IntroductionA takeover is the acquisition (by purchase) by one company, known as the acquirer, of another company (the target). It can either involve purchase of a private or public company (with shares traded in the stock exchange). Depending on the communication to, willingness and reaction of the stakeholders (shareholders, managers, board, customers and employees) of the target company, a takeover can be friendly, hostile, reverse or backflip. The process of a takeover commences once the directors of the acquirer have substantial reasons and the financial capabilities to acquire a target company.
Once the evaluation of the value or expected synergy to be derived from the acquisition, the negotiations are set to begin (Weston & Weaver, 2004). The valuation of the target firm determines whether the takeover will succeed or not. Thus proper valuation should compute the future expected cash flow and assess the synergies expected. The valuation process has to contend with the associated challenges especially when deciding what to pay the shareholders. Lastly, the Post-merger integration ensures that the two companies can work together to benefit from the union. The success of a takeover will depend on the pace of implementation of the last stage (Frankel, 2005). Motivation and evaluationDirectors and managers of the acquiring company would wish to take over the target company because of the associated benefits that are expected to accrue as a result of the move.
While others acquire in an effort to increase their own prestige and power, most business combinations have provided opportunities of creating new economic value for their shareholders. Some of the major factors include taking advantage of the economies of scale, improving target management, combining complementary resources, capturing tax benefits, providing low-cost financing to a financially constrained target, and increasing product-market rents.
As a source of economies of scale, the coming together of the two participating firms succeeds when a function can be performed more effectively as a united force, than when the firms are separated. For instance, being telecommunications equipment makers, Alcatel and Lucent experienced considerable overlap in information technology, management, sales, and R & D activities. The move to merge was anticipated to generate operating synergies by eliminating duplicate functions cutting on excess capacity through minimizing costs in the material, general, research and administrative functions (Copland, Koller & Murrin, 2000).
Secondly, an acquisition occurs to improve target management. If a firm has systematically underperformed in its industry, it qualifies as a target, either by bad luck or resulting from poorly made investment and operating decisions by the management. The firm managers could also deliberately pursue goals that increase the personal power despite increasing costs for the shareholders. However, value can be created for the shareholders through combining their complementary resources.
If one firm has a strong distribution unit, it is sure to benefit by combining resources with one that has a strong research and development unit. For the Alcatel-Lucent case, Lucent’s global leadership in building IP multimedia subsystems and spread spectrum networks for third generation communication systems, would benefit from Alcatel’s strong market position in IP network transformation and triple play (Frankel, 2005).