Corporate Takeovers: Overview, Rules, Regulations and Checklists

Takeover- An Overview

Takeover has become a common practice in today’s economic environment. Takeover is said to have taken place when one company takes control over the company, usually by purchasing the majority stake in the company that is being taken over.

The purchaser of the company is known as the bidder or acquirer and the company being purchased is referred to as the Target Company.

Takeover is the business strategy through which the company acquires the management of another company with the main motive to gain control over the target company. The company takeover with the following purposes:

• Two Combined Company can reduce its fixed cost by combining duplicate departments; therefore, an overall reduction in cost with a relative increase in profit margin.
• There is an economy of the scope by increasing the scope of marketing and distribution of a variety of products
• By absorbing a competitor, the company enhances its market share by attracting more customers
• Companies achieve synergy of economies of scale by combining production facilities through the utilization of plants and resources.

Legal Provision for the regulation of Takeover

A takeover is governed by the following provisions:

a) Companies Act, 2013:

1. Section 230(11) of the Companies Act govern all forms of compromise, arrangement and takeover.
2. Section 250(3) regulates the takeover of the assets & management of the Company by the Company administrator on the orders of the Tribunal
3. Section 261 authorizes the company administrator to prepare the scheme of revival & rehabilitation and it governs the takeover of the sick company by a solvent company

b) SEBI (Substantial Acquisition of Shares & Takeover) Regulation, 2011: the takeover of the listed companies is governed by the provisions of SEBI along with Companies Act.

Types of Takeover

There are the following four types of takeover:

• Reverse Takeover: This form of takeover occurs when a private company acquires a public listed company. This way a private company can go public without undergoing the lengthy procedures of Initial Public Offer.
• Bailout Takeover: This is the takeover of a sick company by a profit-earning & running company in order to bail out the sick company from the lengthy procedure of liquidation.
• Friendly Takeover: This form of takeover is made with the consent of the target Company. There is an agreement signed between the management of both companies. Under this form of the takeover, the bid is made with the consent of the majority shareholders. This kind of takeover is done via negotiations between the managements of the companies involved and hence, is also known as a negotiated takeover.
• Hostile Takeover: Under this, an acquirer does not offer any proposal to or make any negotiations with the Target Company. Acquirer silently pursues an effort to gain control over the company against the wish of the management and non-acceptance of the shareholders of the Target Company.

7 Steps to Takeover a Company

Following are the steps to Takeover a company in India:

I. Determining the market

Leaders start the acquisition process by determining & evaluating the right market for acquiring. The right market in terms of growth opportunities sustain in the market served, business or service provided is evaluated and ranked based on opportunities available. For determining growth opportunities, analysts collect and evaluate the following data:-

• Client origin
• Population
• Population age group
• Employment rate prevailing in the market
• Competitors and alternate source for the product or service
• Competitive cost
• Consumer preferences, etc

II. Identification of candidates

Suitable candidates for acquisition are identified in the second step. This stage involves proactive evaluation of the potential candidates that could meet the suitable strategic & financial growth objectives of an acquirer. This involves identification of suitable suspects and possibilities that prevail inside and outside of the industry. This step is based on management research, experiences, consultation and related methods.

III. Evaluation of financial position

The third stage is a comprehensive analysis of volume, revenue, cost and balance sheet consideration of the target company. Under this stage, financial & credit position of the target Company is evaluated based on the financial forecast.

IV. Take the decision

The acquirer has to determine the pros and cons of the takeover. They must evaluate the likely benefits and drawbacks of the proposed acquisition based on the evaluation report, checklist of items or questionnaires. The high-quality decision is based on wholesome evaluation. Leaders analyse the strategic value addition for a combined entity after the takeover.

V. Assessing the value of the Target

Next stage is to evaluate the financial value of the target company. Simultaneously, the alternatives for structuring and financing the takeover are identified. The structure that best suits the financial & growth objectives of acquiring a company is selected in this stage.

There are three methods for the valuation of target Company:

• Discounted cash flow method
• Comparable transaction method
• Comparable publicly traded company method.

VI. Due Diligence

Once the offer is accepted after all the evaluation & analysis, the leaders of the acquirer Company undertake the complete due-diligence process of the Target Company in order to get a clear picture about the target company. This way they are assured of their decision of making investment in the company. The procedure of due diligence involves complete investigation & inspection of financial, legal & operational position of the target Company. Definitive Agreement is formed after the Due-Diligence is completed.

VII. Implementing Takeover

The successful acquisition involves the combining of two organizations for maximizing the strategic & financial benefits and minimizing the disruptions and limitations of the existing operations of both the entities. Proper implementation of the deal along with the ongoing monitoring of performance is crucial to the success of a takeover.

Consideration of a Takeover

Consideration refers to the consideration paid in connection with the acquisition of the target company. Following are the different form of consideration paid by an acquiring company to the target company:

1. In The Form of Cash: The full amount of shares acquired by an acquiring company is paid in cash to the target company. Shares can be acquired through a bid or in an open market.
2. In The Form of Shares: Acquirer Company allots the shares to the shareholders of the target Company in proportion to their shareholding in the existing company.
3. Acquiring by the formation of a New Company:  A new company can be formed by acquiring shares in the target company and shares are allotted to the shareholders of both the companies.
4. Acquiring Minority Shares:  Acquirer Company can plan to acquire the balance equity if the acquirer company holds at least 50% of the shares of the Target Company.

Objects of a Takeover

The takeover is usually practised by the entity for pursuing the following objectives:-

• To achieve the synergies of product development and enhancement through compatible products & innovative technologies of the target company.
• To diversify the existing market & product line of the acquirer company by entering the new market and service lines through the target company.
• Improvement in profitability and productivity through joint efforts of technical, personnel and other resources.
• For increasing the market share of the acquirer company.
• Acquirer Company gets the benefits of market diversification by entering into new geographical segments in which it has no presence.

Step by Step Procedure for Company Takeover

After completing the company takeover checklist, you can proceed to follow the process of Takeover:

1. Acquirer passes the Board Resolution to bid for the shares of the target company

2. Acquirer applies to the commission for approving the authority to proceed with the takeover bid.

• Application is accompanied by the following documents:-
• Takeover bid
• Information memorandum
• NOC from relevant government authority

3. Upon the receipt of approval, the authority proceeds with a takeover bid. The Acquirer has to file the proposed bid with a commission for its registration.

4. Once registered, Acquirer Company shall forward the takeover bid to the target company.

5. After the receipt of bid, Target Company consider the bid in properly held meeting and accepting more than 90% of the shares subjected to acquisition.

6. Once the Takeover gets completed, the acquirer shall file within 7 days of the conclusion of the Takeover to the commission.