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A takeover target, also called a target company, is a business that another company wishes to acquire. Normally, takeovers are determined as either hostile or friendly, depending on the tactic used by the bidding company. Takeover targets are often identifiable by several qualities, and identifying which companies are likely to be targets is an important part of investing.
In order to take over a target company, a bidding company must purchase a majority of the target’s shares. This can be done by buying shares on the open market, persuading shareholders to sell, convincing the board of directors of the takeover target that the acquisition is in their best interest, or using influence to have dissenting board members ousted. In a friendly takeover, the board agrees that the acquisition will be beneficial; in a hostile takeover, the bidders will try to obtain the shareholding majority regardless of the opinion of the board of directors.
A takeover target being subjected to a hostile takeover attempt by a bidding company has a wide variety of tactics to fend off unwanted buyers. In a white knight strategy, a third company who wishes to keep the bidder from acquiring the target will buy enough shares to prevent a majority, while not interested in acquiring the takeover target for themselves. A gray or black knight defense is considerably riskier, in that the third company may want to get a majority for themselves, and the target company is left praying that the two bidders will deadlock one another.
Depending on the desperation of the board of directors, takeover targets may attempt one of the many varieties of poison pill defenses. These involve taking on massive new debt to make the company less attractive to bidders, or ensuring severe shareholder penalties if the company is taken over. In a scorched-earth defense, the company undertakes agreements ensuring that all assets will be liquidated should a takeover occur. The downsides to these severe tactics are that if the takeover is unsuccessful, the takeover target is left vulnerable by the debt it has taken on or the tactics used.
According to market experts, several signs are indicators that a company may be or may become a takeover target. Small companies that fill a new or unusual niche in the market are likely to be taken over by large corporations once they have proved themselves able to make a profit. Companies that need additional financing to extend their products availability due to a larger demand than expected are also extremely vulnerable to a take over. Generally, if a small company has a good history of profit, good consumer ratings and a well-run structure, it will be desirable to large companies who wish to add to their profit margins without the risks of starting totally new ventures.
The ability to discover a potential takeover target can be an extremely profitable skill. Having shares of a takeover target can be beneficial, as the amount paid for them by a bidding company will normally be considerably higher than prices on the open market. Savvy investors are able to spot takeover targets before any acquisition attempts are made, allowing them to liquidate their shares to the bidding company at the highest possible profit margin.
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