# Understanding Corporate Takeovers: Definition, Funding, and Types

> **Definition**
>
> A takeover is the acquisition of one company (the target) by another (the acquirer), typically by purchasing a majority stake in the target firm.

## What Is a Takeover?

A takeover occurs when one company makes a successful bid to assume control of or acquire another. Takeovers can be done by purchasing a majority stake in the target firm and are often part of broader [mergers and acquisitions](https://www.investopedia.com/terms/m/mergersandacquisitions.asp) strategies. Companies pursue takeovers for reasons such as gaining strategic value, entering new markets, or eliminating competition, sometimes using financial tools like leveraged buyouts.

Takeovers are typically initiated by a larger company seeking to take over a smaller one. They can be voluntary, meaning two companies agree to the transaction, or hostile, where the acquirer pursues the [target](https://www.investopedia.com/terms/t/targetfirm.asp) without its full knowledge or consent.

In corporate finance, there can be a variety of ways to structure a takeover. An acquirer may choose to take over [controlling interest](https://www.investopedia.com/terms/c/controllinginterest.asp) of the company’s outstanding shares, buy the entire company outright, merge the acquired company to create new synergies, or acquire the company as a subsidiary.

### Key Takeaways

*   A takeover happens when one company successfully bids to control or acquire another company.
*   Takeovers can be friendly and mutual or hostile and unwelcome.
*   Companies pursue takeovers to increase market share, achieve economies of scale, or eliminate competition.
*   Hostile takeovers may involve tactics like dawn raids, while target companies can resist using strategies like poison pills.
*   Takeover financing can come from cash, debt, or stock issuance.

![Takeover: When one company makes a successful bid to assume control of another.](https://www.investopedia.com/thmb/jzSNcJSZaj5xokCZd93Bm-V1D8k=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Takeover_sketch_final-6b92ea6fe7f44d4bad6e5b5f24631b97.png)

*— Investopedia / Michela Buttignol*

## How Takeovers Work: A Comprehensive Overview

Takeovers are fairly common in the business world. However, they may be structured in a multitude of ways. Whether both parties agree influences how a takeover is structured.

If a company owns over 50% of another company's shares, it has a controlling interest. Controlling interest requires a company to account for the owned company as a subsidiary in its financial reporting, and this requires consolidated financial statements. A 20% to 50% ownership stake is accounted for more simply through the [equity method](https://www.investopedia.com/terms/e/equityaccounting.asp). If a full-on merger or acquisition occurs, shares will often be combined under one symbol. 

## Different Types of Takeovers: Friendly, Hostile, and More

Takeovers can take many different forms. A [friendly takeover](https://www.investopedia.com/terms/f/friendly-takeover.asp) is usually structured as a merger or acquisition. These typically proceed smoothly as both boards see them as positive. Voting still occurs in a friendly takeover. However, when the board of directors and key shareholders are in favor of the takeover, takeover voting can more easily be achieved. 

Usually, in these cases of mergers or acquisitions, shares will be combined under one symbol. This can be done by exchanging shares from the target’s shareholders to shares of the combined entity.

An unwelcome or [hostile takeover](https://www.investopedia.com/terms/h/hostiletakeover.asp) can be quite aggressive as one party is not a willing participant. The acquiring firm can use unfavorable tactics such as a [dawn raid](https://www.investopedia.com/terms/d/dawnraid.asp), where it buys a substantial stake in the target company as soon as the markets open, causing the target to lose control before it realizes what is happening.

The target firm’s management and board of directors may strongly resist takeover attempts by implementing tactics such as a [poison pill](https://www.investopedia.com/terms/p/poisonpill.asp), which allows the target’s shareholders to purchase more shares at a discount to dilute the potential acquirer’s holdings and voting rights.

A [reverse takeover](https://www.investopedia.com/terms/r/reversetakeover.asp) happens when a private company takes over a public one. The acquiring company must have enough capital to fund the takeover. Reverse takeovers provide a way for a private company to go public without having to take on the risk or added expense of going through an initial public offering (IPO).

A creeping takeover occurs when one company slowly increases its share ownership in another. Once the share ownership gets to 50% or more, the acquiring company is required to account for the target’s business through [consolidated financial statement](https://www.investopedia.com/terms/c/consolidatedfinancialstatement.asp) reporting. The 50% level can thus be a significant threshold, particularly since some companies may not want the responsibilities of controlling ownership. After the 50% threshold has been breached, the target company should be considered a subsidiary.

Creeping takeovers may also involve [activists](https://www.investopedia.com/terms/a/activist-investor.asp) who increasingly buy shares of a company with the intent of creating value through management changes. An activist takeover would likely happen gradually over time.

### 50%

The ownership threshold for controlling vs. non-controlling ownership.

