Hostile Takeover -- the Modern Term Paper

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Types of Takeovers

There are several consequences of whether a takeover is considered hostile or friendly. These consequences are more in the practical business realm than legal ones. Hostile takeovers are riskier for the acquirer than friendly ones. In a friendly takeover, the bidder will have a better chance to examine the company and its health. If the board is amicable to the situation, they will provide a full disclosure of the company's strengths and weaknesses. In a hostile takeover, the bidder only has access to publicly available information. There may be situations within the company that have not been disclosed. This can be good or bad depending on the situation. The acquirer might get a pleasant surprise, or they might find out that they have bought a sinking ship. Due to the risk involved in a hostile takeover, it is often more difficult to obtain financing than for a friendly one if the acquirer does not have sufficient financing on their own.

Hostile takeovers are different in private companies than in public ones. In the private company, the shareholders and board are likely to be one in the same. There will be no surprises and the decision to sell is often an agreement between the major parties involved. However, in a public company, the employees, managers and other entities might not know of the takeover until the deal is already complete. They might face layoffs and insecurity as a result of the action. A hostile takeover often produces fear in the company that has been acquired. This fear can affect production and the operating efficiency of the company. The efficiency of the company that is acquired might drop after the takeover is complete, creating another risk for the acquirer.

It is assumed that management in a company will act in the best interest of the shareholders, but this is not always the case. In a bankrupt company, the management might be acting in the interest of preserving their own assets. A hostile takeover allows the bidder to bypass many of the formalities that might stand in their way in this case. A company might be able to save itself through selling itself to a larger, more stable company. A hostile takeover is not always bad for the company. However, in some cases management might sell a failing company at a profit and keep the proceeds for themselves, without regard for the future of the company. Every hostile takeover situation is different and the outcome is highly dependent upon the players involved.

The most common scenario for a takeover is a larger company that acquires a smaller, or private company. The company to be acquired is often of lower value than the acquirer. However, in some cases the company is be acquired is of higher value. This is called a reverse takeover. The purpose of this type of takeover is for the private company to "float" itself. This allows it to avoid the expense of a conventional public offering. Takeovers can be a way to avoid the necessary legal complications involved in many standard business practices.

Financing for the takeover typically involves three forms. Many takeovers are cash, either from funds the acquirer already has on hand, or from a bank. The financing can occur via a loan note through the company itself. There are some instances where financing can occur through the issuance of shares with no other cash exchanged. All three of these forms of financing have their advantages and disadvantages from a tax and legal perspective. Tax and legal issues become quite complicated when the takeover involves two companies in different countries. This scenario is becoming more common as the world becomes more globally oriented. Currency exchange rates make a foreign takeover riskier than a domestic one.

There are many reasons why one company might wish to takeover another one. Some takeovers are opportunistic. The target company might be a good bargain and a moneymaker in the future. When a company enters into financial disrepair, another company might see it as good potential for the future. The acquiring company might see a way to fix the ailing company's problems and return it to profitability. In this case, the acquiring company feels that there is a significant chance for financial gain in the future.

Some takeovers are strategic in nature. The acquiring company may need the capabilities of the company being purchased. It might be to secure a supplier relationship or to allow access into a new market niche.

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A takeover involving a competitor will help to eliminate the competition and increase one's own market share. A merger of the two companies might be more profitable for both companies than if they continued to operate singly. There are many scenarios where a takeover represents a strategic move. Some companies were created to be takeover, providing quick cash revenue for their owners as opposed to long-term gain typically realized as part of a business venture.

Anatomy of a takeover

Takeovers, either hostile or friendly are a part of the business world. They are more common in the United States, the United Kingdom, and France. They happen rarely in Italy due to the historical tradition of large controlling families. These families typically have special voting privileges designed to keep them in control of the companies that they, or their ancestors built. Takeovers are rare in Germany because of the dual board business structure. In this structure, the shareholders elect members of a supervisory board, which then appoints and supervises a management board. The workers themselves often comprise a majority of the shareholders. This dual board system makes a hostile takeover difficult as it must be approved on many levels. Interlocking ownership sets, called keiretsu, prevent takeovers in Japan. In China, takeovers are essentially impossible as the state owns most publicly listed companies.

In Australia, recent foreign buyouts have results in U.S.$3 billion due to the purchase of four companies. The purchases have been made by companies that specialize in foreign buyouts. Recent takeover attempts place two of Australia's major retail chains in jeopardy of becoming foreign property. Coles Myer Ltd. And Colorado Group Ltd. have recently received buyout bids ("Waltzing Matilda," 2007). As one can see, the scale of foreign buyouts can have a dramatic effect of the competitive outlook in the retail sector. If these two companies come under foreign ownership it locally owned retailers would find it hard to compete. This could force native Australian retailers out of business.

In order to curtail misconduct, the buyout houses have formalized their code of conduct. However, there is little government support to make certain that they fulfill their promises. One of the key reasons for a lack of government support is that until recently, Australia was not a popular target for foreign investment. Currently, bidders in the Coles Myer buyout have combined forces, making them a formidable conglomerate ("Waltzing Matilda," 2007). If successful, this buyout would greatly impact the Australian economy through a loss of assets.

Buyouts are even newer to the Chinese marketplace. However recently, in an unprecedented move, China's Carlyle Group has received permission from Taiwan's regulatory bodies to purchase Eastern Multimedia Co. (EMC) ("Waltzing Matilda," 2007).

This is the first secondary buyout in China's history. The deal required a U.S.$1.5 billion to acquire 90% of the issued share capital of EMC ("Waltzing Matilda," 2007). A combination of Chinese and Taiwanese banks are financing the transaction. Both the Chinese and Taiwanese banking industries will benefit from this acquisition, but the Multimedia Industry in Taiwan will suffer from the takeover.

This takeover demonstrates how the takeover in one industry can benefit another. When one weighs the economic ramifications of this type of acquisition, a wholistic approach must be considered. The aggregate effects of the loss in the multimedia industry and the boost to the banking industry must be weighed in order to asses the affects of such a takeover. EMC is one of the largest cable operator's in Taiwan, with the largest number of subscribers ("Waltzing Matilda," 2007).

This will make a Chinese company the largest cable operator in Taiwan. The effects of this are yet to be seen.

Carlyle has a reputation for acquiring companies and then selling them for an almost immediate profit to another firm. In November of 1999, they acquired Taiwan Broadband Communications and sold it to Australia's Macquarie Bank for U.S.$870 million, reaping a ten-fold profit ("Waltzing Matilda," 2007). There are worries that Carlyle will do the same for EMC, resulting in the collapse of a major Taiwanese cable supplier. This is one of the key fears and concerns with hostile takeovers be foreign investment companies. They do not take over a company in order to run it in an efficient manner. They are only out for their own profit, regardless of the consequences for the company itself. This "shark-like" philosophy is one of the key concerns over the growing….....

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