In the world of business transactions, not all deals are created equal. While some companies join forces amicably over handshakes and mutual agreements, others are thrust into high-stakes corporate battles where control is seized against management’s wishes.
Whether you’re a business owner considering selling or an investor eyeing opportunities, understanding the key differences between friendly acquisitions and takeovers is essential.
In this article, we’ll break down how acquisitions and takeovers work, their pros and cons, and what they mean for businesses down the line.
What Is A Friendly Acquisition?
A friendly acquisition occurs when one company purchases another with the full cooperation of the target company’s leadership and board. These deals are negotiated collaboratively, with both sides working toward a mutually beneficial agreement. Depending on the particulars of the deal, the target company may live on as a subsidiary of the acquirer, or may be absorbed entirely.
How Friendly Acquisitions Work:
- Initial Offer: The acquiring company proposes a deal (cash, stock, or a mix)
- Due Diligence: The target company opens its books for review
- Negotiation: Terms (price, management roles, integration plans) are discussed
- Approval: Shareholders and regulators sign off
- Closing: The deal is finalized, and operations merge
Real-World Example:
Disney’s Acquisition of Pixar (2006): Disney’s $7.4 billion deal for Pixar is the textbook definition of a friendly acquisition. Disney and Pixar negotiated for months before striking a deal which ensured creative independence for Pixar while giving Disney access to groundbreaking animation tech and talent.
Pros and Cons of Friendly Acquisitions:
Friendly acquisitions generally translate to a smooth deal-making process and transition period afterward. The cooperation and collaboration between both parties tends to create a better atmosphere and cultural alignment, allowing teams to integrate more easily. Friendly acquisitions also tend to offer better long-term value than the alternative, as strategic synergies are better planned for and utilized when both parties are working together from the get-go.
On the other hand, one of the downsides of a friendly acquisition is that it can be a much longer process than a merger or business takeover. Negotiations may drag on for months or even years as both parties try to strike the best deal possible. Friendly acquisitions can also lead to bidding wars if multiple parties are trying to acquire the same company, which can inflate prices and increase the risk of overpaying in order to secure a deal.
What Is A Business Takeover?
A business takeover happens when an acquiring company bypasses or overrules the target’s management to seize control against their wishes. These are aggressive maneuvers that require obtaining more than 50% of the voting shares issued by the company. This is usually a “last resort” option launched when leadership refuses to sell.
How Business Takeovers Can Happen:
- Tender Offer: The acquirer bypasses management and offers to buy shares directly from shareholders at a premium. The “Creeping Tender Offer” strategy is a variation of a normal tender offer, where the acquirer makes a series of smaller tender offers over time to gradually increase ownership.
- Proxy Fight: The acquirer tries to replace the board with directors who will approve the deal. This can be attempted by persuading shareholders to vote out the current board members, or via legal action.
- Open Market Purchase: The acquirer buys shares on the open market to accumulate a significant ownership stake and force a change in management. A dawn raid is a much more sudden and aggressive form of an open market purchase, where the acquirer purchases a large amount of shares in a short period of time.
- Bear Hug: A public, informal offer to buy the company at a significant premium. By making this offer public, it’s intended to cause the company’s shareholders to pressure the board into accepting the takeover offer.
- Toehold Acquisition: A smaller purchase of shares (usually less than 5%) allows the acquirer to “get their foot in the door” and use that to launch more aggressive takeover tactics later.
Pros and Cons of Business Takeovers:
One of the main benefits of a business takeover is that they can unlock the potential of undervalued companies by increasing efficiency and profitability through restructuring or strategic alignment. Business takeovers can also be used to remove underperforming management or board members who may be hindering the company’s progress. In addition, business takeovers can also greatly benefit the target company’s shareholders by offering to buy those shares at a premium.
On the other hand, business takeovers often lead to job losses and restructuring, impacting employee morale and job security. The takeover process can also disrupt operations of both the target company and the acquiring company. Finally, business takeovers are not always successful, and there is a risk that the target company will fail to integrate effectively.
Real-World Example:
InBev and Anheuser-Busch (2008): InBev launched a hostile bid of ~$46 billion for Anheuser−Busch, sparking lawsuits and a bitter proxy fight. After months of resistance, InBev upped its offer to ~$52 billion, finally winning over shareholders. The deal created AB InBev, reshaping the global beer industry overnight.
Defenses Against Business Takeovers
Defensive strategies against business takeovers aim to deter a takeover attempt or make things more difficult or costly for the acquiring company. Companies fearing an unwanted buyout often deploy preventative measures and reactive responses, such as:
Poison Pill: Floods the market with new shares to dilute the acquirer’s stake. There are a few variations of the poison pill strategy, including the “flip-in”, “flip-out”, and “dead hand” poison pills.
Real-World Example: Netflix (2012): Netflix adopted a poison pill approach when investor Carl Icahn acquired a 10% stake, preventing a business takeover.
Golden Parachute: Contract stipulations for huge payouts for execs if fired after a takeover.
Real-World Example: Yahoo! (2008): CEO Jerry Yang had a golden parachute worth ~$50 million if he were to be ousted after a Microsoft takeover (which failed).
White Knight: Seeking a friendly buyer to outbid the hostile party, leading to a more friendly acquisition.
Real-World Example: MGM Studios (1980s): MGM Studios fended off a hostile bid from Kirk Kerkorian by partnering with Sony.
Crown Jewel Defense: The target company sells its most valuable assets to a third party, making it less desirable to a potential acquirer.
Real-World Example: P&G’s Gillette Defense (1988): P&G threatened to sell its “crown jewel” (Duracell) to block a hostile bid from Gillette.
Scorched Earth Policy: The “nuclear option” against business takeovers, where the target company sells off its assets or incurs heavy debt to make itself less attractive to a potential acquirer.
Real-World Example: Boeing’s Rumored “Project Barbarian” (1990s): Rumors of an impending takeover bid by a rival defense contractor caused Boeing to allegedly draft a secret scorched-earth plan, which included selling key divisions to competitors and intentionally sabotaging long-term contracts with the Pentagon. Although this plan was never executed, its alleged existence may have directly deterred hostile bidders.
Acquisitions vs Takeovers – Final Thoughts
Mergers, acquisitions, and takeovers shape industries, but knowing the difference between a friendly deal and a hostile power grab can be the deciding factor in the overall success and longevity of your business. Whether you’re looking to sell your business or protect it from corporate raiders, understanding these dynamics is crucial.
Consulting financial advisors, legal professionals, and M&A specialists can help you navigate M&A transactions and achieve your business goals.
To see how The FBB Group can assist you through the M&A process – from preparations to final closing – contact us online today.