## Motivations Behind Corporate Takeovers

There are many reasons why companies may initiate a takeover. A company might pursue an opportunistic takeover if it sees the target as well-priced. By buying the target, the acquirer may feel there is long-term value. With these takeovers, the acquiring company usually increases its [market share](https://www.investopedia.com/terms/m/marketshare.asp), achieves economies of scale, reduces costs, and increases profits through synergies. Some companies may choose a strategic takeover.

This allows the acquirer to enter a new market without taking on any extra time, money, or risk. The acquirer may also be able to eliminate competition by going through a strategic takeover.

There can also be [activist takeovers](https://www.wsj.com/articles/elliott-looks-beyond-activism-to-full-blown-takeovers-11548870326). With these takeovers, a shareholder seeks controlling interest ownership to initiate change or acquire controlling voting rights.

Companies that make attractive takeover targets include:

*   Those with a unique niche in a particular product or service
*   Small companies with viable products or services but insufficient financing
*   Similar companies in close geographic proximity where combining forces could improve efficiency
*   Otherwise viable companies that pay too much for debt that could be [refinanced](https://www.investopedia.com/terms/c/corporate-refinancing.asp) at a lower cost if a larger company with better credit took over
*   Companies with good potential value but management challenges

## How Takeovers Are Funded: Methods and Strategies

Takeover financing can come in various forms. When the target is a [publicly-traded company](https://www.investopedia.com/terms/p/publiccompany.asp), the acquiring company can buy shares of the business in the secondary market. In a friendly merger or acquisition, the acquirer makes an offer for all of the target’s outstanding shares. A [friendly merger](https://www.investopedia.com/ask/answers/05/mergervstakeover.asp) or acquisition will usually be funded through cash, debt, or new stock issuance of the combined entity. 

Using debt for a takeover is called a leveraged buyout. Debt capital for the acquirer may come from new funding lines or the issuance of new corporate bonds.

## ConAgra's Takeover of Ralcorp

ConAgra initially attempted a friendly acquisition of Ralcorp in 2011. When initial advances were rebuffed, ConAgra intended to work a hostile takeover. Ralcorp responded by using the poison pill strategy. ConAgra responded by offering $94 per share, which was significantly higher than the $65 per share Ralcorp was trading at when the takeover attempt began. Ralcorp denied the attempt, though both companies returned to the bargaining table the following year.﻿﻿

[The deal was ultimately made](https://www.conagrabrands.com/news-room/news-conagra-foods-completes-acquisition-of-ralcorp-1779060) as part of a friendly takeover with a per-share price of $90.﻿﻿ By this time, Ralcorp had completed the spinoff of its Post cereal division, resulting in approximately the same offering price by ConAgra for a slightly smaller total business.﻿﻿ 

## The Bottom Line

A takeover occurs when an acquiring company gains control of a target company, often by purchasing a majority stake or merging. Takeovers can be friendly or hostile, as in the ConAgra-Ralcorp case, which began hostile but ended amicably.

Companies pursue them to boost market share, achieve economies of scale, enter new markets, or eliminate competition. They're funded through cash, debt, equity, or leveraged buyouts. Given their strategic and financial complexity, takeovers require careful planning and evaluation.  

> **Article Sources**
>
> 1.  U.S. Securities and Exchange Commission. "[Financial Reporting Manual, Sec. 2200](https://www.sec.gov/corpfin/cf-manual/topic-2#Topic2_2200)." Accessed Aug. 27, 2020.
>     
> 2.  U.S. Securities and Exchange Commission. "[Financial Reporting Manual, Sec. 2400](https://www.sec.gov/corpfin/cf-manual/topic-2#Topic2_2400)." Accessed Aug. 27, 2020.
>     
> 3.  ConAgra. "[ConAgra Foods Reaffirms Its $94 Per Share All-Cash Proposal to Acquire Ralcorp Holdings](https://www.conagrabrands.com/news-room/news-conagra-foods-reaffirms-its-94-per-share-all-cash-proposal-to-acquire-ralcorp-holdings-1606495)." Accessed Aug. 27, 2020.
>     
> 4.  ConAgra. "[ConAgra Foods Completes Acquisition of Ralcorp](https://www.conagrabrands.com/news-room/news-conagra-foods-completes-acquisition-of-ralcorp-1779060)." Accessed Aug. 27, 2020.
>     
> 5.  PR Newswire. "[Ralcorp Completes Separation of Post Cereals Business](https://www.prnewswire.com/news-releases/ralcorp-completes-separation-of-post-cereals-business-138772904.html#:~:text=Ralcorp%20Holdings%2C%20Inc.&text=%28NYSE%3A%20RAH%29%20today%20announced,spin%2Doff%20to%20Ralcorp%20shareholders.)." Accessed Aug. 27, 2020.