With the takeover, Byju’s, which is only present in the online spectrum, can offer its services offline using Aakash Educational Services’ services and infrastructure. Both the parties discussed and agreed on every term in the takeover agreement.

Tata’s friendly takeover of 1Mg

In June 2021, a subsidiary of Tata Sons, named Tata Digital Services, signed a takeover deal with online pharmaceutical delivery startup 1Mg to buy a controlling 60% stake for $230 million. The investment was in line with Tata’s vision of a comprehensive digital ecosystem to address customer needs across various categories.

The example is a good one to understand how Tata’s used the takeover process to mark their presence in the digital spectrum without having to create an entirely new company. By taking over 1Mg, they cut out the competition that they would have to tackle if they had launched a new company of their own.

Larsen & Toubro’s hostile takeover of Mindtree

In 2019, India saw its first hostile takeover when Larsen & Toubro initiated a process of a hostile takeover of Mindtree Limited, an IT company. It started with Siddhartha, the director of Mindtree, also the founder of Coffee Day Enterprises, wanting to sell his entire 20% stake in Mindtree to use the money for paying off CCD’s debt.

After making an open offer to L&T, the company bought the shares from Siddhartha, making the stake of L&T higher than 13% of the current promoters. Since it was against SEBI law, L&T offered to buy 31% of the stake, which was denied by the promoters. L&T then initiated a hostile takeover and bought the rest of the shares from the open market, with its stake reaching as high as 28.9%.

Final Words

Takeovers can prove fruitful for a company that does not want to create a new company and fight with the current competitors for market share. Takeover provides an effective way for companies to use their cash and buy currently operating companies to increase their user base, cut out competition and make profits based on the goodwill and growth potential of the acquired company. However, as takeovers can be hostile, companies need to look out for other companies and protect themselves against any frowned upon business activities.

Frequently Asked Questions

1. What is a takeover order?

A Takeover Order is when a company bids to buy a majority stake in another company by using cash, equity or a mix of both

2. What is the advantage of a takeover?

It allows the acquirer company to expand and cut out the competition while the acquiree company can use the cash to pay off debt.

3. What are the objectives of a takeover?

Takeover is the process of one company buying another company. The objectives are to expand, mitigate competition and increase profitability.

4. How does a takeover work?

A takeover works with a company buying a majority stake in another company, either through agreed-upon terms or by forcibly buying the shares from the open market.

5. What are takeover tactics?

Takeover tactics are the possible takeover strategies a company can implement to take over another company. These tactics can be friendly, reverse or hostile.