Note on Takeovers

Takeover is a general and imprecise term referring to the transfer of control of a firm from one group of shareholders to another. A takeover thus occurs whenever one group takes control from another.2 This can occur through any one of three means: acquisitions, proxy contests, and going-private transactions. Thus, takeovers encompass a broader set of activities than just acquisitions. These activities can be depicted as follows:

Takeovers

Takeovers

Acquisition Proxy contest Going private

Acquisition Proxy contest Going private

Merger or consolidation Acquisition of stock Acquisition of assets

Merger or consolidation Acquisition of stock Acquisition of assets proxy contest

An attempt to gain control of a firm by soliciting a sufficient number of stockholder votes to replace existing management.

As we have mentioned before, a takeover achieved by acquisition will occur by merger, tender offer, or purchase of assets. In mergers and tender offers, the bidder buys the voting common stock of the target firm.

Takeovers can also occur with proxy contests. Proxy contests occur when a group attempts to gain controlling seats on the board of directors by voting in new directors. A proxy is the right to cast someone else's votes. In a proxy contest, proxies are solicited by an unhappy group of shareholders from the rest of the shareholders.

In going-private transactions, all of the equity shares of a public firm are purchased by a small group of investors. Usually, the group includes members of incumbent management and some outside investors. Such transactions have come to be known generi-cally as leveraged buyouts (LBOs) because a large percentage of the money needed to buy up the stock is usually borrowed. Such transactions are also termed management buyouts (MBOs) when existing management is heavily involved. The shares of the firm are delisted from stock exchanges and can no longer be purchased in the open market.

LBOs have become increasingly common, and some recent ones have been quite large. For example, the largest cash acquisition in history (and possibly the single largest private transaction ever of any kind) was the 1989 LBO of RJR Nabisco, the tobacco and food products giant. The acquisition price in that buyout was an astonishing $30.6 billion. In that LBO, as with most of the large ones, much of the financing came from junk bond sales (see Chapter 7 for a discussion of junk bonds).

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