Takeovers: Types, Reasons, Process, Advantages and Disadvantages

 Acquisition or Takeover

An acquisition or takeover is a common method of corporate acquisition. It may be defined as the attempt by one firm to acquire ownership or control over another firm, sometimes against the wishes of the latter’s management.

However, not all takeovers involve an element of surprise or occur against the wishes of the acquired firm. In many cases, the management of the target company may agree to or support the acquisition.

Takeover is a popular strategic alternative adopted by Indian companies for achieving rapid growth, expanding market share, acquiring new capabilities, and strengthening their competitive position. The post-liberalization period witnessed an increasing use of takeover strategies by Indian companies as a means of achieving faster growth and expansion.

Some notable companies that have been subject to major takeover or acquisition transactions include Ashok Leyland, Dunlop, and ACC, among others.

How Does a Takeover Take Place?

A successful takeover requires careful planning, evaluation, and effective management of both organizations. The major steps involved in the takeover process are:

1. Spell Out the Objectives
   Clearly define the objectives of the takeover, including the strategic, financial, operational, and growth-related goals that the acquiring company intends to achieve.
2. Assess Management Quality
   Evaluate the quality, capabilities, experience, and effectiveness of the management team of the target organization. Strong management can play an important role in ensuring a smooth transition and successful integration.
3. Check the Compatibility of Business Styles
   Assess whether the business practices, management approaches, organizational structures, and working styles of the two companies are compatible. Greater compatibility can make the integration process easier and more effective.
4. Anticipate and Solve Problems Early
   Identify potential financial, operational, technological, cultural, and human-resource problems at an early stage. Addressing these issues promptly can minimize risks and prevent them from becoming major obstacles.
5. Treat People with Dignity and Concern
   Employees are a critical part of any organization. During a takeover, employees should be treated with respect, dignity, transparency, and concern. Effective communication and sensitivity toward employees can reduce resistance and support successful integration.

Reasons for Takeovers

Companies may pursue takeovers for a variety of strategic, financial, and managerial reasons. These reasons can broadly be classified into rational reasons and irrational reasons.

1. Rational Reasons

Rational reasons are based on strategic and business considerations aimed at improving the company’s growth, competitiveness, and long-term performance.

• Quick Growth – A takeover enables a company to expand its business, market presence, and customer base more rapidly than organic growth.
• Diversification – Companies may acquire businesses in new products, services, or markets to diversify their operations and reduce dependence on a single business area.
• Reducing Competition – A takeover may help reduce competitive pressure by acquiring or combining with a competing company.
• Creating Goodwill – Acquiring a reputed business can strengthen the company’s market reputation, customer relationships, brand image, and goodwill.

2. Irrational Reasons

Irrational reasons arise when takeovers are driven primarily by personal ambitions, excessive risk-taking, or the desire for power and wealth rather than sound strategic considerations.

• Greed or Desire to Become Rich – Management or promoters may pursue takeovers primarily with the intention of increasing personal wealth or financial gains.
• Accumulation of Wealth – A takeover may be motivated by the desire to accumulate assets, businesses, and financial resources without sufficient consideration of their strategic value.
• Building an Industrial Empire – Managers or promoters may undertake acquisitions mainly to increase their size, influence, status, or control and build a large industrial group.

A takeover is more likely to create sustainable value when it is based on sound strategic objectives, careful evaluation, and long-term business considerations rather than personal ambition or excessive expansion.

 

Types of Takeover

Takeovers can be broadly classified into hostile takeovers and friendly takeovers, depending on whether the existing management of the target company supports or opposes the acquisition.

1. Hostile Takeover

A hostile takeover occurs when the acquiring company attempts to obtain control of a target company despite resistance or expected opposition from its existing management.

In such cases, the acquiring company may purchase shares from the open market or make a direct offer to shareholders with the objective of acquiring a controlling interest. The target company's management does not support the takeover and may take measures to prevent it.

Example: The NEPC bid for Modiluft is an example of a hostile takeover attempt.

2. Friendly Takeover

A friendly takeover takes place with the mutual consent and cooperation of the existing management of the target company. The acquiring and target companies generally negotiate and agree on the terms of the transaction before the takeover is completed.

Because both sides cooperate, the process is usually smoother and involves less conflict and uncertainty.

Example: Tata Tea's takeover of Consolidated Coffee and Asian Coffee is an example of a friendly takeover.

Pros and Cons of Takeovers

Takeovers can provide significant strategic and financial advantages to companies, but they may also create challenges for employees, shareholders, and society. The major advantages and disadvantages of takeovers are as follows:

Advantages of Takeovers

• Offer Easy Growth Opportunities – Takeovers enable companies to achieve rapid growth by acquiring an established business, customer base, market presence, and operational capabilities.
• Create Mobility of Resources – They facilitate the transfer and more efficient utilization of financial, technological, managerial, and human resources between businesses.
• Avoid Gestation Periods and Hurdles of New Projects – Acquiring an existing business can help a company avoid the long gestation period, uncertainties, and initial challenges associated with establishing a new project.
• Provide a Chance for Sick Units to Survive – A financially or operationally weak company may obtain an opportunity for revival when acquired by a financially stronger organization.
• Offer Alternatives for Selective Divestment – Takeovers can provide opportunities to restructure businesses and selectively divest non-core or underperforming assets and operations.

Disadvantages of Takeovers

• Professionalism May Be Replaced by Money Power – Takeovers may sometimes give greater importance to financial strength and control than to professional management and organizational capabilities.
• May Not Create New Assets for Society – A takeover primarily involves the transfer of ownership or control of existing assets and may not necessarily result in the creation of new productive assets.
• Interests of Minority Shareholders May Be Affected – Minority shareholders may face disadvantages if their interests are not adequately protected during the takeover process.
• Create Stress and Strain – Takeovers can create uncertainty, anxiety, and stress among employees and management, particularly during restructuring and integration.
• Expose Companies to the Threat of Takeover – Companies may become vulnerable to unwanted acquisition attempts, particularly when ownership is widely dispersed or effective defensive measures are absent.