Takeover is a corporate process of acquiring one company the target by another the acquirer or bidder. According to Brealey, Myers, Allen, takeover is a tender offer directly to the shareholders. To receive the approval of the shareholder is needed to obtain 50% or more of the shares of the acquiring company. (Sel 11 aspro vivlio-takeovers fourth edition)
Pike and Neale (2006) state that 'takeover is the acquisition of one company of the share capital of another in exchange for cash, ordinary shares, loan stock or some mixture of these, resulting in its identity being absorbed into that of the acquirer'.
There are various differences between the takeovers and the other investments.(poios???) some of them are the uncertain outcome, the long term strategic motives and benefits which are difficult to meet the criteria, the size of the purchase and finally the risk. -isws kai sto conclusion
To understand why the takeovers take place, we have to look at the economic perspective stated by Fox and Marcus (1992). It is believed that the approaches are both economic and behavioral. Managers supposed to be the agents of the shareholders. Shareholders pass on the decision-making part to the managers. If both sides have as their objective the 'utility maximization', then it is believed that in some cases agents do not act in favor of the interest of the shareholders. As a result, there is conflict between the two sides. As we can see from the table, the division of ownership and control leads to excessive managerial discretion. So this phenomenon can be limited by giving incentives to the agents and by monitoring them by the board.+++
Source of….
In order to define what exactly a takeover is, we should meet its varieties and their purposes.
Three are the main varieties of takeovers, Proxy contest and going Private or Leveraged buyout. The management and ownership of large corporations are separated. Shareholders elect the board of directors but have little direct say in most management decisions. Agency costs arise when managers or directors are tempted to make decisions that are not in the shareholders' interest.
There are three main ways to change the management of a firm: a)a successful proxy contest, in which a group of shareholders votes in a new board of directors who then pick a new management team, b) an acquisition, meaning a takeover of one company by another, and c) a leveraged buyout of a firm by a private group of investors.
Reasons for takeovers
Pike and Neale (1996) state that managers try to maximize the capital of shareholders. As a result, they can go for a takeover process. A variety of reasons a company starts a takeover may be the followings:
First of all, through a takeover, companies can exploit scale economies. Research showed that the larger the company the more productive. Secondly, synergies are a good motive to start a takeover, because through this process companies earn money by combining resources. Thirdly, restore or further growth of the company. Companies with weak production. Another reason would be to gain market power or enter new markets if the company is able to become competitive and to expand.
Moreover, listing to the stock market would be a good reason in which a small listed company is acquired by one unlisted.
Takeover Defenses (Brealey, Mayers, Allen, 2011)
Companies which do not have very strong financial position and believe that there are possibilities of being taken over, prepare their defenses in advance. Actually, a takeover defense is an action of the companies to avoid or fight the takeover bids.
There are two categories of takeover defenses: the pre- offer defenses, and the post- offer defenses.
Pre-offer defenses
Staggered board: Classification of the board.
Supermajority: a high price percentage of shares is needed to approve a takeover.
Fair price: takeovers are restricted unless a fair price is paid.
Restricted voting rights: Blocks the voting rights of some shareholders.
Waiting period: increases the time needed in order for the takeover to be completed.
Other types of defense:
Poison pill: In case of purchase of shares, existing shareholders can purchase additional stock in the company
Poison put: existing bondholders can demand repayment if there is a change of control, as a result of a hostile takeover.
Post- offer defenses
Litigation: file suit against bidder for violating antitrust or securities laws.
Asset restructuring: buy assets that bidder does not want or that will create an antitrust problem.
Liability restructuring: issue shares to a friendly third party or increase the number of shareholders. Repurchase shares from existing shareholders at a premium.
Some of them are more effective or credible than other. During this process, the agency costs raise because of the increased involvement of the board members. Furthermore, sometimes companies in order to reduce the conflicts of interest between the shareholders and the managers, offer to the managers 'golden parachutes'. These are generous payoffs in case of dismissal because of a takeover.
Leveraged Buyouts
A Leveraged Buyout(LBO) is an acquisition financed by debt. LBOs take place in order companies make acquisitions without having the obligation to spend a lot capital (Brealey, Mayers, Allen, 2011). Both assets and the acquired company operate as collateral of the commerce deal. As the company goes private, it does not have a place to the trade market.
There is a variety of reasons for an LBO to occur. According to Luk, Simons and Wright (2007 ), the principle-agent problem is prevalent, so one reason is the reduction of this problem and the incentives that should be given to the agent to try his best for the stockholders interests. The free cash flows hypothesis states that the expected stock returns (from debt) to force managers to pay out free cash flows (to fund all the projects, that have positive net value, when discounted the appropriate cost of capital. The tax incentives are also significant on an LBO process. When a company issues new debt, then firms increase interest deductions and depreciation benefits. The reduction on transaction costs can be considered as a reason, as well. These expenses are divided into direct(low) and indirect(high).+++++
There are several characteristics among LBOs. However, three of them are the most common. (Brealey, Mayers and Allen, 2011)
High debt: it may not be a stable debt, but it will paid off steadily. This action of saving money to debt services is going to boost the operating activities of the company (in cases only of gathering lots of cash and few investments).
Another feature can be considered the incentives given to the managers. These are either shares, or stock options.
Last but not least is the factor of private ownership. When a company goes private, the management is monitored by the private investors. However, this period is not permanent because usually the LBOs go public again when the debt is paid and its performance is improved.
To measure the performance after an LBO
Fox and Marcus (1992) state that it was noticed improvement and operating efficiency. They also support that the reasons for this improvement were the improving working capital, the management inventory turnover and accounts receivable.
Level of R&D after LBO the writers indicate that the economists' point of view is that the R&D would be lower after the LBO, because of agents and their policy not to invest on short term activities.
Conclusion
