Takeover financing refers to the funding obtained to gain control over a corporation through the purchase of its stock.
The Concept of Takeover Financing
Takeover financing means exactly what it sounds like.
The goal is to utilize stock purchases as a means to obtain control. The corporation being targeted for takeover is commonly known as the “target,” and its assets often serve as collateral for the substantial loan required for the acquisition.
Forms of Takeover Financing
1. Tender Offer
This takeover can also take the form of a tender offer meaning that there is a public invitation for all shareholders to sell their stock. Often the price to sell is higher than what the stocks are worth and the takeover will take place once the firm or individual taking over has purchased enough shares to obtain control. The Williams Act of 1966 does require that all shareholders are offered the same price when a public tender offer is made.
2. Creeping Tender Offer
Another form of takeover financing that is similar to the ones mentioned above is a creeping tender offer. This is where a group of investors gradually purchase company shares. This helps them get around the Williams Act so not as much financing may be necessary for the takeover.
Leveraged Buyouts (LBOs)
Takeover financing is also commonly referred to as a leveraged buyout. Sometimes this process can result in a merger of two large corporations. The key use for this financing is that it allows the individual or entity to gain a controlling interest in the target company. Targeting a business with undervalued assets will allow the entity to take over to acquire control with less money.
Example of Takeover Financing: Leveraged Buyout of Company XYZ
Company XYZ, a well-established manufacturing firm, has been experiencing financial difficulties, leading to a decline in its stock price and market value. Recognizing the opportunity, an investment group decides to pursue a leveraged buyout (LBO) to gain control over Company XYZ.
1. Identifying the Target:
The investment group conducts a thorough analysis of Company XYZ’s financial situation, market position, and potential for growth. They identify the undervaluation of the company’s assets and see the opportunity for a profitable takeover.
2. Structuring the Takeover Financing:
The investment group approaches various lenders and investors to secure the necessary funding for the LBO. They negotiate terms, including the loan amount, interest rates, and collateral requirements. Due to the undervalued assets of Company XYZ, the lenders are willing to provide substantial financing, using the target company’s assets as collateral.
3. Developing the Acquisition Strategy:
The investment group strategizes on how to acquire a controlling interest in Company XYZ. They may decide to negotiate directly with the company’s board of directors or launch a public tender offer, aiming to convince the shareholders to sell their stock at a premium price.
4. Finalizing the Leveraged Buyout:
Once the financing is secured, the investment group executes its acquisition strategy. If they opt for a public tender offer, they communicate the offer terms to Company XYZ’s shareholders, emphasizing the benefits of selling their shares. The offer price is often higher than the current market price, incentivizing shareholders to accept the offer.
5. Obtaining Controlling Interest:
As shareholders start selling their stock, the investment group gradually accumulates a significant number of shares. Once they acquire enough shares to gain a controlling interest, they effectively gain control over Company XYZ.
6. Post-Acquisition Measures:
After gaining control, the investment group implements strategic changes to improve Company XYZ’s financial performance and increase its market value. This may involve restructuring operations, optimizing resources, or exploring new growth opportunities.